How Big Changes Coming to Flood Insurance Will Affect Commercial Property in Florida

How Big Changes Coming to Flood Insurance Will Affect Commercial Property in Florida

The Federal Emergency Management Agency (FEMA) administers the National Flood Insurance Program (NFIP). The NFIP offers insurance coverage for physical losses to buildings and/or contents caused by a flood. Over the years, FEMA has incurred debt from the Department of Treasury to pay claims and expenses associated with NFIP-insured properties. According to the Government Accountability Office (GAO), FEMA is unlikely to collect enough in premiums from NFIP-insured properties to repay this debt. Although changes to the NFIP have been under consideration for some time in order to bridge the gap between premiums and expenditures, new rates for all NFIP-insured properties will go into effect on October 1, 2021 pursuant to a major overhaul of the NFIP referred to as “Risk Rating 2.0.”

What is Risk Rating 2.0?

Risk Rating 2.0 is FEMA’s comprehensive redesign of the flood risk rating system for all types of properties, including commercial and residential properties. Risk Rating 2.0 will incorporate a broader range of flood frequencies than the current rating methodology’s heavy dependence on the 1-percent-annual-chance-event. For example, Risk Rating 2.0’s methodology will focus on a property’s distance to a coast and other flooding sources, different types of flood risk (e.g., hurricane wind, storm surge, inland flooding, etc.), and structural variables (e.g., rebuilding cost, height of lowest floor relative to base flood elevation, and foundation type). Instead of primarily relying on FEMA’s existing flood mapping data and NFIP claims data to determine flood risk, Risk Rating 2.0 will also incorporate third-party, commercially-prepared catastrophe flood models and replacement cost data. In addition, under Risk Rating 2.0, flood zones will no longer be used in calculating flood insurance premiums, although flood zones will still be used for certain purposes such as the determination of the mandatory purchase requirement for property located in a Special Flood Hazard Area as well as floodplain management purposes. Accordingly, Risk Rating 2.0 will consider each property’s individual flood risk and underlying values from a broader data set, meaning that insurance rates may vary for different properties located in the same flood zone.

Proponents of Risk Rating 2.0, such as First Street Foundation, praise FEMA’s adoption of a climate-centric NFIP through its incorporation of commercially-prepared catastrophe flood models which account for the actual or perceived risk of climate change. Supporters of Risk Rating 2.0, such as David Maurstad, FEMA’s Deputy Associate Administrator, believe that flood insurance premiums could decrease under Risk Rating 2.0 for owners of lower value homes as replacement cost data better account for losses thereto.

Critics of Risk Rating 2.0 believe that commercially-prepared catastrophe flood models do not accurately predict tidal behavior, the effects of certain manmade structures such as levees, and stormwater management practices. These critics wonder whether commercially-prepared catastrophe flood models yield imprecise data which will result in negative implications for various stakeholders. There is also some concern among insurers that increased flood insurance premiums under Risk Rating 2.0 will cause some property owners to forego flood insurance.

Who Will the Changes Affect and How Will They Be Affected?

Risk Rating 2.0 means that new rates for existing NFIP-insured commercial and residential properties will go into effect on October 1, 2021. In addition, by incorporating commercially-prepared catastrophe flood models, the risk rating of additional commercial and residential properties may be reclassified to a higher risk category. GAO anticipates that increased flood insurance premiums from existing policyholders combined with new premiums from reclassified properties will contribute to the stabilization of the NFIP.

FEMA has not yet provided any information about premium increases or decreases associated with Risk Rating 2.0. Nevertheless, FEMA must adhere to the statutory requirements for premium increases set forth in 42 U.S.C. § 4015(e). By way of example, flood insurance premiums for commercial property could rise by 25% per year until full risk-based rates are achieved, and the flood insurance premium for a primary residence could rise by as much as 18% per year. Note that the foregoing percentages represent examples only and are subject to certain exceptions and limitations set forth in 42 U.S.C. § 4015. In addition, since surcharges and fees are not considered part of the policy premium, the total outlay to procure a flood policy will be greater than the foregoing percentage increases.

Owners of commercial and residential property in Florida are not the only ones who will be affected by Risk Rating 2.0. Insurers and insurance agents will see their business change as premiums rise for existing policyholders, some policyholders drop coverage due to affordability issues, and new insurance customers are generated by the reclassification of property to a higher risk category attributable to the individualized flood risk factors of Risk Rating 2.0. The owners of commercially-prepared catastrophe flood models, such as First Street Foundation, will also benefit as they sell or license their models and data sets to private parties. Lenders will be adversely impacted by Risk Rating 2.0 as borrowers struggle to pay for increased insurance premiums in mandatory flood insurance areas. Downward pressure on property values attributable to Risk Rating 2.0 may cause local governments to experience reduced property tax collections for some properties.

How Should Owners and Prospective Owners Prepare for the Changes?

Property owners and prospective property owners can take the following steps to prepare for Risk Rating 2.0:

  1. Research the property. Compare the property’s designation on FEMA’s flood map to a commercially-prepared catastrophe flood model. Consider the effects of high tide flooding in coastal areas of Florida. For example, some of the roads which the City of Miami Beach recently elevated has placed certain properties below street level and caused the pooling of water on those properties.
  2. Contact an insurance agent. Communicate with an insurance agent who issues flood insurance policies to see if the agent can provide information about the property and how the property may be affected by Risk Rating 2.0. FEMA’s website provides a listing by state of participating insurance providers as well as their contact information.
  3. Review commercial leases. Review commercial leases to confirm which party to the lease is responsible for flood insurance. Be prepared to address the issue of increased flood premiums as soon as information concerning premium increases becomes available.
  4. Contact local government. Communicate with local government (or hire a consultant) to investigate whether there are any moratoria or restrictions affecting the property which directly pertain to flood risk. For example, the City of St. Petersburg in the Tampa Bay area has implemented certain restrictions and requirements in high risk flood areas relative to density, building elevations, and structural materials.
  5. Explore flood risk mitigation measures. Whether building new or retrofitting existing structures, flood risk mitigation measures can offset flood risks and provide mitigation credits to reduce premiums. Examples of such mitigation measures, which can be costly, include:
    • Installing flood openings in the base of the structure in order to facilitate the flow of floodwater in accordance with 44 C.F.R. § 60.3;
    • Elevating structures onto posts, piles, or piers; and
    • Elevating equipment and machinery and equipment above the lowest floor.


FEMA’s implementation of Risk Rating 2.0 is scheduled to take effect on October 1, 2021. Owners of Florida property should brace themselves for Risk Rating 2.0, which will impact property ownership costs and the resale market for years to come. Commercial landlords and tenants should review their leases and be prepared for increased flood insurance premiums. Potential buyers of Florida property should be aware of flood risks in certain parts of Florida and evaluate their purchase decisions in light of Risk Rating 2.0. Owners of commercial and residential property should be prepared for lenders to require flood insurance for properties having increased flood risks resulting from Risk Rating 2.0.

The law firm of Shutts & Bowen LLP advises parties on transactions involving the sale, leasing, and use of real property in Florida.

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