A new law partially addresses that situation. AB 70 was signed by the governor this week. It adds a new section 8307 to the California Water Code:
(a) A city or county may be required to contribute its fair and reasonable share of the property damage caused by a flood to the extent that
the city or county has increased the state’s exposure to liability for property
damage by unreasonably approving new development in a previously undeveloped area that is protected by a state flood control project. However,a city or county shall not be required to contribute if, after the amendments required by Sections 65302.9 and 65860.1 of the Government Code have become effective, the city or county complies with Sections 65865.5, 65962,and 66474.5 of the Government Code as applicable with respect to that development. This section shall not be construed to extend or toll the statute of limitations for challenging the approval of any new development.
(b) A city or county is not required to contribute unless an action has been filed against the state asserting liability for property damage caused by a flood and the provisions of subdivision (a) providing for contribution have been satisfied. A city or county is not required to contribute if the state settles the claims against it without providing the city or county with an opportunity to participate in settlement negotiations.
The statute defines “unreasonably approving” as meaning "approving a new development project without appropriately considering significant risks of flooding made known to the approving agency as of the time of approval and without taking reasonable and feasible action to mitigate the potential property damage to the new development resulting from a flood."
The liability provision does not become effective until related legislation is passed, and it is obviously hedged in with qualifications. But at least it is a start in reducing the incentives for development in high risk areas.