I need help with a couple flood insurance-related questions.
First, we have a lien on property on which there sits a cottage and a quonset hut, both located in a SFHA. The loan officer says the cottage is being sold and moved off the property, and that the metal quonset hut will be torn down. Of course, I explained that we will need flood insurance in place until the cottage is moved and the hut destroyed, but I'm struggling to determine how we do this from a practical standpoing. The loan officer says that the appraisal says the buildings have no value. The insurance agent for the customer says there is no hazard insurance on the buildings because they have no value. Even if I can get someone to come up with some dollar figure for the ACV of these buildings (and I don't know who that would be), lenders are allowed to permit deductibles between $10,000 and $50,000 for non-residential buildings, so any ACV is almost certainly going to be less than the mimimum deductible. Am I still required to have flood insurance?

Second, does the requirement to consider any first mortgage balance in the required coverage amount (when you're in second lien position) only apply to home equity (consumer) loans, or do you also need to take into consideration any first lien balance that another lender may have when you're in second position on Commercial loans?

1. You cannot purchase insurance with a deductible higher than the value of the building. If you do, you don't have coverage. There is no wiggle room in the law. If you have a covered loan and the improvements are located in a SFHA, you must have flood insurance. It's that simple. The FEMA Guidelines make it clear these rules are not designed to protect the lender but to protect the federal government. IOW, it's not about you. You are acting as the enforcer to ensure applicable borrowers purchase flood insurance and pay in to the NFIP.

You must determine a value for these buildings. You are correct that when the cottage is moved and the hut is destroyed, the insurance can be dropped.

2. You must always consider previous liens when calculating coverage. It is not limited to home equity loans.

I wonder who ordered the appraisal, and did they tell the appraiser not to value the buildings? Hmmmmmm

Most appraisers do not arbitrarily exclude a building from an appraisal, unless instructed to do so. Hmmmmmm

Could this loan officer have put you in this quandry????

So, David, it sounds like you're saying that we would have to dictate that the deductible on the policy was less than the ACV of the buildings. Correct? What if the value of the buildings is so low (say $500) that it isn't possible to even purchase insurance with a deductible lower than that? Thanks so much for your help.

I believe what David is saying is you must establish the value before you can determine whether insurance is obtainable or not. I don't believe you can have that high a deductible on residential-type property, which the cottage should be...I believe the max is $5000 (without looking). I believe the norm is $500 and if the value is more than that...you will need insurance.

BTW, I have no idea what a Quonset Hut is! If it's roofed, floored, but not walled, it wouldn't be insurable.

I guess the cottage would be residential, but the quonset hut would be non-residential. (A quonset hut is a prefabricated metal building that has domed walls and roof--often used in military settings.) I think the minimum deductible for residential properties is $500 and for non-residential properties is $10,000. So, if the appraiser and/or insurance agent tell us that the cottage is worth less than $500, and the quonset hut is worth less than $10,000, how do you practically obtain flood insurance coverage?

You don't...but I highly doubt your cottage RCV will be less than $500. BTW, some older buildings (pre FIRM) carry a $1000 minimum, so that may come into play with your analysis. See page 29 (4) 1st paragraph.

Thanks to all of you for helping me work through this.

This is another example of the importance of pulling your FHD prior to ordering your appraisals. You want to ensure that if your property is in a flood zone you require the cost approach to be included in the appraisal and not allow the appraiser to invoke a departure provision on the cost approach in the appraisal.

I thought that if the Hazard Insurance agent indicates that the structure is not insurable or has no value, that flood insurance, even though required per the flood rules, cannot be purchased through the NFIP because of the deductible issue. If there is no value, then even a $500 deductible is more and a policy can't be purchased (application would be refused by NFIP). Can you clarify?