Q: The bank has two commercial loans that are in flood areas. We have the required amounts of flood insurance on the structures. We were advised by auditors that since the UCC-1 filings include all assets (including the building contents) we need to have flood insurance on the contents of the buildings. Do we need insurance on the contents as well as the structure?
A: Yes, contents coverage is required based on the information provided in the question. There are three factors to consider when determining if flood insurance is required for contents:
1) Does the bank have a security interest in the building and its contents?
*Keep in mind that the method of securing collateral is not relevant. (i.e. UCC, Mortgage, Security Agreement)
2) Is the building that serves as collateral located in a Special Flood Hazard Area?
3) Are the secured contents stored in that building?
If the answer is yes to all of these questions, then flood insurance on contents is required. You should have procedures to make a reasonable determination of value on contents to obtain the appropriate amount of coverage.
– This Q&A was included in the materials from the FDIC New York Region Regulatory Teleconference: “Flood Insurance – Flood Insurance Compliance and an Examiner’s Perspective” which took place on December 3, 2012. These materials may be found here: https://www.fdic.gov/news/conferences/NY/2012-12-03.html