Flood Insurance Coverage Requirements for Multiple Properties

Bank is making a loan secured by two one-to-four family residential properties, both of which are located in a Special Flood Hazard Area (“SFHA”). What are the coverage requirements for flood insurance on those properties?

When a loan is secured by more than one structure in Special Flood Hazard Area (“SFHA”), each structure must be insured under a separate policy.

The minimum amount of flood insurance required will be the lesser of the outstanding principal balance of the loan or the maximum coverage available under National Flood Insurance Program (“NFIP”), which is the lesser of:

 

• The maximum limits for the types of structures; or
• The sum of the insurable value of the structures.

The total required insurance can be allocated among the buildings, so long as each building has some coverage.

Example 1:

Bank has a loan with $375,000 with the following residential buildings as collateral:

• Building One: $300,000
• Building Two: $100,000

The minimum coverage required is:

• Building One: $250,000
• Building Two: $100,000
• Total Coverage: $350,000

Flood insurance coverage in the amount of $350,000 will be necessary to meet the minimum standard of the lesser of the outstanding loan balance or insurable value, up to the maximum amount of insurance coverage.

Example 2:

The loan amount is $150,000 and it is to be secured by three residential buildings, each of them worth $80,000:

Building 1 Building 2 Building 3

$80,000 $80,000 $80,000

RCV RCV RCV

Coverage:

$50,000 $50,000 $50,000

or $80,000 $50,000 $20,000

or $80,000 $40,000 $30,000

The total coverage available is limited by the loan amount, which is less than the aggregate Replacement Cost Value (“RCV”) of the properties or the insurance coverage available through the National Flood Insurance Program for residential properties. Each property could be insured up to its RCV of $80,000 or some lesser amount, provided the aggregate coverage was equal to $150,000. Within that limitation, the available coverage can be allocated among the properties, as long as each property has some coverage.

This entry was posted on Friday, February 7th, 2014 at 10:22 pm.