I have read several articles on the issue of flood insurance requirements based on appraisal value, hazard insurance value, replacement cost and actual cost values. Now my head is spinning.

A consultant has noted an exception on a commercial loan for insufficient insurance because it does not cover the replacement cost of the properties. Both the outstanding balance of the loan and the appraised value are more than the $500,000 maximum coverage available under the NFIP.

So, am I right that $500,000 is enough to meet the regulatory requirements?

Yes.

I believe you can require more than the regulatory requirement, but the $500K is sufficient to meet the regulation. Is the consultant arguing that the bank should be going beyond the requirement because the loan amount is so large and you have exposure?

And where pray tell does this "consultant" recommend that additional coverage come from since they have the maximum amount offered by NFIP? Time for a new consultant.

Doug, no, the consultant is citing an exception because the loan does not carry sufficient flood insurance to cover the replacement cost of the properties.

Randy, I have no idea what the consultant was thinking. I am the new compliance officer here and the engagement was completed before I came. I have been asked to investigate the findings. I agree, I won't be recommending this consultant. Every exception involved this same issue.

It sounds like I am on the right track with my interpretation. I appreciate you taking the time to respond.

When you say "properties" is there more than 1 property on the loan that is in a flood zone? Each building should have its own policy, and each could be insured up to $500,000.

Yes, there are 19 buildings on the property.

Appraisal replacement cost = $1.6MM
Outstanding loan balance = 1.4MM
Flood insurance = $800,000

Is the replacement cost on the appraisal for each building or for the total of the 19 buildings?

I am not a flood expert at all, but if you have 19 buildings, the maximum coverage under the NFIP would be $9.5MM, right (500,000 x 19)? So then you would be under-insured with only $800,000 in coverage. You should have 1.4MM (I'm assuming that all 19 buildings are in the SFHA).

Hopefully a guru or someone more confident and knowledgeable than me will chime in!!

Whoa - wait a minute. Where did the $800,000 in flood insurance come from, that was not originally mentioned. I didn't get the impression that there were multiple buildings. With 19 commcercial buildings, you have to potential for $9.5 million in flood insurance at $500,000 per building. Maybe your consultant is correct.

My apologies,RL. I was trying to ask my question without getting too specific. I see now that specifics were critical to the answer. Yes, I think I am beginning to see that the consultant is right. I now see that the maximum insurance available is $500,000 (commercial building) PER building.

Appraisal replacement cost = $1.6MM (19 buildings)
Outstanding loan balance = 1.4MM
Insurance available under NFIP = $9.5MM
Current Flood insurance = $800,000

Using the "lesser of" formula, the Bank should at least have 1.4MM? I appreciate your help. Flood insurance calculation is new to me.

FWIW....I agree.....you need 1.4MM.

Woohoo! Maybe I am getting a handle on flood! Randy the word "properties" tipped me off that there might be more than 1 building.