W-23: Statutory vs. Contractual Flood Insurance Requirements

W-23: Statutory vs. Contractual Flood Insurance Requirements

Presenters: J. Fletcher Willey, Jr., CPCU, AAI; Lauri Lydecker, CRCM; and Ed Pasterick, FEMA

Statutory Flood Insurance Requirements

So, what coverage IS required by the Federal law?

• The minimum Federal requirements - § 4012a(b)

(1) - “…an amount at least equal to”

• “the outstanding principal balance of the loan[s], or”

• “the maximum limit of coverage made available under the Act with respect to the particular type of property, whichever is less.”

• The maximum limit available under the Act - § 4012a(a)

• “the development or project cost (less estimated land cost), or”

• the maximum for the type/use of building and community status


The Interagency Q&A on Flood Insurance –

•Section II – Determining the appropriate amount of flood insurance required under the Act and Regulation

• Questions #8 - #17



•Question #14 – Multiple buildings in a SFHA

Is flood insurance required for each building when the real estate security contains more than one building located in an SFHA in a participating community?

• Answer: Yes. The lender must determine the amount of insurance required on each building and add these individual amounts together.


Appurtenant Structures –

When one NFIP policy is not enough

•Can a detached garage always be covered under a Dwelling Policy and meet the minimum statutory requirements?

•Unfortunately - No


Example: Appurtenant Structures - When one NFIP policy is not enough

• Total Loans: $400,000

• Replacement Cost Value (RCV):$310,000

• Main house $280,000• Detached garage $ 30,000

• Maximum NFIP by type of structure:$280,000

• Main house (Max) $250,000• Detached garage (RCV) $ 30,000

• Minimum Coverage Required:$280,000

• One Dwelling Policy for $250,000 isn’t enough



•Question #16 – More than the minimumCan a lender require more flood insurance than the minimum required by the Regulation? • Answer: Yes. Lenders are permitted to require more

flood insurance coverage than required by the Regulation. The borrower or lender may have to seek such coverage outside the NFIP. Each lender has the responsibility to tailor its own flood insurance policies and procedures to suit its business needs and protect its ongoing interest in the collateral. However, lenders should avoid creating situations where a building is “over-insured.”


Setting the record straight on the some common misconceptions –

• FEMA does not have the statutory authority to require the purchase of flood insurance on mortgages

• FEMA does not have the authority to regulate lenders

• So… “Who ya gonna call?”

• Call your primary regulator if your question is about what is required to comply with the law

• Call FEMA with questions about the NFIP

Going Beyond Statutory Flood Insurance Requirements

Requiring more than the Federal minimum requirements – When Does it make sense?

•Bank credit policy

•Secondary market requirements

•Excess Flood Insurance - When the maximum NFIP limits available are not enough protection

RCV versus ACV Considerations

Replacement Cost Value (RCV) versus Actual Cash Value (ACV)

• Calculating RCV Accurately - Excluding land value

• Avoiding over-insuring:

• State insurance laws

• Many prohibit insurance agent and lenders from insuring for more than the “insurable value”

• NFIP loss payouts – Mandatory Purchase Guidelines page 28

• RCV: Primary residence and RCBAP

• ACV: General Form and non-primary residences

Special Notice of Flood Hazard Documents

Statutory Notification Requirements

• Prior to loan closing - § 4104a(a)

• Borrower & Servicer

• Deficiency in coverage - § 4012a(e)

• Change of servicer - § 4104a(b)

• Within 60 days of change


Borrower Notifications

• Be clear on where the law ends and contractual requirements begin

•Misstatements can lead to confusion and reduce the lender’s credibility

• Applies to:

•Initial Notice to Borrower cover letters

•Ongoing monitoring “45-day” letters


Example – Initial Notice to Borrower Cover Letter

“Federal law requires that coverage limits must be equal to the replacement cost of the structure or the maximum coverage amount available under the National Flood Insurance Program, whichever is less. The deductible should not exceed $5,000.”

• These are the lender or investor’s requirements, NOT provisions that are required by the statute

• Change the statement to say “[Lender name] requires…”


Example – Map Change 45-Day Letter

“Under the statutes of the National Flood Insurance Act of 1968, as amended, and the Flood Disaster Protection Act of 1973, as amended, the Federal Emergency Management Agency (FEMA) mandates that flood insurance must be obtained within 45 days after first notification that your property is located in a Special Flood Hazard Area (SFHA).”

• Federal statute does not grant FEMA any authority to mandate flood insurance

Force Placement of Flood Insurance

Lender force placement

• Can the lender force place if the borrower has coverage that meets the minimum Federal requirement?

• Yes, if permitted under the loan contract

• Don’t imply that the force placement is due to the FDPA

• Impact of state banking and/or insurance laws

Force Placement of Flood Insurance

Force placement outside of the MPPP

• Private borrower flood policy vs. a private force placed policy

• Do they meet the MPG rules for private policies?

• The financial strength of the carrier

• Force placed insurance policy provisions

Statutory vs. Contractual Requirements – Wrap Up

Statutory vs. Contractual Considerations

• Know what the law requires

• When more coverage makes sense

• Contract provisions

• Calculate coverage correctly

• The fine line between under-insuring and over-insuring

• Make notices accurate about coverage requirements

• Force placement

Thank You