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Wednesday, August 22, 2007

Should homeowners be forced to carry flood insurance?

Few residents in the areas of southeastern Minnesota hit by flash floods last weekend had flood insurance on their homes. In the two hardest-hit counties -- Winona and Houston, total population 70,000 -- only 196 flood insurance policies have been issued for homes and businesses, according to the Federal Emergency Management Agency.

Insurance experts are predicting that many homeowners in the area who had homeowners insurance but not flood insurance will end up defaulting on their home loans. The cost will be absorbed by lenders, and the homeowners will have their credit ratings adversely affected by the defaults.

There are laws on the books that provide residents in especially flood-prone areas financial incentives to move away or elevate their homes. As the cost of rebuilding Minnesota’s flooded areas starts to mount, banks, mortgage lenders and insurers could start lobbying for compulsory flood insurance in areas such as southeastern Minnesota. Should homeowners in such areas, where floods are severe but rare, be legally compelled to own flood insurance?


Anonymous said...

Or we could let the market resolve the issue and people exercise free will.

Homeowners will insure themselves as they see fit. Should the state force people to buy life insurance? How about insure their valuables from theft? This is something that the person who is best in control and informed of the risk--the homeowner--should decide.

As for mortgage companies, they were in a position to decide whether and which insurance to require their mortgagor carry. They require title insurance; if it made economic sense, they would insist on flood insurance.

Classical liberal theory says people will make decisions that are tailored to their risk tolerance. Legal economics says that mortgagees will not write loans unless there is the right nexus of contracts and insurance to meet their risk tolerance.

Can you help me understand why flood insurance is any different from any of the millions of other choices free people can make without government intervention? We don't force parents to feed their babies healthy food, we don't force people to buy life insurance--why should we force people to buy insurance for floods?

Warren Jorgenson said...

In my opinion there is an ethical and possibly a legal issue also. In many cases new young first time home buyers rely heavily on the realty company to assist the new owners in purchasing a home.

When you take a tour of a home and the sump pump hole has no pump in it and you ask the Realtor agent where the pump is, and the agent says "they don't have a water problem here", and you believe them. Then the first rain storm you have a flooded basement you realize you have been mislead it's too late.

You barely have enough money to make house payments let alone pay for a legal battle so you deal with it as best you can.

Then your home owners insurance company (Country Insurance) never suggested that you have a rider on your policy to deal with sump pump failure because they bought out your previous homeowners insurance company and you have never seen an agent from Country Insurance and no one from the Country Insurance company has ever stopped by your house to look at your risk with you.

The next problem is when you do not live in a Federal flood plain you can not even purchase flood insurance so you are screwed again.

Then you try to get the city to fix their flooding issues and they refuse. Now it is impossible to sell your home UNLESS you lie to the next poor sucker that comes along so you can get out the mess.

"I pay you taxes every year ... You flood my house every year ... Then you throw me out when we need your help the most ... Only in Willmar.

Couple ordered to vacate home
West Central Tribune - Willmar, MN, USA
(Submitted photo courtesy of the Jorgenson family) Warren Jorgenson tries to salvage family photos damaged when storm-water flooded the family home. ...