Insurance program, called on for flood relief, is broke Taxpayers are left to foot the bill


WASHINGTON -- As flood waters recede in the Middle West, thousands of people will be turning to the Federal Flood Insurance program for the money they need to repair or rebuild their damaged homes. But in a development long predicted by its critics, the program is out of money.

The homeowners will get their benefits because the program can borrow up to $1 billion from the Treasury, and that should be more than enough to pay their claims. But questions about how -- or if -- the program should repay the loans are raising questions about whether it should exist at all.

Backers of the insurance program say its building code requirements have encouraged people to build their houses high enough and strong enough to withstand flood damage, thereby greatly reducing the need for federal disaster assistance. The only major problem with the program, they say, is that not enough homeowners take advantage of it, either because they are not aware that the insurance exists or because banks, in violation of the program's rules, have not required them to purchase it.

But opponents argue that providing federal insurance that is unobtainable or prohibitively expensive on the private market is subsidizing people who build homes on vulnerable flood plains and beaches. Over the long run, they argue, the premiums are too low to cover the claims, leaving the taxpayers to foot the bill.

By 1985, in fact, Congress had forgiven $1.2 billion in loans that the program had been unable to repay. The program began this fiscal year with well over $400 million in reserve. But devastating winter storms depleted the fund, and by July 1, as rivers in the Midwest were rising, administrators estimated that the program was running about $18 million in the red.

"Today we find ourselves in the very position we had hoped to avoid: a nearly bankrupt fund, underwritten by the American taxpayer, facing a season of hurricanes," officials of several environmental groups wrote last month to Rep. Joseph P. Kennedy II, the Massachusetts Democrat whose subcommittee on consumer credit and insurance has held hearings on the program.

As of Friday, the program had received about 1,600 claims based on Midwest flooding. But the agency will not get a true picture of its liability until the flood recedes.

"It's going to be a couple of weeks before we have a handle on the amount," said James Taylor, assistant administrator at the Federal Emergency Management Agency for the flood insurance program. "Given our policy base, it's not going to be of a magnitude that will impair our ability to pay." As premiums come in, the program may even be able to pay the claims without borrowing, he said.

There are about 15,000 policies totaling $780 million in the areas affected by flooding, Mr. Taylor said. The agency expects to pay out about $50 million on 6,000 to 7,000 claims.

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