Q: In regard to a detached garage and other structures on such property – what is the best way to determine the value of each of these structures? The appraisal generally provides a value for the entire parcel including the land. We generally subtract the land value from the total appraised value to determine dwelling cost, which is part of our formula for determining flood insurance requirements. The garage and/or any shed on the property which would be covered under the master flood policy is generally not “broken out” from the total value. Should we use the appraisal adjustments for such structures to determine value, to insure that the value of the garage does not exceed 10% of the value of the property? Or should we use the information provided by the town on the property card, regarding the assessed value?
A: Please refer to Q&A # 9, pasted here:
9. What is the ‘‘insurable value’’ of a building?
Answer: The insurable value of a building is the same as the overall value of a property minus the land on which the property is located. FEMA’s Mandatory Purchase of Flood Insurance Guidelines state that the insurable value of a building is the same as 100 percent replacement cost value (RCV) of the insured building, which is defined as ‘‘[t] he cost to replace property with the same kind of material and construction without deduction for depreciation.’’ FEMA’s guidelines, however, also provide that lenders should avoid creating a situation in which the insured pays for more coverage than the NFIP would pay in the event of a loss strictly linking insurable value to RCV is not practical in all cases. In cases involving certain residential or condominium properties, insurance policies should be written to, and the insurance loss payout usually would be the equivalent of, RCV. However, in cases involving nonresidential properties, and even some residential properties, where the insurance loss payout would normally be based on actual cash value, which is RCV less physical depreciation, insurance policies written at RCV may require an insured to pay for coverage that exceeds the amount the NFIP would pay in the event of a loss. Therefore, it is reasonable for lenders, in determining the amount of flood insurance required, to consider the extent of recovery allowed under the NFIP policy for the type of property being insured. This allows the lender to assist the borrower in avoiding situations in which the insured pays for coverage that exceeds the amount the NFIP will pay in the event of a loss. Lenders need to be equally mindful of avoiding situations in which, as a result of insuring at a level below RCV, they underinsure property. In calculating the amount of insurance to require, the lender and borrower (either by them or in consultation with the flood insurance provider or other appropriate professional) may choose from a variety of approaches or methods to establish the insurable value. They may use an appraisal based on a cost-value (not market-value) approach, a construction-cost calculation, the insurable value used in a hazard insurance policy (recognizing that the insurable value for flood insurance purposes may differ from the coverage provided by the hazard insurance and that adjustments may be necessary; for example, most hazard policies do not cover foundations), or any other reasonable approach, so long as it can be supported.
– 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