Flirting with disaster

Waterfront: Experts say Hurricane Katrina should make Americans think twice about encouraging development in dangerous areas.

September 11, 2005|By June Arney | June Arney,SUN STAFF

For decades, environmentalists have fretted over development on fragile barrier islands and flood plains, but Americans' fascination with waterfront living and their willingness to take chances building in dangerous spots has shown no sign of abating.

But Katrina is likely to cost the federal government hundreds of billions in cleanup and reconstruction costs and to shock private insurers with its toll. That staggering expense appears certain to give fresh life to a national argument over who should pay for risky development decisions.

Many experts believe that this storm, unlike any before it, could make Americans take a hard look at the folly of building on barrier islands and flood plains and at the wisdom of a federal flood insurance program that encourage developers and homeowners to take increasingly greater risks.

"People who build right next to an eroding shoreline, where there's a rising ocean level and a lot of storms, that's crazy," said Orrin H. Pilkey, professor emeritus at Duke University's Nicholas School of the Environment and Earth Sciences and an expert on the impact of coastal development. "It's a combination of greed, arrogance, ignorance, government inaction and government irresponsibility."

At the very least, Katrina is likely to make it significantly more expensive for those who do decide to build in flood-prone areas in the future, through higher premiums on both federal flood insurance and private insurance on property. The storm damage is likely to spark further study of the structure of premiums, so that high-risk property owners pay more, and to toughen risk mitigation rules that govern construction.

There may be a call for more frequent government mapping of flood-prone areas and more careful study of areas suffering from erosion, like the Mississippi Delta, which elevates the flood risk.

And, with major hurricanes becoming more common and virulent, the public costs of providing flood insurance will have to be reassessed.

"There's a significant chance that the taxpayer will have to bail out the flood insurance program because premiums have been based on claims that may have reflected a much lower risk than we face going forward," said Douglas J. Elliott, president of the Center on Federal Financial Institutions, a nonprofit institute that studies insurance and lending. "They certainly didn't factor in a hurricane like Katrina."

Major questions still loom about how much responsibility regular homeowner policies must take for damage that could be assessed as resulting from wind -- which is covered under typical homeowner policies, rather than flooding, which is not. There is also still the possibility that a victim-compensation fund could be created, such as the one established after the terrorism attacks of Sept. 11, 2001.

An intense debate

That suggestion, that victims should somehow be made whole from any major disaster with federal aid, is certain to intensify the debate over the potentially enormous costs of development in dangerous places.

The National Flood Insurance Program, created by Congress in 1968, was designed to provide affordable flood insurance to homeowners and businesses through licensed agents and insurance companies, since the private market either avoided the coverage or offered it only at high prices.

Theoretically, it was a way for individuals who chose to live in flood-prone areas to share in the cost of disaster relief, through premiums. Most lenders require flood insurance on loans issued on property in flood-prone areas, as a protection on their investment. The federal flood insurance has a cap of $250,000 on residential property, although additional coverage can be purchased from private insurers.

Before its inception, the federal government often stepped in and provided disaster assistance after a flood -- an expensive proposition for taxpayers and one that covered only some of the losses.

Generally, the current program has paid for itself through the years, with some exceptions -- until now.

"It has paid for itself, but there's a strong argument that it was able to pay for itself by being lucky," Elliott said.

Last year, the brunt of four hurricanes and losses of $1.3 billion forced it to use all its premium money and to dip into the Treasury for a loan of several hundred million dollars, Elliott noted.

Sharing the load

The anticipated claims from Katrina will certainly wipe out the fund and force re-examination of premium rates, he said. Already the high-risk homes are likely being subsidized by low-risk homes under the flood insurance program, in much the same way that good drivers carry some of the load for high-risk drivers in paying auto insurance premiums.

"If the government sells you cheap auto insurance, but you don't have an accident, are you being subsidized?" he said. "Every year there's a chance you would have the accident or Katrina could have hit. Without having the private market offering it, you can't prove it's a subsidy, but it's highly likely."

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