By: Kari Osier, Compliance Specialist
We have never had to enforce flood insurance, does a member need to have whole house or just carry enough to cover their loan with us?
Section 760.3(a) of the NCUA Regulation states the amount of flood insurance required “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 Act”.
So what is meant by the maximum limit of coverage available for the particular type of property under the Act? It depends on the value of the secured collateral. Under the National Flood Insurance Program (NFIP), there are maximum caps on the amount of insurance available. For single-family and two-to-four family dwellings located in a participating community under the program, the maximum cap is $250,000. For nonresidential structures, the maximum cap is $500,000 (there are different caps for the emergency program phase). In addition to the maximum caps, the Regulation also provides that “flood insurance coverage under the Act is limited to the overall value of the property securing the loan minus the value of the land on which the property is located” (commonly known as the “insurable value” of a structure). Land values should not be included in the calculation as the NFIP does not insure land.
An NFIP policy will not cover an amount exceeding the “insurable value” of a structure. Lenders often follow the same practice used to establish other hazard insurance amounts, however, the insurable value of improved real estate for flood insurance purposes also includes the repair or replacement cost of the foundation and supporting structures. If a lender fails to exclude the value of the land when determining the insurable value of the improved real estate, the borrower will be asked to purchase coverage that exceeds the amount the NFIP will pay in the event of a loss.
For further explanation on insurable value and this topic, see the following link from joint guidance released by NCUA and other agencies in 2011: https://www.ncua.gov/Legal/Documents/Regulations/PR20111003Flood.pdf