Accepting Private Flood Insurance

A Series of Decisions

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By Chuck Marshall

The concept of private flood insurance, and the ability to utilize it, is not a new one. Guidance around its use was included in the 2007 National Flood Insurance Program (NFIP) Mandatory Purchase of Flood Insurance Guidelines. However, the use of private flood insurance was rare, regulatory guidance was minimal, and NFIP was king – accessible, understandable, and coverage was affordable.

With the passage of the Biggert Waters Flood Insurance Reform Act, things began to change. Biggert Waters was focused on strengthening the NFIP by matching risk to insurance costs (premiums). In doing that, it became apparent that the private sector might be able to provide this insurance coverage more affordably and without some of the coverage limits / ceilings inherent in the NFIP coverage.

Fast forward to January 2019 and the issuance of the Interagency Private Flood Insurance Final Rule. This document provided solid guidance to all bankers regarding the use of private flood insurance. It requires a series of decisions to assess each flood insurance policy and related transaction. These are in addition to the appropriate coverage amount – the lesser of the loan balance, the insurable value of the collateral, or the maximum NFIP coverage available for the transaction.

  • Decision 1 – If the policy is a Standard Flood Insurance Policy (SFIP) available through the NFIP, and meets the coverage test, the policy is acceptable. However, if the policy is a Private Flood Insurance Policy (PFIP), you must make the next decision.
  • Decision 2 – Does the PFIP contain the “Compliance Aid,” a phrase defined in the regulation as:

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

The regulation allows that if the PFIP contains this language and meets the coverage requirements, the policy should be acceptable, actually subject to mandatory acceptance. What if the PFIP doesn’t contain the “Compliance Aid?” It’s on to the next decision.

  • Decision 3 – Does the PFIP contain all the prescribed language and stipulations required by the regulation for mandatory acceptance? The list is a bit longer and includes items –not all of which are noted here – such as policies:
    • Issued by an insurance company with
    • Coverage as broad as a similar SFIP with
    • Deductibles less than or equal to a similar SFIP, and
    • Meeting all the regulatory disclosure(s) requirements.

Now your newly updated policies, newly developed systems and processes must take over. Your bank needs to make the right decisions regarding the PFIP being evaluated and should also have a clearly documented and comprehensive process of doing so.

What if the policy doesn’t contain all the language required by the regulation?

  • Decision 4 – If the policy doesn’t contain all the language required by the regulation, discretionary acceptance of a PFIP is an option for the bank if that policy:
    • Provides a coverage amount required by the regulation,
    • Is issued by an appropriate insurer,
    • Covers both the mortgagor and mortgagee, and
    • Provides sufficient protection of the designated loan, consistent with general safety and soundness principles. The regulatory guidance requires each bank to document in writing its conclusion regarding sufficiency of the protection of the loan.

Keeping these decision points in mind and documenting the bank’s conclusions each step of the way will insure compliance with the new PFIP regulations.

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