Flood Insurance and Multiple Buildings

Issue/Inquiry

The Bank is originating a loan that will be secured by three buildings:

• A primary residence
• A two-story storage building with loft space
• A 2,500-square foot barn that was converted into a gallery and studio space

The primary residence and storage building are in a Special Flood Hazard Area (“SFHA”), but the barn is not. How would the Bank determine the required flood insurance coverage? Is flood insurance coverage required for the barn?

Response

Proof of flood insurance coverage would not be required for the barn, since it is not located in an SFHA. The storage building may also be exempt from flood insurance coverage, since it is a structure detached from the primary residence.

Response Detail

Under the Flood Rules, if a loan is secured by a building that is located in an SFHA within a community that participates in the National Flood Insurance Program, a financial institution shall not make, increase, extend, or renew that loan unless the building is covered by flood insurance for the term of the loan. A “building” is considered a walled and roofed structure (not including gas or liquid storage tanks) that is primarily above ground and attached to a permanent site, and can include any walled and roofed structure that is in the course of construction, alteration, or repair. 12 CFR section 339.2, 3(a).

In this case, the Bank would be required to obtain proof of flood insurance coverage for the primary residence and storage building located in the SFHA, but not for the barn, as such is not located in an SFHA.

With respect to the buildings located in the SFHA, when a loan is secured by multiple buildings, the amount of flood insurance required must be at least equal to the lesser of:

• The outstanding principal balance of the loan; or
• The maximum amount of insurance available under the NFIP. 12 CFR 339.3(a).

If the real estate security, as in this case, contains more than one building located in an SFHA that is within a participating community, a financial institution must determine the amount of insurance required for each building and add these individual amounts together. The total amount of required flood insurance is the lesser of:

• The outstanding principal balance of the loan; or
• The maximum amount of insurance available under the NFIP, which is the lesser of:
  • The maximum amount available for the type of structures; or
  • The “insurable value” of the structures.

Interagency Questions and Answers Regarding Flood Insurance (“Interagency Q&A”), Q.14.

Proof of flood insurance coverage may not be required for the storage building. The Biggert-Waters Flood Insurance Reform Act of 2012 provides an exemption for detached structures associated with residential real estate. To qualify for such, each of the following conditions must be met:

• There must be more than one building on the property
• One building must serve as a residence (i.e., it must have sleeping, bathroom, or kitchen facilities)
• The detached structure must be used primarily for personal, family, or household purposes, but not as a residence. 12 CFR 339.4(c).

Whether a building serves as a residence is based upon the good faith determination by a financial institution that the structure is intended for use or used as a residence, which generally includes sleeping, bathroom, or kitchen facilities. 12 CFR 339.4(c)(3).

If the Bank determines that the storage building is not used as a residence, then it would be exempt from the flood insurance requirement as a building detached from a residence. However, given the penalties for non-compliance with the Flood Rules, the prudent approach would be to presume that the building is subject to the insurance requirements unless it clearly qualifies for the exemption.

This entry was posted on Monday, September 23rd, 2019 at 6:00 am.