Flood Insurance Contents Coverage for Multi-Use Property

Issue/Inquiry

The Bank is making a $2,000,000 loan secured by a building that has two residential units and a retail space. The residential units occupy over 75% of the square footage, with less than 25% of the space allocated for retail use. The building is located in a flood zone and has $250,000 in building flood coverage in place. As a security interest is also being taken in the contents of the building, would the amount required under regulation be $100,000 or $500,000?

Response Summary

A one-to-four unit residential building will still be considered residential if less than 25% of its floor space is given to non-residential use. In such case, the limit on National Flood Insurance Program (“NFIP”) coverage of the contents of the building is $100,000. However, the Bank can require additional flood insurance on contents if it finds that amount inadequate.

Response Detail

A one-to-four unit residential building may have incidental non-residential use and still be considered a residential building, as long as such use does not exceed 25% of the total floor area. Interagency Questions and Answers Regarding Flood Insurance (“Interagency Q&A”), Q. 11; FEMA, Flood Insurance Manual, GR1. In this case, the non-residential use of the building is less than 25% of the floor space, so the building will be considered a residential building for the purpose of flood insurance coverage.

The flood insurance coverage of $250,000 was appropriate for a one-to-four family residential building. When the contents of a residential building securing a loan are also taken as collateral, NFIP coverage on the contents is limited to $100,000. FDIC, Compliance Manual, V-6.3.

It should be noted, however, that the minimum coverage required to satisfy the Flood Rules is not the maximum amount a lender can require, as a matter of contract. Lenders are permitted to require more flood insurance coverage than required by the Flood Rules. Each lender has the responsibility to tailor its own flood insurance policies and procedures to suit its business needs and protect its ongoing interest in the collateral. However, lenders should avoid creating situations where the collateral is over-insured. Interagency Q&A, Q. 16.

Therefore, if the Bank finds the $100,000 limit on NFIP coverage inadequate, it can require additional insurance, even if the borrower must go outside the NFIP to obtain it.

This entry was posted on Monday, January 23rd, 2017 at 1:34 pm.