[Chris]

Seeking some help in determining proper flood coverage for the following scenario:

Commercial purpose loan secured by a 1-4 family investment property (residential)

Potential Loan amount –> $120,000
Replacement Cost Value per appraisal –> $164,115
Max available for dwelling policy –> $250,000

Normally, I’d say $120,000. However, the Assignments of Rents & Leases document that will accompany this loan references additional things including the following:
Building materials
Appliances
Goods used for the purpose of supplying or distributing heating, cooling, electricity, gas, water, air and light
Fire prevention & extinguishing apparatus
Plumbing
Bath tubs
Water heaters
Water closets
Sinks
Ranges
Stoves
Refrigerators
Dishwashers
Disposals
Washers / Dryers
Awnings / storm windows / storm doors
Screens, blinds, shades, curtains, curtain rods
Mirrors & cabinets
Paneling and attached floor coverings

Even though we did not assign a value to the contents or note them as part of our collateral, I’m inclined to think we need to include them for coverage purposes. The ARL document will work in conjunction with the mortgage to establish the collateral.

Am I overthinking this???? Would the above items be covered on a Building policy for flood?

If not…. how do I go about determining how much coverage to have? Would it still be $120,000 and we just need to have it divided so some is on building coverage and some is on contents coverage?

Any help will be welcome. 🙂 I’m reading some of the recent FDIC information and Jack’s blog from a while back where Banks are getting cited for not having contents coverage – want to make sure we are properly covered before this loan goes to closing!

Thanks.
Chris

[rcooper]

Hi Chris,
I apologize for the delay. Your question didn’t show up on our list of new questions last week (an issue we’re checking in to) and this week I was out of the office. You may have already found you answer, but in case you haven’t I’ll offer some information.

If you are taking personal property/contents as collateral – sounds like you are – you must obtain flood insurance coverage for the contents if all three of the following conditions are met:
1. the bank has a security interest in the building and its contents or personal property;
2. the contents and/or personal property is within the building that is located in a special flood hazard area (SFHA); and
3. the personal property and/or contents have an insurable value.

Here’s the link to Jack’s blog post on this which includes a link to the FDIC’s newsletter. It give good info on when contents coverage is required and an example: https://mycomplianceresource.com/flood-insurance-concern/.
Here is a link to the FDIC’s summary of coverage that will show you what types of contents are covered under the building coverage and what is considered contents: https://www.fema.gov/media-library-data/20130726-1620-20490-4648/f_679_summaryofcoverage_11_2012.pdf.

After becoming familiar with the types of content considered part of the building and the content that requires separate coverage, compare that to your list to determine what you are taking that qualifies as personal property/contents. At that point you will need to determine the value of the content you are taking as collateral.

As for how to allocate the insurance coverage, the same coverage requirements apply. The flood faq (2009) tells us that both contents and building will be considered to have a sufficient amount of flood insurance coverage for regulatory purposes as long as some reasonable amount of insurance is allocated to each category. Also see q&a 39.

Hope this helps!

[Sandy]

I have a question about what to include when determining the amount on flood insurance for contents/fixtures coverage for my instance on a commercial loan. I know you would account for any equipment, appliances, etc. bigger items but what about the miscellaneous small items? For example I have a commercial loan that has a “simple” mom and pop store/shower house on a RV campsite. As well as a small garage that houses mowers, weedeater, items to take care of the grounds. Do you have to include a value for items say in the store building for items such as staplers, trash cans, clocks on the wall, mirrors on the wall in the shower house part, etc.? And for the garage would you include a value for miscellaneous small items such as bottles of oil, gas can, etc. I see a previous post from June 2019 that had a link to further explain contents coverage but the included links would not work.

Thank you!

[rcooper]

Take a look at the proposed Q&As, beginning on p. 100, with questions “Other Security Interests 7” through “Other Security Interests 10” that will help you determine when contents should be insured and then look at the FEMA document to help you figure out if you need contents coverage. (Here’s the link to the FEMA summary of coverage for commercial property: https://www.fema.gov/media-library-data/6a2ad0291e8d6a5452aa891a6c037039/fema_Summary_508C.pdf. See table on p. 2.

Let us know if you have any follow up questions.
Thanks!

[Sandy]

I have a commercial property secured loan that is in a SHFA. The real estate and equipment/contents are security for the loan. The insurance agent is telling me that 2 of the buildings that house some of the collateral for the loan do not have much and one doesn’t have a foundation. He said he doesn’t recommend flood insurance because of that. The fema.gov/pdf/nfip manual says that an “Eligible building” has to be affixed to a permanent sight, must resist flotation, collapse, and lateral movement. So I am thinking the one building that doesn’t have a foundation would not be insurable right? Also, if that building is deemed uninsurable for flood insurance because of no foundation will the contents be able to be insurable for flood insurance?

[Sandy]

I have a commercial property secured loan that is in a SHFA. The real estate and equipment/contents are security for the loan. The insurance agent is telling me that 2 of the buildings that house some of the collateral for the loan do not have much and one doesn’t have a foundation. He said he doesn’t recommend flood insurance because of that. The fema.gov/pdf/nfip manual says that an “Eligible building” has to be affixed to a permanent sight, must resist flotation, collapse, and lateral movement. So I am thinking the one building that doesn’t have a foundation would not be insurable right? Also, if that building is deemed uninsurable for flood insurance because of no foundation or a very bad foundation will the contents be able to be insurable for flood insurance?

One other question? If the building is deemed uninsurable how do we back that up in our file? Can the insurance agent write a letter stating why it is not insurable? I have concern that I thought I have read something that even if the building is not insurable that you may have to insurance it for clean up though?

[rcooper]

I believe you are saying that the insurance agent is telling you that two of the buildings don’t house much of the contents. Regardless, if it is taken as collateral and located in an building in a SFHA you need to insurae the contents. If there are other details you can provide (e.g. the value of the contents would not exceed the minimum deductible, then that may a reason you would not insure because your nor the borrower would ever receive benefit of purchasing the policy). As for the barn that is not on a foundation, if the barn meets the definition of an eligible building then it would need insurance. Eligible building is “a structure with 2 or more outside rigid walls and a fully secured roof that is affixed to a permanent site.” (See page GR 3 https://www.fema.gov/pdf/nfip/manual201105/content/03_generalrules.pdf) I assume this barn like most have posts that are buried/embedded into the ground meaning it is affixed to a permanent site. Permanent foundation is term used when talking aobut what a manufactured homes or travel trailer must be affixed to in order to be insurable.

Proposed Q&A Security Interests 10 below, while discussing a different situation, makes it clear that if contents securing the loan is located in a building that is in a SFHA then the contents should be insured.

OTHER SECURITY INTERESTS 10. Is flood insurance required if the lender takes a
security interest in contents located in a building in an SFHA securing the loan but does
not perfect the security interest?

Yes, flood insurance is required. The language in the loan agreement determines whether the
contents are taken as security for the loan. If the lender takes a security interest in contents
located in a building in an SFHA securing the loan, flood insurance is required for the contents,
regardless of whether that security interest is perfected

To say a building would be uninsurable is not likely. To do so you would need something from the appraiser or perhaps insurance agent showing the value of the building. If that value is below the minimum deductible available, then this would show that the borrower could not purchase a policy that would ever pay him/her/them in the event of a loss and that purchasing a policy in such a situation would be of no benefit and actually cost the borrower money they would never recoup. See this recent post on determining insurable value for a low value building: https://mycomplianceresource.com/forums/topic/flood-insurance-on-old-barn/.

Let us know if you have any other questions.

[Sandy]

I am following up on a reply you gave me on December 17th about flood insurance. (Your Reply #33124) In talking to the insurance agent the property has 2 “Amish” sheds. The kind that are already built elsewhere and is purchased and moved to the new location. They are set upon blocks underneath and are not affixed to a foundation. He did email me pictures and so you can see they are the prebuilt sheds that can be purchased and moved. One shed has nothing between the ground and the bottom outside edge of the building so you can see there is no foundation. The other building has covering at the bottom edge of the building for looks. It looks as though it is concrete blocks. The insurance agent did give me something in writing that the 2 Amish style sheds are not affixed to the ground per via foundation. Therefore we are telling the borrower that since it is not an “Eligilbe Building” per foundation that we are not requiring flood insurance. There are contents valued at approximately $18,000 in the building. Because the building is not insurable does that make the contents inside the building not insurable too?

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