now be accompanied by a certification or endorsement from the
insurance company indicating that the policy meets the requirements of the NFIP. Commenters on both proposed versions of
the private policy rule have requested a provision in the final
rule allowing banks to rely on this type of assertion from the
insurance provider, but it is unclear if we will see that inclusion
in the final rule. In the absence of a regulatory safe harbor of this
nature, responsibility for verifying that the policy meets all NFIP
requirements will remain with banks. There are two versions
of this endorsement that may necessitate different treatment:
• A certification affirmatively stating compliance—this will be
a sentence, sometimes on the declarations page, sometimes
within the text of a policy, that states “this policy meets the
standards of the NFIP,” or similar verbiage. While this sounds
good, it may not accurately reflect the terms of the policy.
This should prompt additional review to ensure the policy
meets each of the six guidelines.
• An endorsement or certification amending the policy—this
will be a sentence that states that where the policy text does not
comply with the NFIP, the policy is hereby amended such that
those provisions conform to NFIP standards. This would mean
that, for instance, a policy showing aggregated coverage on the
declarations page would function with per occurrence coverage under the certification. This can be an acceptable policy.
There is a lot of hazardous debris in this private policy stream,
and it’s best to keep a sharp eye out for those bits of danger that
lurk beneath the surface.
Walled and Roofed Structures
The flood regulation will tell you that a covered building
“means a walled and roofed structure, other than a gas or liquid storage tank, that is principally above ground and affixed
to a permanent site, and a walled and roofed structure while
in the course of construction, alteration, or repair” ( 12 CFR
339.3(a)). What won’t the regulation tell you about covered
buildings? Everything else. Let’s wade in a bit further.
The NFIP Flood Insurance Manual provides a more specific definition of “building,” which includes the clarification that a structure
need only have “two or more outside rigid walls” to be considered
“walled and roofed” (NFIP Flood Insurance Manual, DEF 1). This
widens the pool of structures requiring flood insurance to include
pass-through structures having only two walls, open-sided lean-to
style structures, and small structures. The only things not insurable under this definition are structures lacking rigid walls, such as
greenhouses covered in sheet plastic; buildings located primarily
below ground and buildings not affixed to a permanent site.
Just as some areas are known to flood each and every year, a
particular, if somewhat familiar challenge in complying with the
flood insurance regulation lies in obtaining proper insurance when
the property collateralizing a loan comprises more than a single
structure. With a definition of “structure” that is so broad, this is
a frequent occurrence. The bank may be interested from a value
perspective in only the primary buildings on a property, but even
the pump houses, prefabricated sheds, small storage buildings and
neglected barns require insurance from a regulatory perspective.
Undoubtedly, a universal experience of compliance officers with
flood responsibility is explaining to personnel that even though
such a structure does not add to the collateral value it does still
require insurance. Yes, even that shed.
A strong control environment will give heavy consideration to:
■ ■ ■ Identifying all structures located on a property proactively,
such as by providing the appraiser with specific instructions
or having the loan officer perform a site visit.
■ ■ ■ Retaining appropriate documentation when a building is de-
termined not to require insurance. Regulators will expect the
financial institution to have considered each structure and
provide proof that it does not meet the definition of a structure
or is otherwise uninsurable. Is that manufactured home sitting
on cinderblocks, not permanently affixed to the site? A pho-
tograph of those cinderblocks or a description of them from
the appraiser will go a long way toward answering questions
posed by an examiner. Is that vacation home situated primarily
over water? Somewhat ironically, that fact makes it ineligible
for flood insurance and even that ineligibility must be docu-
mented (NFIP Flood Insurance Manual, Section IV(C), GR 7).
■ ■ ■ Calculating and documenting the amount of adequate insurance.
In the event the lender is relying on the amount of the loan to
establish the minimum amount of insurance, coverage will be
considered adequate so long as all structures have some insur-
ance and the aggregate of the policies exceeds the loan amount.
If the lender is relying on the maximum amount
of insurance available or the building value,
each structure will require a policy insuring
it either to its full value or the maximum al-
lowed under the NFIP (whichever is lower).
A worksheet or other job aid show-
ing the calculation and the basis
on which it was completed will
help to support the determination
of adequate insurance, especially in
the case of multiple structures.
When the NFIP lapses, the whole country essentially
becomes a non-participating community for
purposes of compliance.