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After floodwaters ravaged Gordy Henn's home this fall, he sorely recalled a letter received two years ago from his mortgage company.
At first it seemed like good news: His property was no longer considered part of a high-risk flood zone, the letter said, so he wasn't legally required to carry flood insurance. By the time he discovered the company had made a mistake, it was too late. His house in Zumbro Falls and hundreds of others across southern Minnesota were damaged by a September flood.
Henn is stuck with $50,000 in repairs and thousands more in lost personal property. "I have a house with no heat, no walls, no furniture, no anything," Henn said.
It's a common predicament in Minnesota. Some 100,000 structures across the state sit in high-risk flood areas without proper insurance coverage, according to the latest federal estimates.
The lack of coverage means tens of thousands of homes and businesses could be exposed, with only the generosity of state, federal or private aid to help rebuild if a flood hits. The lack of coverage leaves taxpayers who aren't even near flood zones on the hook to help with public aid.
"People have the perception 'I don't need flood insurance because the government will bail me out,'" said Ceil Strauss, the state's flood insurance coordinator. "The individual homes and businesses that don't have flood insurance, they're the ones that are really hit hard."
Minnesota ranks next to last among the 50 states for flood insurance coverage in high-risk areas, with just 4,709 of about 111,000 structures in high-risk zones carrying coverage, according to 2008 data provided to the state by the Federal Emergency Management Agency. Only Utah trails in coverage with 3.64 percent of high-risk properties covered.
Low participation rates have been a problem throughout the 40-year history of the National Flood Insurance Program. Experts cite several problems: Poorly trained insurance agents have told customers they didn't qualify for flood insurance even though there are no limits on who can buy the coverage. Consumers see the coverage as unnecessary and expensive, with some premiums topping $2,000 a year in Minnesota for maximum coverage in high-risk zones.
Moreover, lenders aren't consistently enforcing a federal law that mandates flood insurance for any property with a federally regulated mortgage in the so-called 100-year flood zone, which designates areas with the highest risk. Properties in those zones have a 1 percent chance of flooding in any given year. A 2006 Rand Corp. study found that about one in four high-risk properties don't carry mandated flood insurance.
Nationally, about 50 percent of homes in the high-risk zone have flood insurance, but rates in the Midwest are 20 to 30 percent, according to the Rand study, which cited the program's limited coverage of basement damage as one of the obstacles to higher participation rates.
Minnesota officials believe participation rates are as high as 20 percent here, but they said that is based on a guesstimate of about 20,000 properties in the high-risk zone.
Policy would have cost her $300
Flooding is the most common disaster in the United States, causing $24 billion in damage over the past decade. Even homes outside the 100-year flood zone are at risk, with one in four flood insurance claims coming from low and moderate risk areas.
Janice Ostrom and her husband, Richard, spent $300 to purchase their first flood insurance policy after 2 1/2 feet of water caused $100,000 worth of damage to their Mazeppa home in September. Janice Ostrom said her insurance agent never mentioned flood insurance, perhaps because her home lies outside the 100-year flood zone.
Like many uninsured property owners, she and her retired husband are taking out a low-interest loan to get the house back in order.
"It changes your outlook," said Ostrom, who is trying to figure out how to make ends meet. "Your finances have changed. What you hoped for in five years, ten years has changed. It's all unknown."
While victims of other floods have received thousands of dollars in federal help, the Ostroms and others hit hard by the September floods are out of luck. The federal government denied the state's request for individual assistance to homeowners, even though more than 600 homes suffered damage from floodwaters. Just 22 percent of those properties carried flood insurance, according to preliminary assessments.
The state approved $73 million in flood relief, and about $60 million more in federal government aid is expected. But most of that money will go to help fix roads, bridges and other public infrastructure as well as help businesses recover.
Misinformation is costly
The federal flood insurance program was created in 1968 out of the realization that private insurers couldn't afford to offer the coverage anymore because it was so costly and risky. Almost from the start, federally regulated banks have been the chief enforcer to make sure high-risk properties are covered through the mandatory purchase requirement tied to home loans. State regulated banks are exempt from the law.
Banks can face fines for not ensuring that their loans in high-risk flood areas carry the insurance, but "there's been a disregard in the past" in terms of compliance, said David Dickinson, a flood insurance expert whose company, Banker's Compliance Consulting, helps some 600 banks comply with federal regulations.
Dickinson said banks have been working harder on compliance in recent years, as federal regulators crack down on violations in the wake of Hurricanes Katrina and Rita in 2005. Part of the problem, he said, is that bankers and insurance agents sometimes disagree on whether a property lies in a 100-year flood zone.
"Constantly I get the bankers and the agents pointing their fingers at each other," Dickinson said.
Scott Deobald wishes someone had mentioned flood insurance when he took out a loan to open Scooter's Bar and Grill in Zumbro Falls. A former plumber, Deobald cashed in his retirement 2 1/2 years ago to buy the bar.
It wasn't until the September floods pushed more than 5 feet of water in his place, causing an estimated $165,000 in damage, that he realized his 131-page property and business insurance policy doesn't cover floods. He said neither his lender nor his insurer told him that his business was in a high-risk flood zone. Deobald said his insurance agent told him his company is "not in the business to sell flood insurance."
'No rule you can't buy'
Similar complaints followed the 2007 floods that devastated Rushford and other areas of southeast Minnesota. One of the persistent myths, perpetuated by some insurance agents and others, is that someone has to live in a flood zone to purchase flood insurance.
That's not true. The only prerequisite to purchase flood insurance is that a property owner or renter live in a community that participates in the National Flood Insurance Program, and about 94 percent of Minnesotans live in communities that meet that requirement.
In 2005, FEMA started implementing mandatory training for agents that sell flood insurance. Minnesota followed suit in 2008, adopting a law that requires insurers to send an annual notice to policyholders that lets them know their homeowners policy doesn't cover flood damage and that they'll have to buy flood insurance if they want to protect against that risk.
"Eventually we hope all the agents will know the truth about flood insurance," said Mark Kulda, vice president for public affairs with the Insurance Federation of Minnesota, an insurance trade association. "There's no rule you can't buy unless you live in the floodplain. Too many people have had that answer over the years."
To raise awareness and increase participation rates, FEMA has increased marketing in Minnesota and across the region. The effort seems to be helping. As of August, Minnesota had 12,100 flood insurance policies in effect, an increase of 10 percent in the past year. Nationally, the program grew by less than 1 percent.
After conducting focus groups, FEMA found that many Midwesterners have a false sense of security because the region is protected by a network of levees. Many residents see flooding as a routine but manageable occurrence.
"We've seen how devastating flooding can be for homeowners and their families or small business owners, especially if you don't have flood insurance," said FEMA spokeswoman Rachel Racusen. "Even those in lower-risk areas should consider investing in flood insurance because as we've seen time and again, flooding can happen anytime, anywhere, in any flood risk zone."
Residents who want to see if their property is located in a flood zone can visit a government website, FloodSmart.gov, which gives information about flood risks and helps consumers find an agent to buy insurance.
Brad Schrade • 612-673-4777