CHAPTER SEVEN - AGENT'S RESPONSIBILITY IN RATING

 

The responsibility of rating is the most complicated duty of insurance agents who market Flood Insurance.  A detailed discussion of rating is beyond the scope of this text and some of the basics have been discussed earlier.  To do the proper job in rating—especially because there are so many variables—it is essential that the agent has a copy of the Flood Insurance Manual, which is obtained either from NFIP or from the insurance company represented.  However, there should be more detailed information on this process so as to make it easier to understand the variety and reasons for rating and actually apply such ratings.

The agent must first obtain essential rating information so as to accurately determine the correct rate table to be used with that particular risk.  The most important starting point is to determined the exact location of the building and do that by checking the application to see if the mailing address is the same as the property address—if it is not the same, use the property address only.

Eligible Community?

Next, it must be determined if the building is located in an eligible community.  Not all communities participate in the NFIP, and if the community does not participate, then the flood policies are not available to those residents and property owners.  The NFIP lists all eligible communities in the Community Status Book (CSB)—note the illustration of those eligible communities in the State of Illinois previously. 

If it still is not clear whether the property is eligible, the agent can e-mail FEMA at:

http://www.fema.gov/fema/csb.shtm  – or the WYO company should know or –  call the NFIP servicing agent at 1-800-638-6620.  The FEMA regional office of a local community official can also be contacted.

Emergency or Regular Program

Then, determine which NFIP program phase that the community is in, if they are eligible.  They will either be in the Emergency Program or the Regular Program—they use different rate tables.  This information can be found in the CSB on FEMA's website, as shown above.  Look in the "Date of Entry" column.  If t here is an (R) there, then the community is in the Regular Program. 

Community Premium Discounts

Some communities are eligible for premium discounts under the Community Rating System.  This can be determined by checking the Community Rating System (CRS) Section in the Flood Insurance Manual for a list of eligible communities, and their corresponding discounts.  Usually insurance agents work in certain geographical areas, so it will behoove a new flood insurance agent to check the geographical areas to determine what areas are eligible, whether they under the Emergency Program or the Regular Program, and whether they are eligible for premium discounts. 

Pre-FIRM or Post-FIRM

The essential question is whether the building was built Pre-FIRM or Post-FIRM (before or after the flood insurance rating maps were made).  The date of construction or date of substantial improvement for insurance purposes means the date the building permit was issued, provided the actual start of the construction, repair, reconstruction, or improvement was within 180 days of the permit date.  The date of construction/repair to differentiate between Pre-FIRM or Post-FIRM is a specific date, which must be committed to memory.  Therefore, it will not be restated here as if it is not known now, searching for the date will help commit it to memory.

Incidentally, there can be considerable "digging" to determine just when the building was first built.  There are areas of new/newer homes that contain within their boundaries much older homes that have been remodeled so as to fit the prominent genre.  Also, the rules governing the date of construction for a manufactured (mobile) home are different from a standard building and depend on the location of the manufactured (mobile) home.

DETERMINATION OF THE FLOOD ZONE

Next, it is necessary to determine the flood Zone where the building is located.  This information can be found in Section B of the Elevation Certificate.  It does not hurt to double check to make sure that the building is in the correct Zone by searching the location in a FIRM. 

BUILDING TYPE

The type of building must be determined.  Does the building have a basement, enclosure, one floor, two floors, three or more floors?  Is it a split level, tri-level, or is it a manufactured (mobile) home on a foundation? 

 

CONTENTS

Finally, determine where the contents inside the building are located. 

 

 

As an example, if a store owner has stock and merchandise stored in a basement, he will pay higher premiums for them than the stock/merchandise stores on the ground floor; and if the stock/merchandise is on the second floor, the premiums are lower for the contents there.  Higher is cheaper.

 

 

 

 

 

 

 

 

EXAMPLE

 

 

This (roughly sketched) house is a residential, single-family, Post-FIRM building, Zoned in an AE Zone.  It is elevated with a property vented enclosure used as a storage area below the elevated floor.  The lowest floor for rating is +3.2 feet above the BFE.  The building is located in a city in Florida, community is eligible for NFIP. 

The owner of the property wants to purchase $225,000 in building coverage and $32,000 in contents coverage.

PREMIUM CALCULATION

Calculate the premiums for the building first, and then do the contents calculations.  To calculate the building premium, first select the appropriate rate table, which in this case is:

Table 3B: Regular Program, Post-FIRM, Firm Zones AE, A1-A30 -Building rates.

Since floor rating is +3, the premium is .24 (no basement, enclosed).

Contents premium is .38.

These rates are found in the Flood insurance Manual (next page)

 

 

 

 

Note the "Contents Rates" in above rate page from the Flood Insurance Manual, on the bottom portion of the rates page.  Contents coverage is calculated using this table. First, find the proper row of rates (+3 row on the "Elevation of Lowest Floor Above or Below BFE row) and column (the Residential column within the "More than One Floor with Basement/Enclosure" column).

CALCULATING DEDUCTIBLE

After calculating the annual premium, the deductible factor must be considered.  The standard deductible for a Post-FIRM single-family building is $500 for the building, and $500 for the contents (total $1,000).  The $1,000 would be deducted first, before any claim is paid.  The insured is allowed to lower the cost of the annual premium of the Flood Insurance Policy by choosing a larger deductible. 

 

The premiums are for $100 of content, so the coverage of $225,000 is 2250 hundreds for the building.  320 hundreds for the contents..

 

(Next page)

 

 

(The above table is from the Flood Insurance Manual.)

If the insured chooses the standard deductible, no discount is applied and the annual premium remains the same.  Our homeowner wants to lower the annual premium cost and selects deductibles of $1,000 for the building and $1,000 for the contents.  According to this Table, the deductible factor is .950.

 

Premium Calculation:  225000 less deductible of $1,000 = 2240 hundreds.  At .24 per hundred, that would create a premium of $537.60 for the building.

Contents would be 320 hundreds @ .38 per hundred = $121.60

Base premium would then be $659.20

After determining the annual premium subtotal would be $262, the Increased Cost of Compliance (ICC) program must be added.  Table 9, ICC Premium in Rating Section of the Flood Insurance Manual is used to calculate the premium.  This shows the building in the AE Zone as $6.00.                                                                           Subtotal Premium   $665.20

 

 

 

 

So, let's figure the CRS discount.  The building is located in a city that is an eligible community (Community Rating System - Eligible Communities), it is determined that Class 8 is the property class, and then checking the CRS Premium Discount table, Class 8 gets a 10% discount.

Subtotal:                ($665.20 less $66.65)  = $598.55

PROBATION SURCHARGE

If it is found that the building to be insured is located in a community that the NFIP has placed on probation for improper floodplain management, then a probation surcharge is added to the premium.  In order to determine if the community is on probation, check with the WYO insurer, NFIP Servicing Agent or a local official.  The Federal Policy Fee ($30) and Probation Surcharge in the manual, shows the Probation Surcharge is $50 in all cases.

For the purpose of this example, assume that the house is not in a probation area.  Therefore, the total subtotal adds the Federal Policy Fee of $30.

                                                      Final Premium:  $628.55

FEDERAL POLICY FEE

The Federal Policy Fee is a flat charge that must be paid by the policyholder on each new or renewal policy to defray certain administrative expenses incurred in carrying out the NFIP.  The fee is fully earned on the effective date of the policy, except as indicated in the Cancellation/Nullification Section of the Manual.  It is not subject to commissions, therefore it is not considered as part of the Total Prepaid Premium.  The Federal Policy Fee must be added to the Total Prepaid Premium, however, in order to figure the Total Prepaid Amount. (Note:  For a PRP, the fee is $11) 

Therefore, as far as the property owner is concerned, the total out-of-pocket is $252 (but only $242 is commissionable).

RATING A BUILDING IN A V ZONE

Buildings located in a V Zone are rated differently than if they were in an A Zone.  Using another example where the residence is an elevated residential building.  Assume this building is a 3-story building elevated because it is close to the water.  From the manual, the table that should be used is Table 3F: Regular Program-Post-FIRM Construction Rates, 1981 Post-FIRM V1-V30, VE, Elevated Building with Obstruction.

 

 

 

 

Notice on the left-hand column, the heading is "Elevation of the lowest floor above or below BFE adjusted for wave height."  Wave height adjustment is not required if the FIRM indicates that the map includes wave height.  The identifying statement that indicates that the FIRM has been adjusted for wave height, is "Coastal Base Flood elevations shown on this map … include the effects of wave action" which appears in the Notes section of the legend.

Note that the rate table is divided into Contents and Building columns.  The Contents column is further broken down into Residential and Non-Residential columns.  This differs from the A Zone table used in the previous example as the elevation rows only have one rate.  For Post-FIRM buildings, one rate is used for both Basic and Additional Coverage.

 

CONDOMINIUM RATING

 

CONDOMINIUM ASSOCIATIONS

Condominiums are governed by their Board of Directors of the Condominium Association, and usually they are responsible for maintaining all forms of property insurance necessary in order to protect the common property of the association against all hazards to which that property is exposed for either the insurable value or replacement cost of the common elements.  The responsibility usually involves adequate insurance including flood insurance protection located in Special Flood Hazard Areas.  These by-law requirements could make the individual members of the Board of Directors of the associations personally liable.  They have a fiduciary responsibility to maintain all forms of insurance to protect the common property against all perils.

 

A Condominium is where an owner has an individual interest in his or her own unit and a combined interest—i.e., undivided interest—in the common areas of the condominium structure, which includes the pool, parking lot, club house, etc.  In addition, State laws may also require that common interest residential buildings require necessary property and liability insurance be maintained if reasonably available.  This, of course, includes flood insurance.

Federally regulated lenders, government-sponsored enterprises and government agencies are required to follow the statutes under the Flood Disaster Protection Act and the National Flood Reform Act of 1994.  These laws require flood insurance be obtained in order to loan money for the purchase of condominium buildings and those located in Special Flood Hazard Areas.  Lenders may, at their own choosing, require flood insurance to protect properties in minimal risk areas, if such have been reserved in mortgage documents.

Other lenders, such as the Federal Home Loan Mortgage Corporations, Federal National Mortgage Association, and other government enterprises may require protection for their loans, and these can be more or less severe than those found under Federal regulations.  A detailed explanation can be found at http://www.fema.gov/nfip/infol.shtm under Mandatory Purchase of Flood Insurance Guidelines.  (You may have to type in the "Mandatory Purchase of Flood Insurance Guidelines" in the search box at the bottom of the page.)  An example:  Freddie Mac will not purchase loans on condominium units unless the association insures to full replacement value of all improvements. 

METHODS OF INSURING CONDOMINIUMS AGAINST FLOOD DAMAGE

There are five different methods for insuring condominiums against flood damage:

1. Residential Condominium Building Association Policy (RCBAP).
2. Residential Condominium - Unit owner's policy (Dwelling Policy).
3. Residential Condominium Building Policy (General Property Policy)
4. Non-Residential (Commercial) Condominium (General Property Policy)
5. Non-Residential (Commercial) Condominium - Unit Owner (General Property Policy)

RESIDENTIAL CONDOMINIUM BUILDING ASSOCIATION POLICY (RCBAP)

The RCBAP has several benefits to the association and unit owners, including convenience to the association which allows them to obtain coverage for buildings without having to rely upon the actions of the individual unit owner.  For anyone who has knowledge of Condominiums, this is a real, big, plus.

In addition, there is a cost savings to owners of the units as the RCBAP premiums are proportionately lower than individual residences. 

RCBAP is a replacement cost policy, provided the property is insured to at least 80% of full replacement cost at time of loss, and the 80% does not deduct depreciation (nor does it include appreciation—condominium owners hope that their property increases in value with time, plus the replacement cost will almost always increase).

The NFIP points out in their material, that RCBAP reduces complaints against associations, and again, for those that know anything about condominiums, there are plenty of those.

For a quick summary of the RCBAP:

Policy Form:  Residential Condominium Building Policy (RCBAP)"

Insured:  Condominium association and individual unit owners.

Property Covered:  Condominium building.

1. Individual owned units in the building.
2. Improvements within the units.
3. Additions and Extensions attached or connected by a common wall.
4. Fixtures, machinery and equipment within the building.
5. Materials and supplies used in repairing or altering the building.
6. Contents owned by the Association.

Eligibility:  Community must be in the Regular Program.

1. Residential Condominium units with one or more residential units.
2. At least 75% of the floor area must be residential.
3. "Building" includes Townhouses, rowhouses, low-rise, high-rise and single-family condominium building.

Replacement Coverage:   Yes

ICC:                                 Yes

1. Regular Program Coverage Limits:  Replacement cost of total number of units times                             $25,000, whichever is less.

Contents - ACV of commonly owned contents, to maximum of $100,000 per building.

Policy must be purchased by the condominium association.

Assessment Coverage:     No

Federal Policy Fee:  Determined by number of units in the Condominium.

 

ELIGIBILITY REQUIREMENTS

Only buildings having a condominium form of ownership are eligible for the RCBAP.

Timeshare buildings having condominium form of ownership in jurisdictions where title is vested in individual unit owners, are eligible, provided all other criteria are met.

The RCAP is required for all buildings owned by a condominium association containing one or more residential units and in which

This rule applies regardless of the number of units or number of floors.  This will include townhouse, rowhouse and detached single family condominium buildings.  The RCBAP is available for all high-rise and low-rise residential condominium buildings in the Regular Program only.

Further, residential condominium buildings being used as a hotel or motel, or are being rented—either short-term or long-term—must be insured under the RCBAP.

The NFIP has grouped condominium buildings into two different types, low-rise and high-rise, because of the difference in the exposures to the risks that typically exists.  Low-rise buildings generally have a greater percentage of the value at risk than high-rise buildings, thus requiring higher premiums for the first dollars of coverage.

The availability of the optional higher deductibles for the low-rise buildings allows the association to buy back some of the risk, thereby reducing the overall coverage.  The individual unit owners continue to have an option to purchase a SFIP Dwelling Form.

High-Rise

High-rise (vertical) buildings contain five or more units and at least three floors, excluding enclosure, even if it is the lowest floor for rating. 

Low-Rise

Low-rise condominiums are buildings defined as containing less than five units and/or less than three floors.  In addition, low-rise also includes all townhouses/rowhouses regardless of the number of floors or units, and all detached single family buildings.

COVERAGE

Under the RCBAP, the entire building is covered under one policy, including both the common building elements as well as individually owned building elements within the units, improvements within the units, and contents owned in common, if the contents coverage is purchased.

Contents owned by individual unit owners should be insured under an individual unit owner's Dwelling Form.

1. Building coverage purchased under the RCBAP will be on a Replacement Cost basis.
2. The maximum amount of building coverage that can be purchased on a high-rise or low-rise condominium is the Replacement Cost Value of the building, or the number of units in the condominium building times $250,000, whichever is less.
3. The maximum amount of Content Coverage that is commonly owned, under RCBAP is $100,000.  Contents covered are always adjusted on the Actual Cash Value.

Basic Limit Amount

The Basic limit Amount of insurance for a single family unit is $50,000.  Additional insurance can be purchased up to $200,000 for a total limit of $250,000; the same limit applies to single family dwelling in the Regular Program.

For residential townhouse/rowhouse and low-rise condominiums, for rating purposes, the building basic limit amount of insurance is $50,000, multiplied by the number of units in the building.  Additional insurance can be purchased up to $200,000 for a total limit of $250,000 per unit.

For high-rise condominiums, the building basic amount of insurance is $150,000.  The additional amount cannot exceed the Replacement Cost Value (RCV) or $250,000 multiplied by the number of units, whichever is less.

For high-rise condominiums, the contents basic limit amount of insurance is $20,000.  Additional coverage cannot exceed $80,000 with a maximum limit of $100,000 per building.

Coverage Limits

Buildings that are not insured to at least 80% of their replacement cost, or the maximum amount of insurance available for that building under the NFIP, at the time of loss, would be subject to a coinsurance penalty which could considerably reduce the amount due the association which would force the association to make up for the difference by using reserves or by levying a special assessment to unit owners.

Replacement Cost and Coinsurance

Replacement Cost Coverage is available for building coverage only on all RCBAP and all Dwelling Policies meeting eligibility requirements.  Coinsurance penalties are applied for building coverage only under the RCBAP.

To the extent that the amount of insurance at the time of the loss does not reach 80 percent or more of the full replacement cost of the building or the maximum amount of insurance under the NFIP, the insured will not be reimbursed fully for a loss. 

Building coverage purchased under individual Dwelling Policies cannot be added to the RCBAP coverage so as to avoid the coinsurance penalty.

With the RCBAP policy, when calculating the flood insurance coverage the same general business practice that is used for hazards other than flood, should be used.  Also, the replacement cost of the building foundation and its supporting structures should be included in the calculation as it is covered under the RCBAP and typically excluded under private commercial policies. Agents should review coverages periodically to make sure that they are adequate, because the RCBAP does not include a method that automatically increases the coverage amount to address increasing construction costs due to inflation.  Unit owners should be encouraged to advise their association board if they have reason to believe that coverages need to be increased.

Coinsurance is determined by using the following formula:

 

Insurance Carried

Insurance Required        Multiplied by (times)  the Amount of Loss = Recovery Limits

 

Where the penalty applies, building loss under the RCBAP will be adjusted based on the Replacement Cost Coverage with a coinsurance penalty.

 

Building loss under the Dwelling Form will be adjusted on an Actual Cash Value (ACV) basis if the Replacement Cost provision is not met.  The cost of bringing the building into compliance with local codes–law and ordinance–is not included in the calculation of replacement cost.

Loss settlement on a Replacement Cost basis applies to a single-family dwelling if at the time of loss, the amount of insurance in the policy that applies to the dwelling is 80 percent or more of its full replacement cost immediately before the loss, or is the maximum amount of insurance available under the NFIP.

ASSESSMENT COVERAGE

Assessment coverage is available only under the Dwelling Policy form (subject to Section III, Property Covered, Coverage C, Paragraph 3):

For single-family dwelling assessments, coverage is available only if each of the unit owners that comprise the membership of the association is also assessed by reason of the same cause, and the assessment arises out of a direct physical loss by or from flood to the condominium building in which the unit is located at the time of the loss.  Alternatively, (or) the assessment arises out of a direct physical loss or from flood to another condominium building of the association that is covered under the NFIP, in an amount equal to (at the beginning of the term) to the

ACV of the other building, or the maximum available limits under the NFIP, whichever is less.

 

Assessment coverage cannot be used to meet the 80 percent coinsurance provision of the RCBAP, and it does not pay for

1. Government assessment charges;
2. RCBAP deductible;
3. Loss to personal property owned by a condominium association;
4. Coverage for closed basin lakes; and
5. Assessment coverage in combination with other building coverages cannot exceed the $250,000 maximum amount of insurance per unit.

 

EXAMPLE (No RCBAP):  Unit owner purchases building coverage under the Dwelling Policy and there is no RCBAP, then the Dwelling Policy responds to assessments against unit owners for damages to common areas up to the dwelling limit.

But, if there is damage to the building elements as well, then the building coverage limit under the Dwelling Policy may not be exceeded by the combined settlement of unit building damages (which would apply first) and the loss assessment.

EXAMPLE (RCBAP not insured to value):  If the RCBAP was not insured to at least 80 percent of the full replacement cost of the building or the maximum amount of insurance available under the NFIP, up to $250,000 per unit times the number of units, whichever is less, then the Dwelling Policy would not provide loss assessment coverage.

The Dwelling Policy will not pay any coinsurance penalties under the assessment coverage, nor will it cover the association's policy deductible.  If there is damage to the building elements of the unit and the unit owner has purchased building coverage, the dwelling policy would be excess and would pay to repair the building elements after the RCBAP limits have been exhausted.

 

EXAMPLE (RCBAP insured to value):  The unit owner purchases building coverage under the Dwelling Policy and if there is a RCBAP that was insured to at least 80% of the full replacement cost of the building or the maximum amount of insurance available under the NFIP, whichever was less, then the individual Dwelling Policy would respond.  The assessment coverage under the Dwelling Policy for will pay that part of a loss that exceeds 80% of the replacement cost covered by the RCBAP, up to the maximum combined total of $250,000.  The Dwelling Policy will not cover the association's policy deductible under the assessment coverage.

If building elements within the units were also damaged, the Dwelling Policy pays to repair building elements under the RCBAP limits that apply to the unit have been exhausted.  To repeat, the assessment coverage cannot exceed the combined total limit of $250,000 per unit.

DEDUCTIBLES AND FEES

The loss deductible will apply separately to each building and personal property covered loss.

The standard deductible is $1,000 for a residential condominium building, located in a Regular Program community in Special Flood Hazard Areas (Zones A, AO, AH, A1-A30, AE, AR, AR dual Zones (AR/AE, AR/AH, AR/AO, AR/A1-A30, AR/A) V, V1-30, or VE) where the rates available for buildings built prior to the effective date of the initial FIRMs, then the Pre-FIRM rates are used to compute the premium.

For all other policies rated as Post-FIRM and those rates in Zones A99, B, C, D, or X, the standard deductible is $500.

Optional deductible amounts are available under the RCBAP.

TENTATIVE RATES & SCHEDULED BUILDINGS

Tentative Rates cannot be applied to the RCBAP.  The Scheduled Buildings Policy Form is not available for the RCBAP.

CANCELLATION/ENDORSEMENT OF EXISTING UNIT-OWNER DWELLING FORM

Unit owners may not see a need to purchase or to continue with their individual unit owner policies if the RCBAP represents the building's full replacement cost.

The Dwelling Policy Form is used to insured individual condominium units for both building and contents coverage.  Building coverage can be purchased to provide the unit owner with loss assessment coverage as well as building items that may not be covered under the master policy.  These items may include additions and alterations, permanently installed building items, such as bookcases, cabinetry, floor and wall coverings, and built-in appliances.  Contents coverage should also be purchased to insure the personal property of the unit owner.  Tenants of a residential condominium unit may also purchase contents coverage under the Dwelling Policy Form.

 

APPLICATION FORM

The entire Application must be completed according to the instructions in the Application section of the manual.  The General Property Form and the RCBAP require at least two new photographs, one of which clearly shows the location of the lowest floor used for rating the risk.

TYPE OF BUILDING

RCBAP: The Application must indicate the total number of units in the building and whether the building is a high-rise or low-rise.

High-rise condominium buildings with the five+ units on 3-or more floors, remember that an enclosure common in these buildings cannot be considered as a "floor" in order to make the building a "high-rise."

DWELLING POLICY OR GENERAL PROPERTY FORM:  When used to insure a condominium unit, or for a Condominium Association Policy, the number of units is not required, but it is recommended to record it.

REPLACEMENT COST VALUE

The Replacement Cost Value for the building must be provided, including the cost of the foundation.  The appropriate valuation must be attached to the Application.

Acceptable documentation of the building's RCV is a recent property inspection report that states the building's value on a RCV basis.  The cost of the building's foundation must be included in determining the RCV.  The cost of brining the building into compliance with local codes is not to be included in the calculation of the building's replacement cost. 

 

COVERAGE

It is the responsibility of the agent to make sure the Application accurately reflects the desired amount of building and contents coverage.  If only building insurance is purchased, be sure to notify the applicant of the availability of contents insurance for contents that are commonly owned.  Further,

 

Even if it not required, it certainly  is recommended that the applicant initial the contents coverage section if no insurance on contents is requested.  This will reinforce the awareness that the policy will not pay for loss to contents by flood.

Enter the amount of insurance for building, Basic and Additional limits.  Enter the full Basic Limits prior to entering any Additional Limits.  The building Basic Limit Amount of insurance for high-rise condominium buildings is up to a maximum of $150,000.

The building Basic limit amount of insurance for low-rise condominium buildings is $50,000 multiplied by the number of units in the building.  The total amount of coverage desired on the entire building must not exceed $250,000 (Regular Program limit) times the total number of units–residential and nonresidential–in the building.  As an example, the total mount of basic building insurance coverage desired on a 5-unit low-rise condominium is $1 million.  Five times $250,000 is $1,250,000.  Therefore, the building could be insured for $1,250,000.

 

CALCULATING RATES AND FEES (RCBAP)

 

 

 

Using Rate Table 3A on Flood Insurance Manual page CONDO 10:

 

 

 

 

 

To correctly determine the rates and fees, first select the proper RCBAP rate table.  For this example use the Post-FIRM, High-Rise Condominium, AE Zone building with the lowest floor determined at zero elevation.  To select the correct table use the following:

Program:  Regular                         Building Type: 3 or More Floors

Building Coverage:  $12,000,000 (for example for one of the buildings)

Contents Coverage: $15,000

Flood Zone:  AE

Occupancy:  Other Residential

Number of Units:  100

Date of Construction:  Post-Firm

Basement-Enclosure

Deductible: $500,000

Deductible Factor:  1.000

Replacement Cost:   $15,000,000

Elevation Difference:  0

80% Coinsurance Amount:  $12,000,000

ICC Premium:  $6  ($30,000 Coverage)

CRS Rating:  9

CRS Discount:  5%

 

1.  Enter the rate for building and for contents and compute the annual premium:

      Building rate is $1.43 for basic coverage and .04 for additional coverage.

      The rates are per $100, so first divide $150,000 by $100 = $1500

      Multiply the first $1500 of basic coverage by 1.43 = $2,145.

2.  Enter the rate for building and contents and compute the annual premium.

      $12,000,000 is the requested amount of flood insurance, therefore subtract $150,000

      (Amount of basic coverage) = $11,850,000.

      Rates are per $100, so divide $11,850,000 by $100 =  $118,500.

      Multiply $118,500 by additional coverage rate of .04  = $4,740 for additional coverage

3.   Enter content rates and compute annual premium

      Content rate is 1.10 for basic coverage and .12 for additional coverage.

      Rates are for $100 of coverage, so divided requested amount of $15,000 by $100 = $150

      Multiply $150 by basic coverage rate of 1.17 to get $175.50.

      Since $150,000 is total amount of contents requested, no additional coverage is needed.

3.  Enter the total premium for building and contents, adjusted for any premium change because of an optional deductible being selected (if any).  The total premium is calculated as if the building were one unit.

      Building:                                $2,145

      Additional Rates:                    $4,740

      Contents:                                 $   175

      Annual Subtotal:                     $7,060

4.  Enter the ICC Premium:  Table 6 on Page CONDO 21 of the Manual = $6.

      Total Premium             $7,066

5.   Calculate CRS Discount:  CRS Premium Discount is 5% ($7066 times 95%)=$6713

6.  Federal Policy Fee add                        $7,066

                                                    +       30

7.  Total Premium Amount           $7,096

 

SUMMARY:  This provides an idea of what information is necessary to property rate a high-Rise Condominium using the provided variables.  The same exercise would be used for Low-Rise Condominium buildings and contents, etc.

 

UNIT OWNERS POLICY (DWELLING POLICY)

If a mortgage lender determines that coverage purchased under the Condominium Association is insufficient to meet the mandatory requirements, he may request the borrower to ask the association to carry adequate insurance or require the purchase of a separate unit owner's building policy.  This can happen as even though the building coverage purchased through the association may be adequate and satisfy the minimum requirements, the lender and the owner can face unknown possible exposures.  As an example, in case of a major loss to the condominium building, the unit owner insured under the Association's policy would have to rely upon the Association to perform the necessary repairs to common areas, such as the heating, air-conditioning, etc., and the owner could find himself having additional temporary housing costs and loss assessments by the Association.

A policy on the condominium unit can be issued that names the owner and the Association, as their interests may appear, wherein coverage under the unit would apply first to the unit owner and then to the damage of the building's common element.

An individual owner's dwelling unit in a condominium building may be insured in one of three ways:

1. An individual unit and its contents may be separately insured under the Dwelling Form, in the name of the unit owner, at the limits of insurance for a single family dwelling.
2. And individual unit may be separately insured under the dwelling Form, if purchased by the association in the name of the "owner of record unit number and (name of) Association, as their interests may appear"—up to the limits of insurance for a single family dwelling.
3. An individual unit owned by the association may be separately insured under the Dwelling Form if purchased by the condominium association.  The single family limits of insurance apply.

In the event of a loss, the claim payment to an individual unit owner may not exceed the maximum allowable under the program.

SUMMARY OF THE UNIT OWNER'S POLICY - DWELLING FORM

Insured:  Condominium association and/or unit owner

Property:  Individually owned building, elements in unit, common building elements, and individually owned contents.

                  All residential units

                  Emergency and Regular Program available

Coverage:             Replacement Cost

ICC:                     NO (does not apply)

Coverage Limits:  Emergency Program:  Building $35,000, Contents $10,000

                              Regular Program:  Building $250,000, Contents $100,000

Federal Policy Fee:  $30.00

 

RESIDENTIAL CONDOMINIUM BUILDING POLICY (GENERAL PROPERTY)

The Condominium Association Policy (CAP) under the General Property Form is available to insure condominium buildings not eligible for the RCBAP.  A CAP is written on the General Property Form in the name of the association.  For policies issued after Oct. 1, 1994, the CAP is used for all condominiums in the Emergency Program communities, and those condominiums in Regular Program communities that do not meet the requirement that 75 percent of the floor area of the building be used for residential purposes.

In all other cases, the Residential Condominium Building Policy must be sold, which will cover buildings not eligible for RCBAP.  The CAP will cover building common areas as well as building elements within units of the building.

In the event of a loss, building coverage under either association or individual policy applies first to building common elements damage and then damage to individually owned building elements.  The claim amount many not exceed the maximum allowable under the NFIP.

Nonresidential (commercial) condominium buildings and their commonly owned contents can be insured in the name of the Association under the General Property Form.  "Nonresidential" limits apply.

The owner of a nonresidential condominium unit may purchase only contents coverage for that unit.  Building coverage may not be purchased in the name of the unit owner.

In the event of a loss, up to 10 percent of the stated amount of contents coverage up to $500,000 can be applied to losses to condominium interior walls, floors and ceilings.  The 10 percent is not an additional amount of insurance.

SUMMARY

Policy Form:        General Property

Owners:                Condominium Association and individual unit owners

Coverage:             Condominium building

                              Individually owned building units within the building

                              Additions and Extensions attached & connected by a common wall

                              Fixtures, Machinery, Equipment within the building

                              Material and Supplies used in repairing or altering the building

                              Contents owned by the association

Eligibility:             Residential condominium buildings not insurable under RCBAP

                              Emergency Program available

Replacement Coverage:  No

ICC:                     Yes

Coverage Limits:  Building - ACV to maximum of $100,000

                              Contents - ACV to maximum $10,000

Assessments Covered: No

Federal Policy Fee:  $30

 

STUDY QUESTIONS–CHAPTER SEVEN

 

1.  The most complicated duty of insurance agents who market Flood Insurance is

      A.  commission accounting.

      B.  reading FIRMs.

      C.  understanding Federal laws.

      D.  the responsibility of rating.

 

2.  A crawlspace with its floor below grade on all sides is

      A.  ignored for rating purposes.

      B.  not insurable, including any contents of the crawl space.

      C.  considered as a basement.

      D.  rated as if the house were on pilings or stilts and open all the way around.

 

3.  The lower the contents are located in the building,

      A.  the higher the rates for contents coverage

      B.  the lower the rates for contents coverage.

      C.  has no effect on the rating.

      D.  the more necessary it becomes for professional appraisal.

 

4.  If the insured chooses the standard deductible, no discount is applied and the annual premium remains the same but if he raises the deductible

      A.  there is a discount and the annual premium is decreased,

      B.  there is a discount and the annual premium is increased.

      C.  only the premium on the contents are affected and they will be increased.

      D.  the commission on the policy increases accordingly.

 

5.  If it is found that the building to be insured is located in a community that the NFIP has placed on probation for improper floodplain management,

      A.  the building is uninsurable.

      B.  the premium is automatically doubled.

      C.  then a probation surcharge is added to the premium. 

      D.  the policy will be issued but the commission will not be paid until the property is no longer on probation.

 

6.  The responsibility of the Board of Directions in a condominium usually involves adequate insurance including flood insurance protection located in Special Flood Hazard Areas.  These by-law requirements

      A.  are universally ignored.

      B.  has the effect of the Directors refusing to purchase flood insurance, leaving such protect-  tion up to the individual unit members.

      C.  could make the individual members of the Board of Directors of the associations person    ally liable.

      D.  have created a Condominium Umbrella flood insurance policy that covers all condomin-  iums within a certain geographic area.

7.  Federally regulated lenders, government-sponsored enterprises and government agencies are required to follow the statutes under the Flood Disaster Protection Act and the National Flood Reform Act of 1994.  These laws require flood insurance

      A.  to be purchased by each individual unit owner.

      B.  be obtained by sources other than the NFIP.

      C.  be obtained in order to loan money for the purchase of condominium buildings and those located in Special Flood Hazard Areas.

      D.  be obtained in order to loan money for the purchase of condominium buildings but those that are located in Special Flood Hazard Areas are excluded.

 

8.  There are five different methods for insuring condominiums against flood damage which can be broken into two categories:

      A.  those in SFHAs and those that are not.

      B.  townhouse and high-rise.

      C.  Residential policies and Non-residential policies.

      D.  commissioned and non-commissioned.

 

9.  One of the big advantages of the RCBAP policy over Dwelling Owners Policy for condominium owners, is

      A.  the RCBAP is less expensive to the unit owners than the Dwelling Owners Policy.

      B.  there is no qualifications necessary for the RCBAP as all condominiums are accepted at preferred rates.

      C.  RCBAP policies are sold by salaried government employees, therefore there is no commission on the RCBAP,  making it less expensive.

      D.  the RCBAP is underwritten, issued and maintained strictly by the Federal government.

 

10.  The RCAP is required for all buildings owned by a condominium association containing one or more residential units and in which

      A.  at least 75 percent of the total floor area within the building is residential.

      B.  100 percent of the total floor area is residential.

      C.  each of the units is a co-operative unit.

      D.  the common areas must consist of at least 50% of the floor area.