[TheBank]

Flood FAQ #9 discusses insurable value and refers to RCV not being practical in all cases. It goes on to say that in some cases the payout for nonresidential and certain residential properties is based on ACV. For consumer purpose home loans located in a SFHA we always use RCV for insurable value, is that correct?

For home loans with the purpose of renting the home, duplex, triplex, etc… If located in a SFHA, and the loan is not consumer purpose, it’s a nonowner occupied business purpose loan, should we use RCV or ACV for insurable value when determining the minimum required flood insurance amount? For this type of loan is it the # of units (1-4 family vs multi-family) that would determine RCV vs ACV?

[rcooper]

I think you’re generally correct in using RCV – most of your consumer loans are probably owner-occupied, primary dwellings. The point #9, referenced in your question, is making is that the NFIP won’t pay RCV on non-owner occupied policies, so a borrower shouldn’t pay for coverage they won’t receive in the event of a loss to their property.

Look at page POL-20: https://www.fema.gov/media-library-data/b761010a7205eb9ac425d6142d2d275d/15_policy_508_oct2013.pdf

Look at page 4: https://www.fema.gov/media-library-data/20130726-1742-25045-5644/interagency_q_as.pdf(and see footnotes 4-6)

[Sandy]

We have a commercial loan that has 3 structures located in a flood zone and the loan amount is more than what the ACV of the combined structures. The appraisal is not specific in the cost approach on what the depreciated amount of one of the structure is. When we look to the hazard insurance policy it gives a replacement cost of the commercial building. Is there any way to determine the ACV that FEMA will only pay on a commercial building using that RCV? Any suggestion would be appreciated.

[rcooper]

Your best bet is probably going back to the appraiser to try to obtain the depreciated value. You could also ask the insurance agent for assistance with determing ACV.

[jholzknecht]

Robin’s advice is sound. When a loss occurs the insured must submit the estimated ACV. If FEMA disagrees with the insured estimate then FEMA submits an ACV figure. If the insured disagrees, then both parties obtain appraisals. The ACV change from loan inception to the time of the loss. Deprecation will increase over time, unless improvements are made to the property in the interim.

Your job is much easier when the appraiser provides the needed value up front.

[Sandy]

We have a commercial loan that the commercial building is in a SHFA. It is a specialty property and the appraisal is not specific on what the cost estimate is on this building therefore I am looking at the replacement cost on the hazard insurance policy. I asked the appraiser for help on the amount for the flood policy but he didn’t want to be liable. I know we are to add to that an amount for the cost of the foundation. We have asked a local contractor to give us an estimate for the foundation. He has given us a verbal amount for the material and an amount for the labor. Once I add those figures together I would deduct 40% depreciation that was shown on the cost approach page on the appraisal. (I think I am calculating this correctly) Is it acceptable to just document in the file that we got a verbal amount from a local contractor on the foundation or do I need to document in a different way?

[rcooper]

I think that is a reasonable means of determining the cost of the foundation. Make sure it is well documented.

You mention that the appraisal is not specific as to the value of the building. You also mention that decpreciaion of 40% is listed in the cost approach. To what does the 40% depreciation apply? I would want to ensure that the 40% aligns with the depreciation of the building. The 40% may be accurate; however, you may also talk to the insurance agent to help you determine what the depreciation amount should be (what it would be if he/she was writing an ACV policy) or the agent/underwriter may be able to refer you to a third party who specializes in caclulating ACV/depreciated value.

[Sandy]

I apologize in advance for this long post. I have 2 questions. We have a recently closed large loan with a commercial building in a RV park and I think they are over insured on their FEMA flood policy. The cost approach within the appraisal did not indicate the cost of the building. Appraisal says 40% depreciation and I verified with appraiser that the 40% applies to that building. I asked him to help with a value for flood insurance and he wouldn’t because his E & O insurance guy tells them not to because they could be liable if it’s wrong. The replacement cost per hazard policy is $230,000 Flood policy was originally written for $225,000. I calculated coverage $141,200 after adding in the cost of the foundation to the replacement cost and deducting 40%. I told the insurance agent that on a commercial building FEMA will only pay ACV and they are over insured. He said it would be best to leave the value as is because of coinsurance. If the amount is lowered below 80% and they have to make a claim the customer will be penalized for not having enough insurance. After doing research I’m wandering if he’s thinking of the 80% rule for a dwellings. Dwellings are to be insured within 80% of their replacement cost or they are penalized. Does this apply to commercial buildings too? Then I wander, is he saying that once a policy is in place it can only lowered by 20%? Can a flood policy be lowered by more than 20% down to the ACV and NOT get penalized?

Second issue, the policy was rewritten to a policy that would grandfather in the property and reduce the premium. In the transition something was messed up and we have received a letter from the new insurance company that because they have not received the premium their coverage is even lower to $114,700. They are to pay the premium difference and their coverage will go to $230,000. Looks like insurance agent increase the coverage by $5,000 from the original policy and matches the amount on the hazard policy.

Now I have to write the 45 day letter to the customer because its insufficient and include in the letter an amount for the minimum coverage needed. Do I put my calculation of $141,200 or the original policy of $225,000; or the new policy amount of $230,000?

I want to tell the customer they are over insured but I don’t want them Under insured and be penalized when they making claim. I also don’t want to get into a safety and sound issue for the loan either. There are already 2 other buildings on the property that were deemed uninsurable by the agent. They are 2 Amish style sheds, premade buildings that are purchased and moved to the location, that are not affixed to the ground by foundation. We did receive pictures from him. One picture shows nothing placed around the bottom outside edge to the ground and looks to be resting on concrete blocks way underneath that is resting upon blacktop. The other building has something around the bottom edge,looks like concrete blocks. They are staggered so it is shown not a solid foundation. We have received written confirmation from the agent that “ 2 Amish style buildings are not affixed to the ground via foundation.”

If it can be lowered without them being penalized can you give me advice on who I need to consult to get this lowered. Call FEMA?

[rcooper]

I know this is frustrating.

In an effort to get on the same page with the agent and understand what kind of policy the borrower has, I would ask the agent to show you the customer’s policy and what type of coverage it provides (ACV, RCV). The agent should also be able to show you if there is co-insurance (80% or XX% insured required for coverage) language in the general property form like there is the dwelling form. Also, provide him the flood faqs (linked below), highlighting the language on ACV/ for non-dwelling properties.

Here’s the 2011 FAQ (see #9): https://www.bankersonline.com/sites/default/files/tools/flood_faq_2011_10_17.pdf

And here’s the proposed flood faqs (see Amount 2): https://www.govinfo.gov/content/pkg/FR-2020-07-06/pdf/2020-14015.pdf

Here is a commercial coverage fact sheet from FEMA that discusses ACV on page 2: https://www.fema.gov/sites/default/files/2020-05/fema_NFIP_Summary_Coverage_aug292013.pdf

Safety and soundness risk is a legitimate concern and in many cases and you may require more insurance beyond the minimum required by the flood rules. However, requiring the borrower to over-insure if the policy would never pay in the event of a loss is not beneficial to the customer and will not mitigate the bank’s risk. Ultimantely, you need to know what you should require. What you want to avoid is “requiring” the customer to purchase an amount that exceeds what they would receive in coverage. If the customer, per the agent’s advice, decides to insure it for more than you have required that is their decision to do so. If your determination of what you are requiring continues to differ from what the agent recommends, then your letter should outline what you are requiring.

I’ll send this over to Jack to see if he has any additional advice.

[jholzknecht]

There are lot of issues involved in your question. To determine the amount of insurance required you need the loan amount, FEMAs maximum and the value of the improvements. I assume your loan amount is greater than the calculated replacement cost, or else the amount of insurance would be higher than proposed.

The appraiser could be more helpful by providing a replacement cost figure. In the future you may want to add to your list of approved appraisers appraisers who are willing to complete that part of the appraisal. It would eliminate a lot of guesswork.

The information provided by the insurance agent appears confusing. Much of the mystery could be cleaned up by obtaining and reviewing a copy of the policy, as suggested by Robin.

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