Int Q&A – Condo and Co-op 7 – How does the RCBAP’s co-insurance penalty apply in the case of residential condominiums, including those located in multi-story condominium complexes?

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Q:  Condo and Co-op 7 – How does the RCBAP’s co-insurance penalty apply in the case of residential condominiums, including those located in multi-story condominium complexes?
 
A:   In the event the RCBAP’s coverage on a condominium building at the time of loss is less than 80 percent of either the building’s replacement cost or the maximum amount of insurance available for that building under the NFIP (whichever is less), then the loss payment, which is subject to a coinsurance penalty, is determined as follows (subject to all other relevant conditions in the policy, including those pertaining to valuation, adjustment, settlement, and payment of loss):

A. Divide the actual amount of flood insurance carried on the condominium building at the time of loss by 80 percent of either its replacement cost or the maximum amount of insurance available for the building under the NFIP, whichever is less.

B. Multiply the amount of loss, before application of the deductible, by the figure determined in A above.

C. Subtract the deductible from the figure determined in B above.
 
The policy will pay the amount determined in C above, or the amount of insurance carried, whichever is less.

Example 1: (Inadequate insurance amount to avoid penalty).

Replacement value of the building: $250,000.
80% of replacement value of the building: $200,000.
Actual amount of insurance carried: $180,000.
Amount of the loss: $150,000.
Deductible: $ 500.
Step A: 180,000 ÷ 200,000 = .90
(90% of what should be carried to avoid coinsurance penalty)
Step B: 150,000 x .90 = 135,000
Step C: 135,000 - 500 = 134,500
The policy will pay no more than $134,500. The remaining $15,500 is not covered due to the co-insurance penalty ($15,000) and application of the deductible ($500).

Example 2: (Adequate insurance amount to avoid penalty).
 
Replacement value of the building: $250,000.
80% of replacement value of the building: $200,000.
Actual amount of insurance carried: $200,000.
Amount of the loss: $150,000.
Deductible: $ 500.
Step A: 200,000 ÷ 200,000 = 1.00
(100% of what should be carried to avoid coinsurance penalty)
Step B: 150,000 x 1.00 = 150,000
Step C: 150,000 - 500 = 149,500
In this example there is no co-insurance penalty, because the actual amount of insurance carried meets the 80 percent requirement to avoid the co-insurance penalty. The policy will pay no more than $149,500 ($150,000 amount of loss minus the $500 deductible). This example also assumes a $150,000 outstanding principal loan balance.
 
 
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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