In calculating the amount of flood insurance coverage needed, I have always been trained to look at the lesser of the following:

1. The maximum amount of NFIP flood insurance coverage available,
2. The outstanding principal balance of the loan or
3. The value of the property minus the land.

For example, let's say we have a loan with a outstanding principal balance of $500,000 secured by a commercial piece of property valued at $900,000 (land worth $200,000). In following the above steps, the bank would require at least $500,000. With me so far?

Well, I have come across a Lenders Workshop Manual (I think conducted by NFIP) where it says "The Reform Act states that the amount of insurance required is the outstanding principal balance of the loan, excluding land value , or the maximum amount available under the Program, whichever is less." Also, page 23 of FEMA's Mandatory Purchase of Flood Insurance Guidelines states " The lending regulations provide that, in addition to the statutorily prescribed dollar limits, flood insurance coverage under the NFIP is limited to the overall value of the building. Accordingly, a lender must evaluate the amount of coverage required in relation to the portion of the loan that is associated with the improved real estate (excluding the appraised value of the land), or the maximum amount of insurance available under the NFIP, whichever is less."

So, that would mean if you have a loan for $500,000.00 and the value of the land is $200,000, the minimum coverage the bank would require would be $300,000?

My problem with that is that the actual regulation reads "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 particualr type of property under the Act. Outstanding principal balance is not defined nor is "excluding the land value" from the outstanding principal balance mentioned.

Anyone?

In your scenario, $300,000 would be the maximum limit of coverage through NFIP. NFIP will only insure the value of the “structure”, not the land, up to $500,000.

If, from a risk factor, the bank feels they need additional coverage, they can require the borrower to purchase additional insurance through third party vendors.

If, from a risk factor, the bank feels they need additional coverage, they can require the borrower to purchase additional insurance through third party vendors.

I need to clarify this, if the value of the property (commercial) is greater than $500,000, then you can require additional coverage above the $500,000 available through NFIP. Obiviously, you can't, or shouldn't, over insure the property.

I had a similar situation last spring. I e-mail FEMA and their reply was "The minimum required coverage is the lesser of the oustanding principal balance on the loan, OR the maximum amount available from the NFIP. However, the amount of the insurance should not be less than the value of the improved structure ". Under an Interagency Q&A in 1997, it is stressed that the NFIP policy will not cover losses in excess of the value of the improvements. And in the Sept 1999 version of Mandatory Purchase of Flood Insurance Guidelines, pg 23, it states "Where the outstanding principal balance of the loan exceeds the value of the building, the lender should exclude the value of the land in determining the amount of coverage needed."

I agree with your initial assessment of the amount needed, and with Reged. In your example the principal loan amount did not exceed the value of the insurable building, so you would need to require $500,000

I agree, in his first scenario, he would need $500,000, but in his second scenario, he would only need $300,000.

As far as I could tell there is only one scenario presented. And in that scenario, the correct amount of flood insurance that must be required in my opinion is $500K.

In the scenario presented, you must have $500,000 in Flood Insurance. You are never allowed to net out land against the loan balance to arrive at a "net exposure." If the improved real estate floats in a flood, FEMA may have to pay the borrowers $500,000. This is FEMA's risk and you are here to protect the Federal government.

I read this as two scenarios.

1. Principal balance $500k, Appraised value $900k, Land Value $200k, Structure value $700k. I would say the minimum required coverage would be $500k.
2. (How I interpreted) Principal balance $500k, Appraised value $500k, Land Value $200k, Structure value $300k. I would say the minimum required coverage would be $300k.

However, if #2 were saying his principal balance is $500k and the property values are based from # 1, I would say his minimum required coverage is still $500k.

I proposed this question via email to Rich Slevin, Regional Manger NFIP Region IV out of Naperville, IL. I will share his response when I receive it.

I apologize for the length of this post, however here is the correspondence between Mr. Slevin and myself.
Dan: you are correct - in this example, the amount of the loan exceeds the value of the structure so the remainder is land cost/value. The only caution I would give you from an insurance standpoint, however, is to make certain that you figure your building value based on replacement cost. After all, repairing and replacing is what insurance is all about. Appraised value is nothing more than a prediction relative to what someone will pay for the building and/or land. What someone will pay to buy a building can be very different from what it costs to repair/replace. Insurable value is based on repair/replacement, not purchase price. Rich.
Rich,

Thank you for your quick reply. I would like to impose on you one more time however.
I did not make my interpretation of the second scenario clear, so I want to be sure on this.
I was assuming that the loan’s principal balance was $500k, the appraised value $500k, land value $200k, and structure value $300k. Minimum required coverage $300k. Is this correct?
Thanks,
Dan

-----Original Message-----
From: Richard F Slevin [mailto:rslevin@csc.com]
Sent: Tuesday, September 03, 2002 10:22 AM
To: Dan Persfull
Subject: Re: Requierd Coverage - Need your opinion


Dan: I have no problem with your answer to the first example. Since the
value of the building exceeds your loan amount, there is obviously no land
value residing in the $500K loan. The answer to the second situation may be
incorrect, however. Please note on page 23 of the Mandatory Purchase
booklet that the narrative explains, “Where the outstanding principal
balance of the loan exceeds the value of the building, the lender should
exclude the value of the land in determining the amount of coverage
needed.” In your second example, you don’t establish the value of the
building. So, it is impossible to tell whether your $500K loan exceeds the
value of the improvements which you are taking as collateral. You don’t
just automatically exclude the value of land - you do so only when your
loan amount exceeds the value of the building. Rich


“Dan
Persfull” To: Richard F Slevin/CIV/CSC@CSC
@peoples-bank Subject: Requierd Coverage - Need your opinion
.com>
09/03/2002
09:05 AM





In calculating the amount of flood insurance coverage needed, I have always been trained to look at the lesser of the following:
1. The maximum amount of NFIP flood insurance coverage available,
2. The outstanding principal balance of the loan or
3. The value of the property minus the land.

For example, let’s say we have a loan with a outstanding principal balance of $500,000 secured by a commercial piece of property valued at $900,000 (land worth $200,000). In following the above steps, the bank would require at least $500,000. With me so far?
Well, I have come across a Lenders Workshop Manual (I think conducted by NFIP) where it says “The Reform Act states that the amount of insurance required is the outstanding principal balance of the loan, excluding land value , or the maximum amount available under the Program, whichever is less.” Also, page 23 of FEMA’s Mandatory Purchase of Flood Insurance Guidelines states “ The lending regulations provide that, in addition to the statutorily prescribed dollar limits, flood insurance coverage under the NFIP is limited to the overall value of the building. Accordingly, a lender must evaluate the amount of coverage required in relation to the portion of the loan that is associated with the improved real estate (excluding the appraised value of the land), or the maximum amount of insurance available under the NFIP, whichever is less.”
So, that would mean if you have a loan for $500,000.00 and the value of the land is $200,000, the minimum coverage the bank would require would be $300,000?
My problem with that is that the actual regulation reads “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 particualr type of property under the Act. Outstanding principal balance is not defined nor is “excluding the land value” from the outstanding principal balance mentioned.
Anyone?
Mr. Slevin,

The above question was proposed in a “compliance thread”. Am I correct in the following assumptions?
In his first example, $500,000 principal balance $900,000 appraised value less land value $200,00 = $700,000 “structure” value. His minimum coverage requirement is $500,000.
The second example, loan for $500,000, appraised value of lend $500,000 land value $200,000. His minimum coverage requirement would be $300,000.
I know you have busy schedule, but your assistance in this would be appreciated.
Thank,
Dan Persfull

Monday on Tuesday is not good. I forgot to reverse the order so it would be in sequence for easier reading. Sorry.