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#2028159 - 07/20/15 03:06 PM Flood Insurance on Multiple Buildings
clarkgriswald Offline
Member
Joined: Oct 2014
Posts: 51
So I’ve run into a problem I’ve never encountered before and am looking for some help.
We have a commercial loan that has 3 buildings in a SFHA. Only one of the buildings has flood insurance so the question is what amount to require on the other two.
The Principal Balance of the loan is 210K. All 3 structures are non-residential making the NFIP maximum higher than the Principal Balance. The insurable value of each structure is as follows: office is 221K, warehouse is 50K and the shed is 3K. The borrower has flood insurance on the office for 221K. The problem I’m having is figuring out how much flood insurance to require (potentially force place) on the warehouse and the shed. I know that the minimum amount of insurance for all three buildings is 210K as that is the lesser of the principal balance, NFIP maximums, and insurable values. I don’t know what to require on the warehouse and the shed as the 221K already on the office is greater than the principal balance of the loan at 210K. Is it appropriate to just force place for the minimum amount possible? Any insight is much appreciated.

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Flood Compliance
#2028160 - 07/20/15 03:10 PM Re: Flood Insurance on Multiple Buildings clarkgriswald
Dan Persfull Offline
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Dan Persfull
Joined: Aug 2002
Posts: 47,517
Bloomington, IN
As long as you meet the minimum coverage requirement how you allocate the insurance between the buildings is up to whatever you and your borrower agree to.
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The opinions expressed are mine and they are not to be taken as legal advice.

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#2028179 - 07/20/15 03:57 PM Re: Flood Insurance on Multiple Buildings clarkgriswald
clarkgriswald Offline
Member
Joined: Oct 2014
Posts: 51
Thanks Dan. From your response I take it that it is OK if the cumulative amount of flood insurance on all three buildings is larger than the prinipal loan balance of 210K (which is the the minimum amount required)?

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#2028188 - 07/20/15 04:16 PM Re: Flood Insurance on Multiple Buildings clarkgriswald
Dan Persfull Offline
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Dan Persfull
Joined: Aug 2002
Posts: 47,517
Bloomington, IN
It appears your minimum amount is $210K and you have $221 in coverage. You can allocate the $221 among the 3 buildings.
_________________________
The opinions expressed are mine and they are not to be taken as legal advice.

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#2028212 - 07/20/15 04:54 PM Re: Flood Insurance on Multiple Buildings clarkgriswald
rlcarey Online
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rlcarey
Joined: Jul 2001
Posts: 83,227
Galveston, TX
Of course this does ignore the safety and soundness aspects of insurance. If you allow the warehouse to be insured at $3,000 and it gets wiped out in a flood but the main building is spared, is the warehouse an integral part of the going business concern and can the borrower rebuild without insurance to keep the business going from other sources of funds?? How does the loss of the warehouse impact the overall market value of the underlying property? All these questions need to be considered while meeting the regulatory requirements.
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#2028229 - 07/20/15 05:45 PM Re: Flood Insurance on Multiple Buildings clarkgriswald
clarkgriswald Offline
Member
Joined: Oct 2014
Posts: 51
Thanks Randy and Dan for your feedback.

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#2031114 - 07/31/15 05:06 PM Re: Flood Insurance on Multiple Buildings clarkgriswald
Newbie06 Offline
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Joined: Mar 2006
Posts: 731
We had a situation where the outside auditor stated that the bank could not aggregate the two flood policies together to ensure coverage amount.

We have a customer who has 1 parcel with 2 dwellings on it. The one house has a value of 89,000 (insurance coverage amount being 54,000) and the other has a value of 93,500 (insurance coverage amount being 10,000). The balance of the loan is only 49,000. So, the two policies, totaling 64,000, cover the amount of the loan, but the external auditor is saying that we cannot add them together.

So, I am not sure if we should be taking the value of the dwellings separately and subtracting the value of the land to get the coverage amount or following the way I described above.

Neither one of the policies indicates replacement cost value...this loan was done a number of years ago.

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#2031126 - 07/31/15 05:40 PM Re: Flood Insurance on Multiple Buildings clarkgriswald
rlcarey Online
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rlcarey
Joined: Jul 2001
Posts: 83,227
Galveston, TX
Your auditor is nuts. You have $64,000 in coverage on a $49,000 loan. Tell them to read FAQ #14 and try again.

As this is an outside auditor - you need to find a new one.
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The opinions expressed here should not be construed to be those of my employer: PPDocs.com

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#2031176 - 07/31/15 07:01 PM Re: Flood Insurance on Multiple Buildings rlcarey
Newbie06 Offline
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Joined: Mar 2006
Posts: 731
Randy, are these the FAQ's from 2011 or is there a more recent version?

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#2031186 - 07/31/15 07:28 PM Re: Flood Insurance on Multiple Buildings clarkgriswald
rlcarey Online
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rlcarey
Joined: Jul 2001
Posts: 83,227
Galveston, TX
Thanks to BOL, you can just go here for the latest:

http://www.bankersonline.com/tools/flood_faq_2011_10_17.pdf
_________________________
The opinions expressed here should not be construed to be those of my employer: PPDocs.com

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