I think I've discovered an issue with how the Commercial side of our bank handles contents coverage for flood and would like some advice on if others agree and how they would handle.

In our standard DOT/Mortgage we take an interest in personal property. The definition of personal property is pretty broad and includes "equipment and fixtures." I know that if we take a security interest in both the building and its contents and both are located in a SFHA that we have to require flood insruance on the builidng and its contents. The business line argument is that they only care about "contents" when they perfect and file a UCC. I say that by having such a broad definition of personal property in every DOT/Mortgage that they are unknowingly taking a security interest in the contents of the building whether they perfect or not. Is my interpretation correct?

Lets assume that it is. If so that would mean that for every loan we do that is in a SFHA we would be taking a security interest in "contents" and therefore we would need flood insruance on the building and its contents. My question then is how do we know how much contents coverage is required? Also, which contents are insurable and which aren't? Fixtures and equipment are vague terms. I see this being a nightmare to manage because I think that it would require that for every loan in a SFHA we would have to do some type of analysis on what exactly is in each builidng ("fixtures and equipment") and derive a value for each in order to determine how much insruance to require. A possible solution that I have seen is to amend the defintion of personal property so that it excludes "contents" if the loan is in a SFHA, but I see resistance to that as well.

So with all this in mind my question is how to others handle contents coverage? Do you require it on every loan? If so how do you determine the insurable value of contents?

Our origination system allows us to specifically exclude the personal property from the Deed if the property is located in a SFHA. That's what we do.

If you have a security interest in the contents, you must have flood insurance on them, where available. Perfection is not necessary.

My question then is how do we know how much contents coverage is required? Also, which contents are insurable and which aren't?
First, determine which contents are insurable. This is an insurance agent question. Once you determine that, you must assign a good faith determination of value to them.

I feel for you. It's complicated. But the loan officers can't have their cake and eat it too.

Ha thanks David. That's the exact argument that I've been making. If the loan goes south I bet you they try and grab any of the fixtures and equipment they can get their hands on.

By asking these questions I'm really trying to build a case for changing the defintion as fmissle said they do.