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Under a recent FEMA remap, the buildings securing a commercial loan are now in a flood zone. Do we need cost or replacement coverage, or can we avoid the flood insurance requirement altogether? – IBA Compliance Connection

IBA Compliance Connection

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Under a recent FEMA remap, the buildings securing a commercial loan are now in a flood zone. Do we need cost or replacement coverage, or can we avoid the flood insurance requirement altogether?

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We believe that you must obtain flood insurance coverage on the buildings, as there is no exemption from the flood insurance requirements for commercial loans. You may not “make, increase, extend, or renew” any loan that is secured by a building located in a special flood hazard area. 12 CFR 339.3(a).

Because you are aware that the building is now in a designated special flood hazard area and is not covered by flood insurance, you must notify the borrower. 12 CFR 339.7. If the borrower fails to obtain flood insurance within 45 days after notification, you are required to force-place the flood insurance policy and may pass on premium and fee charges to the borrower. 12 CFR 339.7.

The coverage amounts for flood insurance do not depend on repair costs or replacement values. Instead, the required insurance amount is the lesser of the outstanding principal balance of the loan or the maximum limit of available coverage for that property under the National Flood Insurance Act of 1968. 12 CFR 339.3(a). The maximum limit will be based on a number of factors, including the National Flood Insurance Program (NFIP) cap, which is $500,000 for nonresidential structures located in a participating community, the “insurable value” of the property, and more. See Question 8 (defining the “maximum limit of coverage available”), and Question 9 (defining “insurance value”), Interagency Questions and Answers Regarding Flood Insurance (July 21, 2009).