[TheBank]

We have a construction and permanent financing combined loan secured by 2 6-unit townhomes to an entity that will rent them. What value should we use to determine the insurable value since they are not owner occupied? Appraised value less land? replacement cost less land?

[Kimberly Boatwright, CAMS, CRCM]

Flood Q&A’s state in the “Amount” Question 2. – The insurable value of the building may generally be the same as 100 percent Replacement Cost Value (RCV), which is the cost to replace the building with the same kind of material and construction without deduction for depreciation. In calculating the amount of insurance to require, the lender and borrower (either by themselves or in consultation with the flood insurance provider or other appropriate professional) may choose from a variety of approaches or methods to establish the insurable value. They may use an appraisal based on a cost-value (not market-value) approach, a construction-cost calculation, the insurable value used on a hazard insurance policy (recognizing that the insurable value for flood insurance purposes may differ from the coverage provided by the hazard insurance and that adjustments may be necessary), the replacement cost value listed on the flood insurance policy declarations page, or any other reasonable approach, so long as it can be supported.

Flood Q&A’s state in the “Condo/COOP” Question 4 (Which is the closest to your situation)- If there is no RCBAP on the residential condominium building, then the lender must require the individual unit owner to obtain coverage in an amount sufficient to meet the requirements outlined in Q&A Condo and Co-Op 3.

Based off the FAQs you would need to determine which method your FI will follow for Flood coverage and use that approach. I would also suggest this be documented in policy so the same approach is used the next time this would happen.

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