We have a customer who purchased a condo that is in a flood zone, and I'm trying to determine if we have enough coverage.

-Outstanding Principal Balance - $114,418.52
-Insurable Value/RCV – The RCV listed on the RCBAP is $500,000 and this is also the coverage that the condo association has (i.e. 100% RCV). If I divide that by the number of units (5), it allocates $100,000/unit.
-Maximum Available under the NFIP - $250,000

My understanding is that we can only require $100,000 because it is the lesser of the 3, if I calculated it correctly, but the $100,000 is less than the loan amount. The insurance company has stated that if the condo floods, they will pay on a first come first serve basis, and won't commit to paying $100,000 to each unit.

Because of this, the question was asked if we can force-place $14,418.52 to cover our loan amount. I don’t see how we can do this, because the borrower is insured for the minimum amount.

I would love to get someone’s opinion on this.

You are allowed to require more than the required minimum amount. We do this from time to time for safety and soundness purposes.

You are allowed to require you borrower to have more, but if you require more than 100% RCV, then you could be accused of over-insuring, which is an absolute no-no.

"The insurance company has stated that if the condo floods, they will pay on a first come first serve basis, and won't commit to paying $100,000 to each unit."

The insurance agent doesn't have a clue. There are no payments ever made to the unit holders. Any insurance proceeds go directly to the association.

But I agree with RR - under the regulations you are currently fully insured.

RR Joker - that's what I'm worried about. I'm not very familiar with flood requirements on condos, and I'm afraid to fore-place the amount if we shouldn't.

Thank you everyone!

FWIW, I totally agree with Randy...the agent is clueless.

How do you reconcile the prohibition against overinsuring with the permission to also require more for safety and soundness reasons?

What prohibition on over insuring? The regulations talk about not over insuring, but only in the sense that you require the customer to buy more insurance than they ever could collect.

If you have a hotel in a flood zone and the value of the building is $5 Million and the maximum NFIP policy is for $500,000, the bank would be foolish not to require a total flood insurance policy amount of $5 Million either through private insurance or a combination of an NFIP policy and a private umbrella policy. That is of course unless the bank wanted to eat $4.5 Million in losses.

What they warn against is that if you have, for example, a 60 year old warehouse that has a replacement cost of $1 Million, but a current ACV of $200,000, you don't want to force the borrower into a $500,000 NFIP policy as they will only be able to collect on the ACV value of $200,000.

A good way to look at it is to think:

At LEAST the lesser of:

The loan amount (including senior liens)
The insurable value of the structure
The maximum available under the FEMA Program