Int Q&A – Private Flood Comp 1 – What is the maximum deductible a flood insurance policy issued by a private insurer can have for residential or commercial properties located in an SFHA?

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Q:  PRIVATE FLOOD COMPLIANCE 1. What is the maximum deductible a flood insurance policy issued by a private insurer can have for residential or commercial properties located in an SFHA?
 
A:   The maximum deductible for a flood insurance policy issued by a private insurer varies depending on whether the lender accepts the policy under the mandatory acceptance or the discretionary acceptance provision. For purposes of compliance with the mandatory acceptance provision, the Regulation provides that a policy must provide coverage at least as broad as the coverage provided under an SFIP for the same type of property, including a deductible that is no higher than the specified maximum under an SFIP for any total coverage amount up to the maximum available under the NFIP at the time the policy is provided to the lender. For a private policy with a coverage amount exceeding that available under the NFIP, the deductible may exceed the specific maximum deductible under an SFIP. However, for safety and soundness purposes, the lender should consider whether the deductible is reasonable based on the borrower’s financial condition, among other factors. See Q&A Amount 9.

● For example, if a private policy for a commercial building provided $1,000,000 of flood
insurance coverage, which is in excess of the NFIP maximum coverage of $500,000 for a
commercial building, then it would be acceptable for a million-dollar policy to have a
deductible higher than the maximum deductible for a policy available under the NFIP.
The lender should consider whether the deductible is reasonable based on the borrower’s
financial condition.

● Similarly, if a private policy for a residential building provided $1,000,000 of flood
insurance coverage, which is in excess of the NFIP maximum coverage of $250,000 for
a residential building, then it would be acceptable for a million-dollar policy to have a
deductible higher than the maximum deductible for a policy available under the NFIP.
The lender should consider whether the deductible is reasonable based on the borrower’s
financial condition.
 
For purposes of compliance with the discretionary acceptance provision, the Regulation requires that the policy provide sufficient protection of the loan, consistent with safety and soundness principles. Among the factors a lender could consider in determining whether a policy provides sufficient protection of a loan is whether the policy’s deductible is reasonable based on the borrower’s financial condition. Unlike the limitation on deductibles for policies accepted
under the mandatory acceptance provision for any total coverage amount up to the maximum available under the NFIP, a lender can accept a flood insurance policy issued by a private insurer under the discretionary acceptance provision with a deductible higher than that for an SFIP for a similar type of property, provided the lender has determined the policy provides sufficient protection of the loan, consistent with safety and soundness principles.

Whether the lender is evaluating the policy under the mandatory acceptance provision or the discretionary acceptance provision, a lender may not allow the borrower to use a deductible amount equal to the insurable value of the property to avoid the mandatory purchase requirement for flood insurance.50 However, a lender may accept a private flood insurance policy covering multiple buildings regardless of whether any single building covered by the policy has an
insurable value lower than the amount of the per occurrence deductible. See Q&A Amount 9, Q&A Amount 10, and Q&A Private Flood Compliance 2.
 
 
ADDITIONAL INFORMATION:
This Q&A was included in the Interagency Questions and Answers Regarding Flood Insurance, which were issued on 05/11/2022.  They were published in the Federal Register on 05/31/2022 and may be found here:  https://www.federalregister.gov/documents/2022/05/31/2022-10414/loans-in-areas-having-special-flood-hazards-interagency-questions-and-answers-regarding-flood
 

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