Q: A loan for a purchase is closing in 10 days. The bank pulls the FEMA certificate and determines that the property is in a flood zone. Immediately, the bank sends the required notice and addendum to the customer about the requirement to purchase flood insurance. The appraisal arrives 4 days later with a RCV of $191,640. It’s a residential property and the maximum allowable coverage through the NFIP is $250,000 and the loan amount is $400,000. The bank requires the borrower to obtain $191,640 in building coverage for the appropriate flood zone. The borrower obtains a flood insurance policy for $191,640. The day before closing the bank receives a hazard insurance binder that indicates the RCV of the building is $305,000. If this is the insurable value, the customer needs $250,000 in coverage, but the flood insurance policy of $191,640 has been requested and paid for. The bank still does not know what the RCV on the flood insurance policy will indicate.
Is the bank in compliance with the amount of building coverage in place? Does the bank need to monitor this loan and reevaluate the insurable value once all policies are received? If the bank needs to increase coverage, what actions should the bank take if the flood insurance company is unwilling to change a new policy until the time of renewal? What value should we rely on?
A: The response to question #20 provides guidance on determining the “insurable value” of a building. A bank has flexibility in determining insurable value, so long as it can be supported. A bank should develop procedures that outline a reasonable approach for determining the insurable value of a building with respect to flood insurance requirements. A bank should use the valuation method it determines to most accurately reflect what the insurance loss payout would be.
– 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