SECTION FOUR – GENERAL RULES AND PREMIUM RATING

GENERAL RULES

LOSS SETTLEMENT

The SFIP provides three methods of settling losses:

Actual Cash Value
Replacement Cost
Special Loss Settlement

ACTUAL CASH VALUE (ACV)

The cost to replace an insured item of property at the time of loss, less the value of its physical depreciation.

REPLACEMENT COST VALUE (RCV

The cost to replace property with the same kind of material, and construction without deduction for depreciation.

SPECIAL LOSS SETTLEMENTS

The following criteria identify the single family dwelling that receives a Special Loss Settlement:

Is a manufactured or mobile home or a travel trailer, as defined in Section II.B.6.b. and II.B.6.c. of the SFIP;
Is at least 16 feet wide when fully assembled and has an area of at least 600 square feet within its perimeter walls when fully assembled; and
Is your principal residence, as specified in V.1.a (1) in the policy?

If such a dwelling is totally destroyed or damaged to such an extent that, in our judgment, it is not economically feasible to repair, at least to its pre-damage condition, we will, at our discretion, pay the least of the following amounts:

The lesser of the replacement cost of the dwelling of 1.5 times the actual cash value, or
The building limit of liability shown on your Declarations Page.

If such a dwelling is partially damaged and in our judgment, it economically feasible to repair it to its pre-damage condition, we will settle the loss according to the Replacement Cost Conditions of the SFIP Section V.2.

LOSS SETTLEMENT

The ACV settlement always applies to building and personal property losses on the General Property Form. Personal property losses are settled on an ACV basis on all NFIP forms. Claims on building losses will be settled on an ACV basis on the Dwelling form except for dwellings that meet the Special Loss Settlement and those that meet the criteria for RC. Most building element losses on the RCBAP are settled on an RC basis.

REPLACEMENT COST SETTLEMENT

On the Dwelling Policy Form:

Risks must be single family buildings.
Losses are paid on the basis of replacement cost only if:
The building was the primary residence for at least 80 percent of the preceding 365 days or the period of ownership; and
At the time of loss, the building insurance amount represented at least 80 percent of the replacement cost immediately before the loss, or the maximum available under the NFIP

Otherwise, the Dwelling form pays on the actual cash value basis, which involves a deduction for depreciation. This ACV settlement includes 2-4 family dwelling types.

CO-INSURANCE PENALTY IN RECBAP

RESIDENTIAL CONDOMINIUM BUILDING ASSOCIATION POLICY RCBAP FORM

Most building elements, including building elements within individual units, are settled on a replacement cost basis (RC) under the RCBAP. The RC settlement is not contingent on the amount of insurance carried; however, there is a coinsurance penalty. If, at the time of loss, the amount of insurance carried is not at least 80% of the building replacement cost value, or $25,000 times the number of units, whichever is less, the coinsurance penalty applies. Therefore, under the RCBAP the condominium building should be insured to full replacement cost value or the maximum NFIP program limits, whichever is less. The RCBAP is the NFIP policy subject to the coinsurance penalty. More detail in respect to the RCBAP follows later.

PROPERTY VALUE DETERMINATION

PROPERTY VALUE DETERMINATION FOR SELECTING COVERAGE AMOUNT

Agents should follow the same general business practice in calculating the flood insurance coverage amount on a building as they do in calculating hazard insurance amounts. The cost of building foundations and supporting structures should be included, ass such areas of buildings are highly susceptible to flood damage.

FEMA encourages agents/companies to insure buildings to their full insurable value and ensure coverage amounts continue to reflect the replacement cost value of buildings over time. NFIP policies are not automatically increased to keep pace with increasing construction costs.

Lender requirements, typically to cover mortgage loan balances, drive flood insurance purchases for buildings securing loans in high flood risk areas. Federally regulated lenders are obligated to require that "at minimum" loan balance, up to the NFIP program limits, is protected. Lenders may, of their own accord, require buildings protected to their full insurable value, if such rights were reserved in mortgage documents. Agents should help borrowers identify their financial interests, which may exceed mortgage balances, and ensure that buildings are protected for the benefit of the mortgage company and also the property owner. Personal property coverage should also be offered.

CONDOMINIUM BUILDINGS AND OTHER COMMON OWNERSHIP ENTITIES

Agents should follow the same general business practice in calculating the flood insurance coverage amount on a condominium building as they do in calculating hazard coverage amounts for condominium buildings. In addition, the cost of the building foundation and supporting structure should be included.

The following is an example of the coinsurance penalty that applies on the Residential Condominium Building Association Policy (RCBAP)" when, at the time of loss, the building is "not" insured to at least 80% of its replacement cost value or to the maximum NFIP program limits.

Example of coinsurance penalty:

Building RCV at time of loss $12, 500,000

80% of RCV at time of loss 10,000,000

Actual amount of insurance carried 6,000,000

Amount of loss 6,000,000

Loss settlement (before deductible) 3,600,000

In this example, the amount of insurance carried ($6,000,000) represents only 60 percent of the required amount ($10,000,000) that avoids the coinsurance penalty. A shortage of $2,400,000 therefore results, which represents the coinsurance penalty.

The RCBAP provides flood insurance protection specifically designed for eligible residential condominium associations and unit owners, which covers the building owned by the association also building elements within individual units. Each entity has unique insurance considerations that require special care. The Condominium section in the Flood Insurance Manual, the Condominium section in the Mandatory Purchase of Flood Insurance Guidelines and the website at http://www.fema.gov/plan/prevent/floodins/condo_time.shtm
are required reading for agents assisting condominium associations and unit owners. Appropriate coverage amounts and combinations with regard to unit owners and associations need identification. Compliance requirements of lending institutions may also apply. Agents should also study the Platinum Level Condominium Training module online at this Agent Training Station, which has premium rating examples.

When a premium payment is not sufficient to purchase the coverage requested, only the amount of coverage that can be purchased with the premium received will be provided. If this underpayment is discovered before a loss a bill for the additional premium will be sent. If payment is made within 30 days from the date of the bill, the policy will be reformed to increase the coverage to the originally requested amount.

(For more information see the Standard Flood Insurance Policy Section VII. General Condition, G. Reduction and Reformation of Coverage.

BINDERS

Binders are not permitted under the NFIP.

The NFIP does not recognize an oral binder or a contract of insurance.

A copy of the Flood Insurance Application and premium payment, or a copy of the Declarations Page, is sufficient evidence of proof of purchase for a mortgage company.

ONE BUILDING PER POLICY – NO BLANKET COVERAGE

Blanket Coverage, defined as a single amount of insurance applying to more than one building and/of contents, is not permitted under the NFIP.

One Building Per Policy.

BUILDING & PERSONAL PROPERTY COVERAGE PURCHASED SEPARATELY

Personal property coverage is not automatically included as a percentage of the building coverage, except for the PRP. Personal property coverage can be added to the SFIP for an extra premium.

WAITING PERIOD

Insurance can be purchased at any time, but there is a30-day waiting period before an NFIP policy becomes effective. The effective date of a new policy will be 12:01 a.m., local time, on the 30the calendar day after the application date and the presentment of premiums. For example, a policy applied for on May 3 will become effective 12_01 a.m., local time on June 2d.

It is important to promptly send the flood insurance application and the annual premium to the insurance company. The company will honor the effective date on the application form, provided the application and full premium payment are received at the insurance company within 10-days of the date of application, or mailed certified mail within 4-days from the date of application.

If the application and premium payment are received later than 10 days from the application date or not mailed certified mail within 4 days from the date of application, the waiting period will be calculated from the date of receipt by the insurance company.

Insurance producers are encourages to use certified mail to ensure the earliest possible effective date.

EXCEPTIONS TO THE 30-DAY WAITING PERIOD

However, there are two exceptions to the 30-day waiting period:

There is no waiting period for new policies written in conjunction with making, increasing, extending or renewing a loan. Provided that the policy is applied for and the presentment of premium is made at or prior to the loan closing date (i.e., application date—April 3, refinancing—April 3 at 3:00 p.m., policy effective date, April 3 at 3:00 p.m.)
The second exception to the 30-day waiting period, which includes a one day wait, applies to the initial purchase of flood insurance pursuant to a map revision that shows the building in an SFHA. There is a one-day waiting period when a new policy application, along with the presentment of premium, has been submitted during the 13-month period beginning on the effective date of a map revision.

POLICY TERM

All NFIP flood insurance policies are issued for a one year renewable term, whether they are written by an agent represents the NFUP Direct Side or an agent representing an NFIP WYO company.

CANCELLATIONS

The NFIP annual premium is considered earned when paid. However the NFIP flood insurance coverage may be cancelled by the policyholder, with the assistance of his or her agent, at any time in accordance with the applicable rules. Details concerning the eligible cancellation reasons and the documentation required are listed in the Flood Insurance Manual online at http://www.fema.gov/business/nfip/manual.shtm

QUIZ

1. For policies other than those identified in the standard deductible, the deductible for each loss occurrence is $500.

A. True

B. False

2. The cost to replace an insured item of property at the time of loss, less the value of its physical depreciation, is:

A. Replacement Cost Value (RCV)

B. Actual Cash Value (ACV)

C. Blanket Coverage

3. Solid perimeter foundation walls are not an acceptable means of elevating building in V and VE Zones.

A. True.

B. False.

4. Buildings constructed before on or before December 31, 1974, or before the date of the initial FIRM requires an elevation certificate.

A. True.

B. False

ANSWERS TO QUIZ

1A 2B 3A 4B