Flood Insurance and the Multiple Building Scenario

One of the most common topics that come up on the Hotline is how to determine the proper flood insurance coverage requirement for the multiple building scenario. The flood regulations generally require buildings in the Special Flood Hazard Area (SFHA) to have “sufficient” flood insurance coverage. This requirement looks a little different when we are discussing multiple buildings that secure the loan. This week let’s take the time to explore some of the basic questions that impact the bank’s requirements so that you can explain them to your team. 

What if some buildings are in and some buildings are out?

Luckily, the regulators published an FAQ that deals with this question directly. Regulators tell us that a “lender must determine whether any improved real property securing the loan is in an SFHA. In cases in which the loan is secured by multiple buildings and some of the buildings are located in an SFHA in which flood insurance is available under the Act, but other buildings are not located in an SFHA (or are located in an SFHA, but not in a participating community), a lender is required to obtain flood insurance only on the buildings securing the loan that are located in an SFHA in which flood insurance is available under the Act.” 

The regulators then give us an example where a loan is secured by five buildings:

  • Buildings 1 and 2 are located in an SFHA and the community participates in the NFIP;
  • Building 3 is not located in an SFHA; and
  • Buildings 4 and 5 are located in an SFHA, but the communities do not participate in the NFIP.

The first prong of our analysis is that the buildings must be in the SFHA for the regulation to require flood insurance coverage. This rules out building 3. The second prong of our analysis is that flood insurance must be available under the NFIP program for the regulation to require flood insurance coverage. This prong rules out Buildings 4 and 5. Even though these two buildings are in a flood zone, they are in communities that do not participate in the NFIP. Members often ask if they can still require flood coverage even if it is not required under the regulations. The FAQ goes on to tell us: “A lender may decide to require the purchase of flood insurance (from a private insurer) on buildings 4 and 5 because these buildings are located in an SFHA. Further, depending on the risk factors of building 3, the lender may elect to require flood insurance as a matter of safety and soundness, even if the building is not located in an SFHA.”

Do we have enough coverage?

Now that know what buildings require coverage under the flood regulations, the next most common question our Hotline advisors answer is how much coverage is required when multiple buildings secure the loan and how it has to be spread around. One of our favorite tool for that question comes from a PowerPoint presentation prepared by the FDIC. Slides 13-15 at https://www.fdic.gov/regulations/resources/director/technical/flood/flood-4.pdf explore at this question. Let’s explore this question with the help of the example provided by the FDIC on Slide 15.  

In the example, we have a $2,000,000 loan secured by two pieces of commercial property and a single-family home. We will assume that each of these buildings is in the SFHA and in an NFIP-participating community.

  • Single family: $200,000 insurable value; $250,000 NFIP Max
  • Commercial Building #1: $1,000,000 insurable value; $500,000 NFIP Max
  • Commercial Building #2: $300,000 insurable value; $500,000 NFIP Max

Slide 13 tells us that for purposes of determining appropriate coverage for multiple buildings, “the calculation is the same as for a single building; however, the bank must spread the coverage among all of the buildings in the special flood hazard area. Each building must have some coverage.” We know from § 339.3(a), for each “The amount of insurance 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.” This means that we first look at each individual building to determine the proper measure for that building and add those numbers together to determine the aggregate total. For this step, we compare the insurable value of the building to the NFIP Max for each building, choosing the lesser of each. After we finish this step we conclude the following:

  • Single family: $200,000 based on the insurable value
  • Commercial Building #1: $500,000 based on the NFIP Max
  • Commercial Building #2: $300,000 based on the insurable value

When we add these individual numbers, it totals to $1,000,000. Next, we compare the result of this calculation to the loan amount. Since the loan amount exceeds $1,000,000, we base our aggregate required coverage on $1,000,000. From here, as long as each of the buildings that require flood insurance coverage has “some coverage,” we have met the regulatory requirement.

Compliance Alliance has the tools to help you stay compliant with the flood regulations. In applying the requirements we discussed today, your team may find our Flood Insurance Minimum Coverage Calculation & Documentation Calculator helpful. Of course, if you have any questions about how to meet the flood insurance requirements, don’t hesitate to reach out to Hotline via chat or email.