RSK.IQ Question of the Week 9/18/17

Flood Insurance for Fixtures and when Contents are Owned by a Tenant


The Bank has made a loan to two business entities: Borrower A, who owns the commercial building securing the loan, and Borrower B, who is a tenant of the building and operates an auto repair business. Both borrowers have pledged business assets as additional collateral. Borrower A’s business assets are only the fixtures of the building, while Borrower B’s business assets include equipment and inventory in the building. The building is in a Special Flood Hazard Area (“SFHA”). Is flood insurance contents coverage required for the business assets of both borrowers?

Response Summary

The Flood Rules require flood insurance coverage for a building securing a loan that is in a SFHA and for the contents of the building if a security interest has been given in the contents. The rules do not distinguish between a building owned by one person and contents that are owned by another person. The value of the personal property securing the loan will be its replacement value. Contents which are fixtures may already be covered by the building coverage.

Response Detail

Under the Flood Rules, an FDIC-supervised financial institution shall not make, increase, extend, or renew any designated loan unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan. A designated loan is a loan secured by a building or mobile home located in a SFHA for which flood insurance is available. The amount of flood insurance must be at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property under the National Flood Insurance Program (“NFIP”). Insurance coverage is limited by the insurable value of the property, which is the value of the improvements less the value of the land. 12 CFR §339.2(d), 3(a).

The Interagency guidance regarding flood insurance states that flood insurance is required if a building and its contents both secure a loan, and the building is in a SFHA. Flood insurance is not required for the contents of a building if the building is in a SFHA but does not secure the loan, or if a loan is secured by a building in a SFHA and by the contents of a building not located in a SFHA. Interagency Questions and Answers Regarding Flood Insurance, Questions 39 & 40.

The Flood Rules do not distinguish between property owned by different borrowers. If the loan is secured by mortgage on a building in a SFHA that is owned by one borrower and by a security interest in the contents of the building that are owned by another borrower, both the building and the contents must be insured against flood hazard.

In this case, since Borrower A has given a mortgage on the building and a security interest in business assets, flood insurance must be provided for both the building and the business assets, to the extent such assets are contents of the building. Likewise, Borrower B must provide flood insurance for the business assets it has given a security interest in, since they are contents of a building securing a loan that is located in a SFHA.

Although the Bank can use any reasonable method for assigning a value to the personal property securing a loan, the value should be based on the actual cost value of the personal property, rather than the market value. This is true whether the contents are in a residential or commercial building. The actual cost value is the cost to replace an insured item of property at the time of the loss, less the value of its physical depreciation. FEMA, National Flood Insurance Program, Summary of Coverage for Commercial Property, F-778.

The Bank has indicated that the “business assets” of Borrower A consist of the fixtures of the building. It is possible that these assets may already be covered by the NFIP building coverage, as follows:

  • Electrical and plumbing systems
  • Water heaters
  • Built-in dishwashers
  • Built-in microwave ovens
  • Garbage disposal units
  • Central air conditioning equipment, furnaces, and ventilating equipment
  • Permanently installed carpeting over an unfinished floor
  • Permanently installed paneling, wallboard, bookcases, and cabinets
  • Elevator equipment
  • Pumps and machinery for operating pumps
  • Awnings and canopies
  • Walk-in freezers
  • Outdoor antennas and aerials attached to buildings
  • Fire extinguishing apparatus and fire sprinkler systems

The Bank should determine what the business assets of Borrower A consist of and whether they would be covered under the building policy. Personal property coverage under an NFIP flood insurance policy would include the following:

Furniture and fixtures, machinery and equipment not included in building coverage

  • Stock (i.e., merchandise held in storage or for sale, raw materials, and in-process or finished goods)
  • Portable and window air conditioners
  • Portable microwave ovens and portable dishwashers
  • Carpets or rugs not included in building coverage
  • Clothes washers and dryers
  • Food freezers (other than walk-ins and the food in any freezer)
  • Certain valuable items such as original artwork and furs (limited to $2,500 in value)
  • Non-licensed self-propelled vehicles if stored inside the insured building and used to service the described location (e.g., a tractor) or designed to assist a person with a disability
  • Up to 10 percent of contents coverage to improvements made to a building the insured occupies as a tenant

What is not covered by either the building or personal property coverage includes the following:

  • Damage caused by moisture, mildew, or mold that could have been avoided by the property owner
  • Damage caused by sewer or drain backup unless there is a flood in the area that caused the backup
  • Currency, precious metals, and valuable papers, such as stock certificates, script, and recorded data
  • Property and belongings outside of a building, or in another structure, such as trees, plants, wells, septic systems, walkways, decks, patios, fences, seawalls, hot tubs, and swimming pools
  • Financial losses caused by business interruption or loss of insured property
  • Most self-propelled vehicles such as cars, including their parts. NFIP Flood Insurance Manual, POL 11 – 13; FEMA, F778.


This entry was posted on Monday, September 18th, 2017 at 1:34 pm.

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