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I was reading in the FDIC compliance manual that the required minimum amount of flood insurance is the lesser of the outstanding principal balance, maximum amount available under NFIP for type of structure, or insurable value. The loan we are working on is a residential dwelling. The loan amount and insurable value are more than $250,000. Is $250,000 the minimum only if the borrower purchases insurance through NFIP? If the borrower purchases a private policy greater than $250,000 that is closer to the insurable value of the property, does the minimum become the lesser of the outstanding principal balance or insurable value?
The $250,000 requirement is the maximum cap on the amount of insurance available under the NFIP for a residential structure. An NFIP policy will not cover an amount exceeding the insurable value of the structure. The borrower may purchase a private policy for greater than the $250,000 but the private policy would need to be compared to an NFIP policy to ensure that it is comparable to the policy under the NFIP (see Flood QA #63 below).
XI. Private Insurance Policies
63. May a lender rely on a private insurance policy to meet its obligation to ensure that its designated loans are covered by an adequate amount of flood insurance?
Answer: It depends. A private insurance policy may be an adequate substitute for NFIP insurance if it meets the criteria set forth by FEMA in its Mandatory Purchase of Flood Insurance Guidelines. Similarly, a private insurance policy may be used to supplement NFIP insurance for designated loans where the property is underinsured if it meets the criteria set forth by FEMA in its Mandatory Purchase of Flood Insurance Guidelines. FEMA states that, to the extent that a private policy differs from the NFIP Standard Flood Insurance Policy, the differences should be carefully examined before the policy is accepted as sufficient protection under the law. FEMA also states that the suitability of private policies need only be considered when the mandatory purchase requirement applies.
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