RSK.IQ Question of the Week 7/28/14

Flood Insurance for a Gas Station


The bank will be making a commercial mortgage refinance of a gas station which is located within a SFHA.  There was a full appraisal completed which included a cost approach to the valuation and the replacement value.  It asks which value should be used when calculating the value of the insurable structure.  Are all components of the gas station insurable under the flood program?

Response Summary

Not all of the components of a gas station are eligible for coverage under the National Flood Insurance Program. The bank will have to identify those components which are eligible and have them insured for their actual cost value (“ACV”). The building will be insurable, but certain other items will be insurable only if they are part of the building or its contents. In the event the “depreciated cost” provided by the appraisal does not correspond to ACV, if may still be the basis of an alternative approach towards calculating the insurable value, which is permitted by the federal regulators.


Not all of the components of a gas station are eligible for coverage under the National Flood Insurance Program (“NFIP”). The bank will have to identify those components which are eligible and have them insured for their Actual Cost Value (“ACV”).

Loans eligible for coverage are those which are secured by improved real estate. “Improved real estate” refers to an insurable building on the property. A building is insurable if it has two load-bearing walls and a roof, and if more than 50 percent of its value is above ground.

For a commercial building located in a special flood hazard area, the minimum amount of flood insurance coverage required is the lesser of the following:

  • The insurable value of the structure, including foundation and supporting structures (i.e., 100 percent of the ACV)
  • The outstanding principal balance of the loan, including senior liens
  • The maximum amount available under the NFIP, which is $500,000

If a security interest is taken in the contents of the building, the maximum amount of coverage available under the NFIP is $500,000.

ACV is the Replacement Cost Value (“RCV”) less depreciation. RCV is used for residential properties and ACV for all other properties.

In this case, the appraisal has an item for “Depreciated Cost of Site Improvements.” If this refers to the building itself, and if “depreciated cost” corresponds to ACV, it would be the starting point for calculating the insurable value of the property.

The appraisal also provides the depreciated cost of tanks, pumps, canopies, and signs, which make up the better part of the value of the property. From the standpoint of flood insurance coverage, however, these items may not be insurable, since they are not part of an insurable structure. Gas pumps and canopies may be roofed, but do not have load-bearing walls and would not be considered an insurable structure.

However, if these items are so attached to the building as to be considered fixtures, and thus part of the building, or are contents of the building, they may be eligible for flood insurance coverage on that basis. FEMA guidelines provide the following examples of what is insurable under building property coverage:

  • Insured building and its foundation
  • Electrical and plumbing systems
  • Water heaters
  • Central air conditioning equipment, furnaces, and ventilating equipment
  • Permanently installed carpeting over an unfinished floor
  • Pumps and machinery for operating pumps
  • Awnings and canopies
  • Fire extinguishing apparatus and fire sprinkler systems

Examples of what is insured under personal property (contents) coverage are the following:

  • Furniture and fixtures, machinery and equipment, and other personal property used in the business
  • Stock (i.e., merchandise held in storage for sale, raw materials, and in-process or finished goods)
  • Portable and window air conditioners
  • Carpeting and rugs not included in building coverage
  • Non-licensed self-propelled vehicles if stored inside the insured building and used to service the described location (e.g., a tractor)

If “depreciated cost” and ACV are not the same, the federal regulators allow the lender and borrower, either by themselves or in consultation with the flood insurance provider or other appropriate professional, to choose from a variety of approaches or methods to establish the insurable value. They may use an appraisal based on a cost-value (i.e., not market value) approach, a construction-cost calculation, the insurable value used in a hazard insurance policy (but recognizing that the insurable value for flood insurance purposes may differ from the value for flood insurance purposes and that adjustments may be necessary), or any other reasonable approach, so long as it can be supported.

In this way, the “depreciated cost” provided by the appraisal may still provide the basis for an alternative approach towards calculating the insurable value.

This entry was posted on Friday, July 25th, 2014 at 8:54 pm.

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