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#1993514 - 02/04/15 09:07 PM Flood Insurance on low value structures
j2rocket Offline
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Joined: Aug 2014
Posts: 15
I have a flood insurance question where the structure is of no value to the property. The maps have recently changed on this property and now it is showing in a flood zone. The property is farm land which contains 2 grain bins. The appraiser stated in the appraisal that the grain bins are “30yrs old and have no significant contributory value”. No value has been added to the appraisal for these grain bins. I know flood insurance is required because grain bins are considered an eligible building. How would the value be considered when the appraiser stated there is no contributory value? How much insurance would be considered adequate in this type of circumstance?

I am trying to find the best answer to assist my loan officers but they don't like my answers

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Flood Compliance
#1993548 - 02/04/15 09:56 PM Re: Flood Insurance on low value structures j2rocket
David Dickinson Offline
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David Dickinson
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Central City, NE
You need to determine a value. Ask the appraiser to assign some dollar amount (that's what they get paid to do). What does "no contributory value" mean? Are they worth $0? I doubt it.

You could also use the functional building cost approach - if the buildings were to be wiped out with a flood, what structure would the owner replace it with? What's the cost of that replacement?

Or you can use the Demolition cost approach - if the building was wiped out by a flood and the owner would not replace them (they aren't needed or used today), what would be the cost to demolish and remove the debris?
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#2033557 - 08/13/15 04:27 PM Re: Flood Insurance on low value structures j2rocket
KRT Offline
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Joined: Nov 2006
Posts: 59
Southeast US
I am reviewing a loan secured by multiple farms (hundreds of acres). A small creek runs through one of the properties, and our flood vendor's determination shows that one of the old barns is in a flood zone. At the time this was learned, we had no new appraisal for the property; at the bank's urging, the borrower obtained a flood insurance policy with a coverage amount of $20,000. The appraiser assigned zero value to the old barns, and made the statement that there were THREE of these barns within the flood zone. The appraisal says that these barns have "no contributory value." These old barns are not listed on the borrower's hazard insurance policy.

Based on the response above, I would assume that it is not acceptable to say that flood insurance is not required because the buildings have no value. How do you determine the correct coverage amount?

Also, how do we handle the fact that the appraiser says there are 3 barns in the flood zone instead of one (per our flood vendor)? It is unlikely that the owner would replace the barns if destroyed. If $20,000 is more than adequate to cover demolition of all 3 buildings, does that mean we are in compliance?

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#2033589 - 08/13/15 06:01 PM Re: Flood Insurance on low value structures j2rocket
raitchjay Offline
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OK
It sounds like you might be over-insured (insured for a value that wouldn't actually pay off in the event of destruction of the barn(s) due to flood). Where did the $20,000 figure come from?
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#2033826 - 08/14/15 07:26 PM Re: Flood Insurance on low value structures raitchjay
KRT Offline
Member
Joined: Nov 2006
Posts: 59
Southeast US
The $20,000 was most likely something the insurance agent chose. Since we didn't have a value to go on, I think the conversation with the borrower was along the lines of "talk to your agent to find out if you can get flood insurance," and this is what they came up with.

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#2033897 - 08/15/15 01:34 PM Re: Flood Insurance on low value structures j2rocket
David Dickinson Offline
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David Dickinson
Joined: Nov 2000
Posts: 18,762
Central City, NE
It is up to the lender to determine th appropriate amount of insurance. You can use the appraisal, the agent's underwriting value, your own inspections, hazard insurance, etc. to help determine the insurable value, but ultimately, the responsibility rests on the lender.

Every building has some value. Read my post from 2/4/15 above. You might be able to use the demolition cost or functional building cost approach, but you have to have a value for each building located in a SFHA. You should also read the article entitled "Flood Insurance: Insurable Value" found at our website:
http://www.bankerscompliance.com/compliance-resources/free-downloads.htm

Concerning the issue of 3 barns vs. 1: Go back to your vendor and tell them what the appraiser reports. Have them do review this property manually (not with automated mapping software) and ask them to send you evidence of their work. They should be able to send you map overlays showing wha they believe is correct. They and the appraiser need to reconcile this issue. They both work for you.
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