The Moral Hazard of Minimum Standards
Early in my career, when I was an appointed planning commissioner in Licking County, Ohio, the late Jerry Brems, who was the county planning director and oversaw floodplain management, explained why the county had some of the most stringent floodplain management standards in the state. It was because they wanted folks moving into Licking County to maintain a certain quality of life and quality of development, and that meant they didn’t want to put the burden of flood recovery or cleanup on the rest of the county’s citizens or local governments. “It wouldn’t be fair to those living in Licking County if those moving in resulted in costs that others paid for,” he would often say when referring to the basic arguments for supporting higher standards. And by no means was Licking County a place where development was being throttled back; rather, it had a rapidly urbanizing western side near the Columbus metro area and a more rural eastern side. At the time, Licking County’s approach to floodplain management was not only to have higher construction standards but also to better identify flood hazard areas and steer development away from them.
Since that time, I have often wondered how a community moves from point A — implementing the bare minimum standards that are likely inadequate — to point B, having a robust land use planning and regulatory system that is fair to all and ensures a good quality of life not beholden to hazards like flooding. It seems like you either have communities like Licking County or you don’t. What are the arguments that work for local political leaders when it comes to saying “yes” to better standards and codes?
I want to focus the remainder of the column on one of these arguments: the moral hazard of promoting inadequate minimum codes and building or land use standards. What is moral hazard? The definition of a moral hazard is when a person or group takes more risks because they do not have to pay for the full cost of those risks. The connection here is essentially that weaker building rules mean developers can build cheaply in high-risk flood zones. If a flood ruins the property, government disaster aid, subsidized insurance, or public funds pay to fix or rebuild it.
How might weaker standards increase risk?
Lower Costs, Higher Dangers. Builders save money upfront by ignoring safe elevation levels, flood-resistant materials, or more expensive certified products. Indeed, the cost of construction might be lower but the trade-off is greater risk — and costs — to subsequent building owners and occupants. After the house is built and sold, most builders are off to build the next subdivision, unburdened by the legacy risk that they may have left behind.
False Security. Weak rules or reduced standards trick buyers into thinking a property is safer than it actually is. They think they’re “getting more house for the money.” I had a conversation with a neighbor at the pool this summer about this very thing. His brother recently had an expensive home built in a community with no building codes. He thought he was getting a “deal” — a larger home and a lot of amenities at a lower price. The “reality” is that his less-than-one-year-old home needs literally tens to hundreds of thousands of dollars in repairs due to the builder cutting corners and the lack of codes. Unfortunately, the brother wrongly assumed that the community had adequate standards in place for construction.
Public Costs for Recovery. What gets the most attention here is disaster assistance — and sometimes the false perception that the government will bail folks out if they get hit by a disaster. Of course, it is ultimately the taxpayers who pay for that — whether directly or through unrepaired property and infrastructure that turns into blight. But what is less visible are those costs that get absorbed by the community when there isn’t a disaster declaration: infrastructure repair, risks to local officials and first responders, and opportunity costs because scarce public funds have to go into repair and recovery rather than something else.
At the end of the day, I think that Jerry was making the case for moral hazard even if he didn’t put it into those words exactly. So, my question is: How does the moral hazard argument for higher standards resonate with you? Does it, or would it, work in your state or community? What other arguments have you made for going beyond NFIP minimums? Feel free to share your experiences by dropping me a line at chad@floods.org.
Let’s face it, in one sense we seem to be stuck with 50-plus-year-old NFIP minimum standards as a baseline in many states and communities. On the other hand, we have new and much better standards in ASCE 24-24 that will be part of the 2027 International Building Code and International Residential Code. I truly believe this will lead to a generational opportunity to improve our flood loss reduction standards through the building code.
Over the next decade, we will be facing a state-by-state battle with opponents of higher standards who want the status quo. With flood disaster losses climbing, we can’t afford to be complacent. We need to develop the best and most effective arguments. I think that moral hazard could be one of them. Let’s do this!
Your partner in loss reduction,
