Flood Insurance and Aggregate Annual Limits

Issue/Inquiry

The Bank has been provided with a flood insurance policy that has an annual aggregate limit of $1 million for a commercial property. Can the Bank accept a policy with such a limitation?

Response Summary

Financial institutions are required to accept private flood insurance policies that satisfy the requirements of the Biggert-Waters Flood Insurance Reform Act of 2012 (“Biggert-Waters Act”). Among other things, such policies must provide coverage that is, at least, as broad as that of a National Flood Insurance Program (“NFIP”) policy. However, a private policy that has an annual aggregate limit does not meet this standard. Therefore, the Bank is not required to accept it. The Bank has the discretion to accept the policy if it meets other certain standards, including satisfying coverage limits and safety and soundness concerns.

Response Detail

Under the Flood Rules, a financial institution cannot make, increase, extend, or renew a loan secured by improved real property located in a Special Flood Hazard Area and in a community participating in the NFIP unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan. 12 CFR §339.3(a).

Some private flood insurance policies have annual aggregate limits. However, Standard Flood Insurance Policies (“SFIP”) issued under the NFIP for non-residential properties do not have such limits. National Flood Insurance Program Claims Manual, Section 1, General Property Form (June 2019).

The Biggert-Waters Act requires institutions to accept private flood insurance that meets both the statutory definition of private flood insurance and the existing mandatory purchase requirement. 

The statutory definition of “private flood insurance” is an insurance policy that:

• Is issued by an insurance company that is licensed or approved to engage in the business of insurance by the insurance regulator of the state in which it is located, and is recognized (or not disapproved) as a surplus lines insurer
• Provides flood insurance coverage that is at least as broad as the coverage provided by an SFIP under the NFIP, including when considering deductibles, exclusions, and conditions offered by the insurer
• Includes a requirement for the insurer to give 45 days’ written notice of cancellation or non-renewal of flood insurance coverage to the insured and the lender
• Includes information about the availability of flood insurance under the NFIP
• Includes a mortgage interest clause that is similar to the clause contained in an SFIP under the NFIP
• Includes a provision requiring the insured to file suit not later than one year after the date of a written denial of all or part of a claim under the policy
• Contains cancellation provisions that are as restrictive as the provisions contained in an SFIP under the NFIP

In order to be considered “as broad as” coverage provided by an SFIP issued under the NFIP, coverage by a private insurance policy must, at a minimum, satisfy the following requirements:

• Define the term “flood” to include the events defined as a “flood” in an SFIP
• Cover both the mortgagor and the mortgagee as loss payees

• Contain the coverage and provisions specified in an SFIP, including those relating to building property coverage, personal property coverage (if purchased by the insured mortgagor), other coverages, and the increased cost of compliance
• Contain deductibles no higher than the specified NFIP maximums, as well as include similar non-applicability provisions as under an SFIP, for any total policy coverage amount up to the maximum available under the NFIP
• Provide coverage for direct physical loss caused by a flood, and may exclude other causes of loss identified in an SFIP (any additional or different exclusions than those in an SFIP may only pertain to coverage that is in addition to the amount and type of coverage that could be provided by an SFIP)
• Does not contain conditions that narrow the coverage that would be provided in an SFIP. 84 Federal Register, 4953, 4958.

SFIPs are written with “per occurrence” coverage, meaning that the limit of coverage will be applied to each loss event, even if there are multiple loss events in a single year. The “annually aggregated” coverage of many private flood insurance policies means that the limit of coverage is applied on an annual basis, regardless of the potential for multiple loss events in one year. While multiple flooding events on the same property may be an infrequent occurrence, the SFIP standards afford greater protection for both the borrower and the Bank. Consequently, private policies issued with aggregated coverage do not meet the “at least as broad as” standard of an NFIP SFIP, and the Bank is not required to accept it.

Financial institutions have the discretion to accept a flood policy that was not issued by the NFIP and does not meet the definition of a private flood insurance policy of the Flood Rules if such policy satisfies the following requirements:

• Provides coverage in the amount required by the flood insurance purchase requirement
• Is issued by an authorized insurer that is licensed, admitted, or not disapproved by a state insurance regulator
• Covers both the mortgagor and the mortgagee as loss payees, except in the case of a policy that is provided, and for which the premium is paid by, a condominium association, cooperative, homeowners association, or another applicable group 
• Provides sufficient protection of the designated loan, consistent with general safety and soundness principles. 12 CFR §339.3(c)(3).

If the Bank does accept the policy, the mandatory purchase requirements of the Flood Rules will have been satisfied. When using its discretion to accept a non-conforming private insurance policy, the Bank must document its conclusion regarding sufficiency of the protection of the loan in writing. 84 Federal Register 4953, 4960-62.

In this case, since the flood insurance policy provided does not meet the definition of a private flood insurance policy under the Biggert-Waters Act, the Bank is not required to accept it. If the policy meets the standards for discretionary acceptance, then the Bank may accept it, but it must document why the policy is satisfactory.

This response is for informational purposes only and is not intended for legal guidance.

This entry was posted on Monday, December 2nd, 2019 at 6:00 am.