Q: We are granting a loan for $2.2 million in a flood zone. The borrower has $3.0 million in coverage from Lloyds of London with a $25,000 deductible. We will hold the deductible amount in escrow. We have never received any flood insurance from anyone other than the NFIP, so I want to make sure that this scenario is in compliance.
A: A private flood insurance policy that meets all six of the FEMA insurance policy criteria described below (a through f) conforms to the mandatory flood insurance purchase requirements of the 1994 Reform Act. Please note that Section 100239 of the Biggert-Waters Act amends § 4012a of the National Flood Insurance Act requiring lenders to accept private flood insurance as satisfaction of the flood insurance coverage requirements if the coverage meets the requirements provided in the Biggert-Waters Act. Until the regulatory agencies issue implementing regulations for the new Biggert-Waters Act provisions, bankers should follow outstanding guidance in this area.
The insurer must be licensed, admitted, or otherwise approved to do business in the jurisdiction where the building is located, by the insurance regulator of that jurisdiction, except as indicated in b. below.
b. Surplus Lines Recognition (Non-Residential Commercial)
In the case of non-residential commercial property insurance issued under a policy of difference in conditions, multiple peril, all risk, or other blanket coverage, the insurer should be recognized, or not disapproved, as a surplus lines insurer by the insurance regulator of the jurisdiction where the building is located.
c. Requirement of 45-Day Cancellation/Non-Renewal Notice
The private flood insurance policy should include a requirement for the insurer to give 45 days’ written notice of cancellation or non-renewal to the insured with respect to the flood insurance coverage. The policy should also state that, to be effective, such notice must be mailed to both the insured and the lender or Federal agency lender, and must include information about the availability of flood insurance coverage under the NFIP. The policy should be as restrictive in its cancellation provisions as the Standard Flood Insurance Policy (SFIP).
d. Breadth of Policy Coverage
The policy must guarantee that the flood insurance coverage, considering deductibles, exclusions, and conditions offered by the insurer, is at least as broad as the coverage under the SFIP.
e. Strength of Mortgage Interest Clause
Lenders must ensure that a mortgage interest clause similar to that contained in the General Conditions section of the SFIP is contained in the policy.
f. Legal Recourse
The policy must contain a provision that the insured must file suit within 1 year after the date of written denial of all or part of the claim.
(Source: pages 57-58 of FEMA’s Mandatory Purchase of Flood Insurance Guidelines)
– 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