Final Rules Released for Acceptance of Private Flood Insurance

Back in 2012, the Bigger-Waters Act required implementation of rules regarding standards for acceptance of flood insurance policies by non-NFIP insurers, commonly referred to as private flood insurance. In October 2013, the regulators published a proposed rule.

On January 28, 2019, the FDIC was the first regulator to release the joint rulemaking but we expect the other regulators to make theirs public shortly. This 78-page document contains the usual background, synopsis of comments received, and reasoning for decisions made. The actual rule begins on page 72 and contains changes from the proposed rule.

The mandatory effective date of the rule is July 1, 2019, but a bank can choose to implement it at any time.

The regulation includes a definition of private flood insurance. Private flood insurance means an insurance policy that

• Is issued by an insurance company that is:
  • Licensed in the state or jurisdiction where the property to be insured is located; or
  • Recognized, or not disapproved, as a surplus lines insurer by the insurance regulator of the state or jurisdiction in which the property to be insured is located in the case of a policy of difference in conditions, multiple peril, all risk, or other blanket coverage insuring nonresidential commercial property.
• Provides flood insurance coverage that is at least as broad as the coverage provided under a standard NFIPissued flood insurance policy (SFIP) for the same type of property, including when considering deductibles, exclusions, and conditions offered by the insurer. To be at least as broad as the coverage provided under an SFIP, the policy must, at a minimum:
  • Define the term ‘‘flood’’ to include the events defined as a ‘‘flood’’ in an SFIP;
  • Contain the coverage specified in an SFIP, including that relating to building property coverage; personal property coverage, if purchased by the insured mortgagor(s); other coverages; and increased cost of compliance coverage;
  • Contain deductibles no higher than the specified maximum, and include similar non-applicability provisions, as under an SFIP, for any total policy coverage amount up to the maximum available under the NFIP at the time the policy is provided to the lender;
  • Provide coverage for direct physical loss caused by a flood and may only exclude other causes of loss that are excluded in an SFIP. Any exclusions other than those in an SFIP may pertain only to coverage that is in addition to the amount and type of coverage that could be provided by an SFIP or have the effect of providing broader coverage to the policyholder; and
  • Not contain conditions that narrow the coverage provided in an SFIP.
• Includes all of the following:
  • A requirement for the insurer to give written notice 45 days before cancellation or non-renewal of flood insurance coverage to:
    • The insured, and
    • The bank that made the designated loan secured by the property covered by the flood insurance, or the servicer acting on its behalf;
  • Information about the availability of flood insurance coverage under the NFIP;
  • A mortgage interest clause similar to the clause contained in an SFIP; and
  • A provision requiring an insured to file suit not later than one year after the date of a written denial of all or part of a claim under the policy.
• Contains cancellation provisions that are as restrictive as the provisions contained in an SFIP.

The rule requires that a bank accept private flood insurance policies; there are two methods to determine whether the policy meets the regulatory requirements.

First, if the non-NFIP policy contains the following statement, no further review of the policy is needed:

“This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.”

To clarify, if a policy includes this statement, the regulated lending institution may rely on the statement and would not need to review the policy to determine whether it meets the definition of “private flood insurance.” However, the institution could choose not to rely on this statement and instead make its own determination.

Also, the regulators do not have the capability to force insurance providers to include the above statement; it is merely a suggestion to promote consistent acceptance. That being said, the statement may provide recourse against an insurance provider that includes the statement but fails to abide by the terms under the definition of “private flood insurance.” The preamble specifies this provision does not permit regulated lending institutions to reject policies solely because they are not accompanied by the statement.

Second, if the policy does not contain the above statement, there is a discretionary acceptance test included. A bank is not required to accept a policy which does not meet the private flood insurance definition – but if they do, the discretionary test states that a policy should, at the very least:

• Provide adequate coverage in the amount required under the regulation (lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property);
• Be issued by an insurer that is licensed, admitted, or otherwise approved to engage in the business of insurance by the insurance regulator of the state or jurisdiction in which the property to be insured is located; or in the case of a policy of difference in conditions, multiple peril, all risk, or other blanket coverage insuring nonresidential commercial property, is issued by a surplus lines insurer recognized, or not disapproved, by the insurance regulator of the state or jurisdiction where the property to be insured is located;
• Cover both the mortgagor(s) and the mortgagee(s) as loss payees, except in the case of a policy that is provided by a condominium association, cooperative, homeowners association, or other applicable group and for which the premium is paid by the condominium association, cooperative, homeowners association, or other applicable group as a common expense; and
• Provide sufficient protection of the designated loan, consistent with general safety and soundness principles, and the bank documents its conclusion regarding sufficiency of the protection of the loan in writing.

Keep in mind that normally, the bank only receives a declaration page of the flood policy. That may not be adequate to evaluate a private policy and the bank may have to obtain the entire policy to determine the adequacy of the policy. This could add some time to the process and potentially delay a closing.

Lastly, the final rule includes a provision that would permit regulated lending institutions to accept, in satisfaction of the flood insurance purchase requirement, certain plans providing flood coverage issued by mutual aid societies that meet all the following:

• Whose members share a common religious, charitable, educational, or fraternal bond;
• That covers losses caused by damage to members’ property pursuant to an agreement, including damage caused by flooding, in accordance with this common bond; and
• That has a demonstrated history of fulfilling the terms of agreements to cover losses to members’ property caused by flooding.

Keeping flood insurance straight got you feeling underwater? TCA can help! Contact us at [email protected] or (800) 934.7347.