On The Disaster Dole

Olicer Ready of Grafton, Ill., guided his flatboat down Water Street and paused at his two-story frame house, where the Mississippi River now inhabits the first floor When it recedes, he'll be in good shape. Ready has purchased federal flood insurance since 1975, and it's been a sweet deal. He's paid about $6,000 in premiums and collected $24,000 in payouts after floods in 1979, 1982, 1986 and last April. He expects $32,000 more for this disaster. Ready is happy to take the money, but he wonders about a government program that rewards people for living in places that are frequently underwater. "You wouldn't run a business like this," says Ready, a 53-year-old fish-market owner. "If every three or four years you had to spend $10,000 to repair a business, you'd wise up and say, 'To hell with this location'."

Imagine a car-insurance policy that didn't raise your rates after an accident. or a Reinsurance policy that charged the same whether you were 25 years old or 70. That's the idea behind the National Flood Insurance Program (NFIP), where property near rivers or in vulnerable coastal areas is restored by the government again and again. "Repetitive loss" cases like Ready's amount to only 3 percent of all claims. But they account for more than a third of total payouts. Since 1974 the NFIP has paid nearly $2 billion to 63,000 flood-damaged properties. "Taxpayers have bought some of these people refrigerators and chain saws 10 times over," says Tom Szilasi, building commissioner in St. Charles County, Mo., across the river from Grafton.

Although the NFIP has done well by many Midwesterners, most of the payouts actually go to the coasts, where beachfront homes are regularly inundated by storms. Federal flood insurance is effectively an entitlement for "some of the wealthiest homeowners in America," says Rep. Joe Kennedy, who is drafting legislation to tighten up the program. A 1991 measure passed the House but stalled in the Senate after banking, real-estate and home-building lobbies mobilized. Calamities this year might provide new impetus for reform. A punishing hurricane season this fall, combined with claims from the Mississippi flood (expected to reach about $50 million), could send the NFIP--already $18 million in the red-deeper into deficit.

Federally subsidized flood insurance began in 1968 as a sound idea. It was a natural niche for government to fill. Private carriers won't offer it, they say, because the only buyers would be those at the worst risk. In exchange for low-cost policies, communities established rigorous building codes for new construction in flood-prone areas, limiting damage when the waters rise. That part of the program has worked. Federal officials say premiums from structures built in flood plains since 1974 have produced a net gain of $248 million for the NFIP. But Congress, reluctant to alienate property owners with older buildings in flood plains, "grandfathered" the structures. As long as flood damage is less than 50 percent of the property's market value, they are eligible for subsidized insurance. (Structures with more than 50 percent damage must be moved to higher ground, brought up to federal standards or razed.) With the average flood claim totaling $10,500, NFIP continually bails out the same older, poorly built properties.

That's certainly the case in tiny Grafton (population: 918), which hugs the bottom of a bluff just above the Mississippi's edge about 40 miles northwest of St. Louis. Kathy Rulo, 37, and her husband, Ron, are filing their fourth flood-insurance claim since buying their home in 1978. "I think the government has paid for our house about two times," she says. In St. Charles County north of St. Louis, one homeowner received 18 separate NFIP payments before this year's two floods. Insurance is remarkably easy to get. Flood-plain residents can rush to an agent at the last minute and buy a federally guaranteed policy. After that, the building need only remain dry for five days to qualify for reimbursement. Lowell Skeens, 77, a retired Grafton boatbuilder, says he bought insurance for his one-story house on July 2, when high crests were forecast. On July 11, floodwaters reached his door.

Compounding the problem are property owners who buy no flood insurance at all. Many simply choose to collect federal bailout grants of up to $11,900. Banks are also culprits. The NFIP requires mortgage lenders to insist that borrowers have flood insurance. But the provision is routinely ignored. Although most homeowners do purchase a policy, many later let premium payments lapse. When mortgages are sold to other lending institutions, there is no mechanism for tracking compliance. Lax enforcement allows 250,000 policyholders to drop out of the NFIP each year.

Critics say several changes would help. Those receiving disaster grants should be required to buy policies. Banks could be penalized for not enforcing insurance requirements. Washington also needs to establish more incentives for communities to raze flood-vulnerable buildings. It's not Oliver Ready's fault. But if Congress again ducks reform, he and thousands of other property owners will continue to benefit from a leaky federal program. "They set the rules," Ready says. "We didn't."