The statutory coverages differ between the Emergency program and the Regular program:
Single Family Dwelling $35,000 ($50,000 in Alaska, Guam, Hawaii & Virgin Islands)
2-4 Family Dwelling $35,000 "
Other Residential $100,000 ($150,000 in Alaska, Guam, Hawaii & Virgin Islands)
Non-Residential $100,000 "
Contents Coverage
Residential $10,000
Non-Residential $10,000
Basic Additional Total
Ins. Limits Ins.Limits Ins.Limits
Single Family Dwelling $50,000 $200,000 $250,000
2-4 Family Dwelling $50,000 $200.000 $250,000
Other Residential $150,000 $100,000 $250,000
Non-Residential $150,000 $350,000 $500,000
Contents Coverage
Residential $20,000 $80,000 $100,000
Non-Residential $130,000 $370,000 $500,000
According to the General Rules of the NFIP, there are two standard deductibles, plus optional deductibles. The insured may choose a deductible amount different from the standard $500 for Post-FIRM or the standard $1,000 for structures in the Emergency Program and those rates using Pre-FIRM rates in Zones A, AO, A1-A30, AE, VO, V1-V30, VE, AR AND AR Dual Zones (AR/AE, AR/AH, AR/AO, AR-A1-A30, AR/A). There are certain options and premiums credits contained in the Flood Insurance Manual.
The Standard Flood Insurance Policy provides for three methods of settling losses;
The Actual Cash Value (ACV) is the cost to replace an insured item of property at the time of loss, less the value of its physical depreciation.
Replacement Cost Value is the cost to replace property with the same kind of material and construction without deduction for depreciation.
A Special Loss Settlement depends upon the type of single family dwelling, whether it is (a) a manufactured or mobile home or travel trailer (as defined in the policy); 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 the principal residence of the policyholder (as specified in the policy).
If such a dwelling is partially damaged and in the judgment of the insurer, it is economically feasible to repair it to its pre-damage condition, then the loss will be settled according to the Replacement Cost (RC) Conditions of the SFIP (V.2.).
If the dwelling is totally destroyed or damaged to such an extent that (in the opinion of the insurer) it is not economically feasible to repair, at least to its pre-damage condition, the insurer will, at their discretion, pay the least of the following amounts:
(1) The lesser of the replacement cost of the dwelling of 1.5 times the actual cash value, or
(2) The building limit of liability shown on the Declarations Page of the policy.
The Actual Cost Value (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 a RC basis.
Replacement Cost settlements apply to single family building risks, and it pays losses on the basis of replacement cost only if (1) the building was the primary residence for at least 80 percent of the preceding 365 days or the period of ownership; and (2) at the time of the loss, the building insurance amount represented at least 80% 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 (ACV) basis, which involves a deduction for depreciation. The ACV settlement includes a 2-4 family dwelling types.
The Residential Condominium Building Association Policy Form (RCBAP) has a coinsurance penalty. Under this policy form, most building elements, including building elements within individual units, are settled on a replacement cost basis (RC). While the replacement cost settlement is not contingent on the amount of insurance under the policy, there is a coinsurance penalty: At time of loss, if the amount of insurance carried is not at least 80% of the building replacement cost—or $250,000 times the number of units, whichever is less—this coinsurance penalty will apply. 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 only NFIP policy that has a coinsurance penalty.
An example of the coinsurance penalty in condominium and other common-ownership entities when the building is not insured to at least 80% of it replacement cost value:
Replacement cost of building at time of loss $12,500,000
80% of the Replacement Cost at time of loss 10,000,000
Actual amount of insured carried 6,000,000 (note: only 60%)
Amount of loss 6,000,000
Loss settlement before deductible 3,600,000
Note that the amount of insurance carried ($6M) represents only 60% of the required amount ($10M) that avoids the coinsurance penalty, leaving a shortage of $2.4M which is the actual coinsurance penalty.
Determining the flood insurance coverage amount on a building is generally the same as that used by insurance agents to calculate hazard insurance on a building. The cost of the building foundations and supporting structures should be included; as such areas of buildings are highly susceptible to flood damage.
FEMA encourages agents and insurance companies to insure buildings to their full insurable value and to make sure that the coverage amount reflects the replacement cost value of buildings over a period of time.
F NFIP policies are not automatically increased to keep pace with increasing construction costs or inflation.
The requirements of lenders and mortgage companies which usually cover mortgage loan balances, is a prime reason for using flood insurance to help secure loans in high flood risk areas.
F Federally regulated lenders are obligated to require that "at minimum" loan balances, up to the NFIP limits, are protected.
FEMA must follow its procedures for notifying mortgagee's and other lenders to ensure that adequate Notification and Due Process are being served.
1. WYO Company/Mortgagee—Any WYO company participating in the MPPP must notify the lender or servicer, for which it is providing the MPPP capability, of the requirements of the MPPP. The WYO company must obtain signed evidence from each such lender or servicer indicating their receipt of this information, and keep a copy in its files.
2. Mortgagee to Mortgagor—In order to participate in the MPPP, the lender (or its authorized representative, which will typically be the WYO company providing the coverage through the MPPP) must notify the borrower of the following, at a minimum:
a. The requirements of the Flood Disaster Protection Act of 1973,
b. The flood zone location of the borrower's property,
c. The requirement for flood insurance,
d. The fact that the lender has no evidence of the borrower's having flood insurance,
e. The amount of coverage being required and its cost under the MPPP, and
f. The options of the borrower for obtaining conventionally underwritten flood insurance coverage and the potential cost benefits of doing so.
Lenders may have internal requirements that require buildings to be protected to the full insurable value, provided such rights are part of the mortgage documents. Agents should assist borrowers to identify their financial interests, which may sometimes exceed mortgage balances, to make sure that buildings are protected for the benefit of the mortgage company, and also the property owner. Personal property coverage should also be offered.
The same business practices used in hazard coverage for condominiums should be used in determining flood insurance coverage on the condominium building and should include the cost of the building foundation and supporting structures.
The RCBAP provides flood insurance that is specifically designed for eligible residential condominium associations and unit owners, covering the building owned by the association and include building elements within individual units. Each entity will have specific and unique insurance needs and considerations. The appropriate coverage amounts and combinations with regard to unit owners and associations must be identified, plus there may be requirements from the lending institution. (Premium rating examples will be discussed in detail later in this text.)
If 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 the underpayment is discovered prior to a loss, a bill for the additional premium will be sent to the policyholder. If the payment is then made within 30 days from the date of the bill, the policy will be adjusted to increase the coverage to the amount that was originally requested. (For more detail, please refer to SFIP under Section VII. General Conditions)
F BINDERS ARE NOT PERMITTED UNDER THE NFIP.
Binders are used in most other forms of insurance as proof of insurance for loan purposes. With the NFIP, a copy of the Flood Insurance Application and premium payment, or a copy of the Declarations page of the policy, is sufficient evidence of proof of purchase of the flood insurance policy for the mortgage company.
Blanket coverage which is a single amount of insurance that applies to more than one building or the contents, is not permitted under the NFIP.
F One building per policy.
Personal property coverage is not automatically included as a percentage of the building coverage, except for the Preferred Risk Policy. Personal property coverage can be added to the SFIP for an extra premium.
Flood insurance can be purchased at any time (there is no enrollment period), however there is a 3-day waiting period before the NFIP becomes effective. The effective date on a new policy will be 12:01 am, local time, on the 30th calendar day after the application date and payment of premiums. For instance, a policy applied for on May 5, will become effective 12:01 am, local time, on June 2.
Therefore, it is important to send the flood insurance application and the annual premium immediately 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 the application, or mailed certified mail within 4 days from the date of the 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. The lesson here:
F Insurance agents should use certified mail to ensure the earliest possible effective date.
However, there are two exceptions to the 30-day waiting period rule:
All NFIP flood insurance policies are issued for a one-year term (annually renewable), regardless if they are written by an agent representing the NFIP or an agent representing an NFIP WYO company.
The NFIP annual premium is considered as earned when paid. However, the NFIP flood insurance coverage may be cancelled by the policyholder, with the assistance of the agent, at any time in accordance with the applicable rules. Eligible cancellation reasons and documentation required are discussed in more detail later.
For rating purposes, there are three types of buildings:
As indicated, an elevated building has no basement and has its lowest elevated floor raised above ground level by foundation walls, shear walls, posts, piers, pilings or columns. A basement is defined as an area of a building, including a sunken room or sunken portion of a room, having its floor subgrade on all side. ("Subgrade" means below ground level, where a section of the ground has been leveled off below the normal ground level.)
An Elevation Certificate is required when flood insurance is applied for on a building that is located in Special Flood Hazard Area (SFHA) and construction or substantial improvement started after December 31, 1974, on or after the date of the initial FIRM of the community, whichever is later (Post-FIRM buildings).
Generally, the lowest floor level of a Pre-FIRM building is below the BFE and it would not benefit policyholders to pay the cost of an Elevation Certificate, because the actuarial rate would be higher than the Pre-FIRM rate. Still, this option—whether to purchase the Certificate—is that of the insured.
The new Elevation Certificate Form and instructions will be phased in on a voluntary basis until Dec. 31, 2006. Elevations certified on or after Jan. 1, 2007 must be on the new form and include at least two photos (as described in the form)
Occasionally, Pre-FIRM buildings can be rated as Post-FIRM when they are constructed with flood mitigation in mind. Pre-FIRM constructions located in an SFHA can be rated using the Post-FIRM elevation rates, which are more favorable, if the lowest flood elevation of the building is at or above the BFE for the community.
When Flood Insurance Rate Maps are updated, areas previously identified as low-to-moderate risk of flooding, may be identified on the new FIRM as high flood risk areas (SFHAs). However, there are two classes of property owners who qualify for grandfathering based on pre-existing conditions. Grandfathering recognizes policyholders who built in compliance with a previous FIRM and/maintained flood insurance coverage under the new NFIP before the new FIRM is implemented.
Property owners whose buildings are now listed in high flood risk areas on the new maps are faced with much higher flood insurance premiums. Grandfathering allows such property owners to qualify for standard flood insurance premium rates based on their existing conditions.
Those who qualify for grandfathering may either use the current rating criteria for that property based on pre-existing conditions, or have the premium rate determined by using the BFE and/flood Zone on the (old) FIRM that was in effect when the building was originally constructed—provided the building was constructed in compliance—or when coverage was first obtained (for those with continuous coverage).
The following resources are available to those agents who rate a flood insurance policy:
Flood Insurance Manual, the "bible" of the NFIP;
Assistance from the participating NFIP WYO (insurer);
Flood Insurance Premium Rating Software. This is almost a necessity and if it is not provided by the insurer, providers/vendors can be reached at http:www.rema.gov/business/nfip/software.shtm
It is extremely important that when the policy is being sold or being renewed, that the client/policyholder be walked through the principal sections of the policy:
For Renewals, at least 45 days before the policy expires, all parties listed on the policy, i.e., insured, agent and/or mortgagee, are mailed a Renewal Notice. This is a good opportunity for the agent to discuss the Inflation Factor and any program changes that may impact flood insurance coverages at renewal.
When the average American purchases an insurance policy, they are concerned about what would cause a claim NOT to be paid, i.e., exclusions. The SFIP contains several exclusions, but the principal exclusions that should be of major concern to the policyholder are as follows:
The methods of loss settlement have been described in detail earlier, but it is important that the client/policyholder fully understand the procedure. This includes a description of Actual Cash Value Settlement (which includes a deduction for depreciation); Loss Settlement on a Replacement Cost Basis (which does not take depreciation); and the Special Loss Settlement which is applicable to manufactured and mobile homes. The coinsurance penalty, which is the only applicable to the RCBAP, and loss settlement examples were explained earlier.
APA - American Planning Association
BFE - Base Flood Elevation
BPAT - Building Performance Assessment Team
CAC - Community Assistance Contact
CAP - Community Assistance Program
CAV - Community Assistance Visit
CBRS - Coastal Barrier Resources System
CFR - Code of Federal Regulations
CRS - Community Rating System
CTP - Cooperative Technical Partners
DFIRM - Digital Flood Insurance Rate Map
DMA - Disaster Mitigation Act of 2000
EMI - Emergency Management Institute
E.O. - Executive Order
FEMA - Federal Emergency Management Agency
FIA - Federal Insurance Administration
FIMA - Federal Insurance and Mitigation Administration
FIRM - Flood Insurance Rate Map
FIS - Flood Insurance Study
FMA - Flood Mitigation Assistance program
GSE - Government-Sponsored Enterprise
HMGP - Hazard Mitigation Grant Program
HUD - Housing and Urban Development (Department of)
ICC - Increased Cost of Compliance
LOMA - Letter of Map Amendment
LOMR - Letter of Map Revision
LOMR-F- Letter of Map Revision based on Fill
NFIP - National Flood Insurance Fund
NFIP - National Flood Insurance Program
NFIRA - National Flood Insurance Reform Act
OMB - Office of Management and Budget
PRP - PREFERRED RISK POLICY
RCBAP - Residential Condominium Building Association Policy
OPAs - Otherwise Protected Areas
SFHA - Special Flood Hazard Area
SFIP - Standard Flood Insurance Policy
TB - Technical Bulletin
WYO - Write-Your-Own
1. The Standard Flood Insurance Policy provides for three methods of settling losses; Actual Cash Value, Replacement Cost Value, and
A. Special Loss Settlement.
B. Special Accumulative Losses.
C. Personal Property Loss Settlement.
D. Settlement for Losses from Miscellaneous Causes.
2. Personal property losses are settled
A. within 30 days of the loss.
B. on an ACV basis on all NFIP forms.
C. after the building losses are settled.
D. on the spot by Adjuster check.
3. The RCBAP has a coinsurance penalty—at the time of the loss, if the amount of insurance carried is
A. in excess of the appraised value of the building, the excess will be subtracted from the loss settlement.
B. less than 50% of the building value, the penalty will not apply.
C. not at least 80% of the building replacement cost—or $250,000 times the number of units, whichever is less—this coinsurance penalty will apply.
D. exactly the amount of what the building is worth on the market, then the insurance policy will only pay 95% of the loss amount.
4. Determining the flood insurance coverage amount on a building is
A. extremely difficult and the insurer's adjusters must use special software.
B. determined by the policyholder with the advice of the agent.
C. really immaterial.
D. generally the same as that used by insurance agents to calculate hazard insurance on a building.
5. Federally regulated lenders are obligated to require that
A. "at minimum" loan balances, up to the NFIP limits, are protected.
B. in addition to flood insurance, Homeowner's insurance must be purchased.
C. the value of the mortgaged building be shown at 125% of the actual value for flood insurance purposes.
D. the insurance company assign all rights and all policies to FEMA.
6. The same business practices used in hazard coverage for condominiums should be used in determining flood insurance coverage on the condominium building and
A. the values should be 125% of the present market value.
B. common areas must be excluded from this valuation.
C. should include the cost of the building foundation and supporting structures.
D. flood insurance must be placed with the carrier of other hazard coverage.
7. Binders are used in most forms of insurance as proof of insurance for loan purposes, and
A. binders for flood insurance are the same.
B. binders are never used for flood insurance.
C. can be issued by the agent in the field.
D. the issuing agent must be an approved flood insurance agent to issue a flood insurance Binder.
8. Acme Corporation wants flood insurance for its warehousing property which consists of an office building, two warehouses, two machinery storage units and a garage. For all buildings to be covered for flood insurance, (all things being equal),
A. they can all be covered under one policy.
B. only the office building would be eligible for flood coverage.
C. each building must have its own policy–one building per policy.
D. the office building would be covered under one policy, the warehouses and machinery units under another, and the garage under a third.
9. To ensure efficiently and consistency in respect to the effective date of a policy,
A. the agent should always use certified mail.
B. the forms are required by law to be sent by overnight UPS mail.
C. the application should be e-mailed to the home office.
D. the agency should keep the application and premium for 30 days to make sure that the insured does not change his mind.
10. The Form that is required when flood insurance is applied for on a building that is located in Special Flood Hazard Area (SFHA) and construction or substantial improvement started after December 31, 1974, on or after the date of the initial FIRM of the community, whichever is later (Post-FIRM buildings), is
A. the Assessment Certificate.
B. the Binding Certificate.
C. an Elevation Certificate
D. Confirmation of Evaluation of Value.