Tips for Lenders and Agents: The Emergency Program

So, you are a lender or an insurance agent and you have a client who lives in a community that has just joined the NFIP and is in the Emergency Program. You’ve just found out the insurance coverage for communities in the NFIP Emergency Program is capped at $35,000. How do you make sure the homeowner gets sufficient coverage to meet the requirements the lender’s regulators have established for flood insurance coverage?

A typical scenario for such a situation might look something like this: the borrower has a $200,000 loan for a home with a replacement value of $280,000. The lending regulator and the lender require the home be insured to the full cost of the loan, but the community in which the home is located has only recently joined the NFIP.

The NFIP Emergency Program

First, I’d like to offer a brief refresher about the NFIP Emergency Program.

A community applies for participation in the NFIP for a variety of reasons ranging from the need to make sure NFIP flood insurance is available to residents to the need to respond to notification from FEMA regarding the presence of one or more Special Flood Hazard Areas (SFHAs) within the community’s boundaries.

The application the community submits to the FEMA Regional Office must include information showing the adoption of resolutions or ordinances to minimally regulate new construction in SFHAs. Once the application is received and approved, FEMA authorizes the sale of flood insurance in the community up to the limits of coverage set for the NFIP Emergency Program (see box).

Next, FEMA assesses the degree of flood risk and development potential in the community and, if appropriate, arranges for a study to determine Base Flood Elevations (BFEs) and flood risk zones in the community. Consultation with the community occurs at the start of and during this “flood study.” Communities with minimal or no flood risk are converted to the NFIP Regular Program without a flood study.

FEMA provides the studied community with Flood Insurance Rate Maps (FIRMs) delineating the BFEs and flood risk zones. The community is given 6 months to adopt BFEs in its local zoning and building code ordinances, and to meet other requirements.

Once the community adopts more stringent ordinances and FEMA converts the community to the NFIP Regular Program (see box), basic floodplain management requirements apply and higher levels of flood insurance coverage are made available to residents.

Mandatory Purchase Requirements

The purchase of flood insurance is required by federally regulated or insured lending institutions for loans secured by buildings located in SFHAs. If FEMA notifies a community that it is flood prone and the community does not apply for participation in the NFIP within 1 year of notification, residents will be ineligible for Federal or federally related financial assistance for acquisition, construction, or reconstruction of insurable buildings in the SFHA. Conventional loans may be available for buildings located in the SFHA of a nonparticipating community; however, such loans are made at the lender's risk.

Excess Insurance

Lenders will notify borrowers there is an insurance requirement to maintain coverage in excess of what is available under the Emergency Program. Federal regulations cap NFIP coverage at $35,000 for residential property in communities in the Emergency Program. For this reason, it is rare for a property owner to get sufficient coverage for the cost of the loan. Excess coverage will be needed for the property.

How does an insurance agent find an excess insurer? The Federal Government does not endorse any companies, so agents may need to contact some of the larger insurance companies doing business and those offering marine coverage.  As always, the Internet is a wonderful search tool.  You can use a regular search engine to enter the phrase “excess flood insurance coverage,” and you’ll be presented with a number of excellent links. I did.

So, let us return to the hypothetical scenario. The borrower has a $200,000 loan for a home with a replacement value of $280,000. The lending regulator legally can stipulate the bank require the home be insured to the full cost of the loan but, since the borrower lives in a community just the joining the program, the maximum NFIP coverage available is $35,000.

The borrower’s insurance agent will need to contact an excess insurer to cover the amount exceeding $35,000. Remember, some banks may legally require a home be protected to the full cost, even if it is more than the NFIP cap.  Lenders, this means, even after the community joins the NFIP Regular Program, you may need to maintain excess coverage on the property for the amount above $250,000 (in this case, $30,000). Always remember to check the insurance requirements of your regulator.

Lenders need to keep track of the community status, because communities often move to the NFIP Regular Program quickly.  For community status information, visit the NFIP Community Status Book page on the FEMA website. Information about an NFIP status change is also usually available in local newspapers or from other media in the community.

Most of this information is covered in the handbook Mandatory Purchase of Flood Insurance Guidelines, also available online or by contacting the FEMA Distribution Center at 1-800-480-2520.

Finally, lenders must remember to always keep the borrower notified of all this information. Property owners may be confused about the reason(s) they need to get a policy from two different insurance companies, but this is a problem easily solved if their lender keeps them informed.  As always, keep track of all notice requirements (see Mandatory Purchase of Flood Insurance Guidelines) to ensure you don’t get warned by your regulator and, worse, sued by your borrower.

Susan Bernstein is the Editor of Watermark and writes regulations for the NFIP. She worked as the Mitigation Division Legal Liaison to WYO Companies and the FEMA Office of General Counsel for 10 years.