An SFIP can generally only cover a single structure, requiring
a property with multiple structures to be covered by multiple
policies. A private policy may cover more than one structure,
but lenders should ensure the policy includes a schedule of all
covered buildings and individual limits of coverage for each (and
that such a policy meets Biggert-Waters standards).
Establishing Insurable Value
Establishing the insurable value of covered structures securing a
loan is integral to being able to document compliance with the
regulation. The lack of direct guidance for this within the regulation allows flexibility in determining the standards a financial
institution will use to document value, but care must be taken to
ensure a consistent approach.
The amount of insurance available under the NFIP is generally the lesser of the full insurable value of the building, or the
maximum allowable under the program ($250,000 for one- to
four-family residential structures and $500,000 for non-residential
structures and multifamily residential structures). However, the
type of value to be utilized depends on the type of structure being
covered. SFIPs covering a dwelling can cover a loss up to the full
Replacement Cost Value (RCV), whereas those covering a structure
other than a dwelling will only cover a loss up to the Actual Cash
Value (ACV), or the RCV less the cost of physical depreciation
(FDIC, Flood Insurance Frequently Asked Questions, www.fdic.
These values are not connected to (and therefore should not be
sourced from) the tax assessment value or the market value. Best
practices for documenting valuation should include:
■ ■ ■ Consistent references to the Standard Uniform Appraisal. For
dwellings, the standard uniform appraisal includes a section
that breaks out the replacement cost value of the structure.
Consistent reference to this documentation adequately supports insurable value for dwellings.
■ ■ ■ A request that commercial appraisers provide a cost approach
as part of their investigation. While not generally included in
commercial appraisals as a matter of course, specific instructions provided to the appraiser can allow for identification
and documentation of a depreciated replacement cost value,
or ACV, for all structures on the property.
■ ■ ■ Consistent basis for and documentation of insurable value. As
stated on a Hazard Insurance policy, this may be referenced to
support the insurable value for flood insurance purposes, but
this approach should be undertaken with care. Hazard Insur-
ance policies generally do not cover or consider the value of the
foundation of a structure and values used for this purpose may
differ in other ways from the requirements of a flood insurance
policy. (Interagency Questions and Answers Regarding Flood
Insurance, Question and Answer 9, as revised October 2011.)
As a result, Hazard Insurance policies relied upon to inform
insurable value for flood insurance purposes should undergo
a full review to ensure that adjustments for discrepancies in
the calculation of value are accounted for. In the absence of
such a review, which may fall outside the expertise of bank
personnel, it is best to utilize the hazard insurance value only
for the purpose of identifying changes in the value over the life
of the loan. For instance, receipt of a renewed hazard policy
showing a significant increase in value may prompt a review
of the property to determine if reevaluation of the amount of
flood insurance is necessary.
■ ■ ■ Utilization of third party tools, such as cost valuation models
like Marshall & Swift. When performed internally by bank
personnel, valuations arrived at through such a model may
offer a cost effective alternative to enhanced appraisals.
Despite the fact that the regulation does not mention insurable value, successful compliance with its requirements hinges
on appropriate understanding of this term and the methods by
which it can be calculated and documented. These waters can get
murky; be careful and conscious in your approach.
Pursuing a water-tight flood compliance program can feel like
bailing water out of sinking ship with a storm fast approaching. By
understanding how compliance with the regulation is inextricably
linked to the programs and supporting guidance, we can be ready
for any flash flood that comes our way. ■
ABOUT THE AUTHOR
KATHRYN MORRIS, CRCM, is proud to serve as Vice President
and Compliance Manager for Columbia Bank, headquartered in
Tacoma, Washington. In this role, she specializes in lending regulation with primary responsibility for compliance in the areas of
Residential Lending, Commercial Banking, Credit Administration,
Loss Mitigation and International Banking.
Kathryn currently serves as the Chairperson of the Oregon
Bankers Association Compliance Roundtable, and has recently
joined the faculty for the ABA Compliance Schools. She lives
in McMinnville, Oregon and can be reached at morrisk@
However, the provision of the
Biggert-Waters Act that has the most
sweeping implications for our industry,
is the requirement for banks to accept
privately issued flood insurance policies—
those issued outside the scope of the NFIP.