Yes, we believe that you may — but are not required to — accept private flood insurance.
The Biggert-Waters Flood Insurance Reform Act of 2012 (Act) included a provision directing the federal banking agencies to promulgate a rule to require regulated lending institutions to accept private flood insurance. This provision will only become effective when the federal banking agencies issue their final implementing rule, which is expected this December (2017).
In our view, regulated lenders should be free to choose whether or not to accept private flood insurance policies before the final rule is adopted and becomes effective. However, having said that, in light of the impending edict that will require you to accept private flood insurance, we also think it would be prudent to begin this practice today, and to familiarize yourself with the proposed rule while doing so.
Under the proposed rule, a bank would be required to accept private flood insurance that meets several requirements regarding the insurance company providing the policy, the coverage provided, notices to the borrower and lender, and other provisions in the policy itself. The full requirements for mandatory private flood insurance from the proposal are copied below.
In addition, the proposed rule would permit (not require) banks to accept private flood insurance that does not meet all of those criteria, provided that the policy meets alternative requirements for discretionary acceptance, which also are copied below.
For resources related to our guidance, please see:
- 42 USC 4012a(b)(1)(B) (“Each Federal entity for lending regulation . . . shall by regulation direct regulated lending institutions . . . to accept private flood insurance as satisfaction of the flood insurance coverage requirement under subparagraph (A) if the coverage provided by such private flood insurance meets the requirements for coverage under such subparagraph.”)
- FDIC Private Flood Insurance Rulemaking Agenda (Indicates the FDIC’s plan to issue a flood insurance final rule in December 2017.)
- 42 USC 4012a(b)(7) (Defines “private flood insurance” as an insurance policy that: (1) is issued by an insurance company that is licensed, admitted, or otherwise approved to engage in insurance in the state where insured property is located, (2) provides flood insurance coverage that is at least as broad as a standard flood insurance policy (SFIP), (3) requires the insurer to give written notice 45 days before cancellation or non-renewal of flood insurance coverage to the insured and the regulated lending institution, or a servicer acting on the institution's behalf, (4) includes information about the availability of flood insurance coverage under the NFIP, (5) includes a mortgage interest clause similar to the clause contained in an SFIP, (6) includes a provision requiring an insured to file suit not later than one year after the date of a written denial for all or part of a claim under a policy, and (7) contains cancellation provisions that are as restrictive as the provisions contained in an SFIP.)
- FDIC Compliance Manual, Lending – Flood Disaster Protection, pg. 6.1 (“Flood insurance may be provided through the NFIP or through a private insurance carrier.”)
- Interagency Statement on the Impact of Biggert-Waters Act (March 29, 2013) (“Private Flood Insurance: The mandatory purchase requirement has been amended to require lenders to accept private flood insurance policies as satisfaction of the mandatory purchase requirement if the coverage provided by the private flood insurance satisfies the standards specified in the Act. . . . This provision will be implemented by the Agencies through notice and comment rulemaking. It is the Agencies’ position that this provision of the Act is not effective until regulations are issued.”)
- Interagency Proposed Rule, 81 Fed. Reg. 78063 (November 7, 2016) (“Specifically, the proposed rule would require regulated lending institutions to accept policies that meet the statutory definition of private flood insurance in the Biggert-Waters Act and permit regulated lending institutions to accept flood insurance provided by private insurers that does not meet the statutory definition of ‘private flood insurance’ on a discretionary basis, subject to certain restrictions.”)
- Interagency Proposed Rule, 81 Fed. Reg. 78063, 78076–78077 (November 7, 2016) (Proposed Amendment to FDIC Flood Insurance Rules, 12 CFR 339.2: “Private flood insurance means an insurance policy that:
(1) Is issued by an insurance company that is:
(i) Licensed, admitted, or otherwise approved to engage in the business of insurance in the State or jurisdiction in which the property to be insured is located, by the insurance regulator of that State or jurisdiction; or
(ii) 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;
(2) Provides flood insurance coverage that is at least as broad as the coverage provided under an SFIP, including when considering deductibles, exclusions, and conditions offered by the insurer. For purposes of this part, a policy is at least as broad as the coverage provided under an SFIP if, at a minimum, the policy:
(i) Defines the term “flood” to include the events defined as a “flood” in an SFIP;
(ii) Covers both the mortgagor(s) and the mortgagee(s) as loss payees;
(iii) Contains the coverage and provisions specified in an SFIP, including those relating to building property coverage; personal property coverage, if purchased by the insured mortgagor(s); other coverages; and the increased cost of compliance;
(iv) Contains deductibles no higher than the specified maximum for the same type of property, and includes 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;
(v) Provides coverage for direct physical loss caused by a flood and may exclude other causes of loss identified in an SFIP. Any additional or different exclusions 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; and
(vi) May not contain conditions that narrow the coverage provided in an SFIP;
(3) Includes all of the following:
(i) A requirement for the insurer to give written notice 45 days before cancellation or non-renewal of flood insurance coverage to:
(A) The insured; and
(B) The FDIC-supervised institution that made the designated loan secured by the property covered by the flood insurance, or the servicer acting on its behalf;
(ii) Information about the availability of flood insurance coverage under the NFIP;
(iii) A mortgage interest clause similar to the clause contained in an SFIP; and
(iv) 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; and
(4) Contains cancellation provisions that are as restrictive as the provisions contained in an SFIP.”)
- Interagency Proposed Rule, 81 Fed. Reg. 78063, 78077 (November 7, 2016) (Proposed Amendment to FDIC Flood Insurance Rules, 12 CFR 339.3(c)(3): “Discretionary acceptance. An FDIC-supervised institution may accept a flood insurance policy issued by a private insurer that is not issued under the NFIP and does not meet the definition of private flood insurance, as defined in § 339.2, in satisfaction of the flood insurance purchase requirement under paragraph (a) of this section, only if the coverage under such flood insurance policy meets the amount and term requirements specified in paragraph (a) of this section, and the policy:
(i) Is issued by an insurer that is licensed, admitted, or otherwise approved to engage in the business of insurance in the State or jurisdiction in which the property to be insured is located by the insurance regulator of that State; 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 where the property to be insured is located;
(ii) Covers both the mortgagor(s) and the mortgagee(s) as loss payees;
(iii) Provides for cancellation following reasonable notice to the borrower only for reasons permitted by FEMA for an SFIP on the Flood Insurance Cancellation Request/Nullification Form, in any case of non-payment, or when cancellation is mandated pursuant to State law; and
(iv) Either:
(A) Meets the criteria of private flood insurance, as defined in § 339.2, set forth in paragraphs (2)(i) and (iii) through (vi) of this section; or
(B) Provides coverage that is similar to coverage provided under an SFIP, including when considering deductibles, exclusions, and conditions offered by the insurer, and the FDIC-supervised institution has:
(1) Compared the private policy with an SFIP to determine the differences between the private policy and an SFIP;
(2) Reasonably determined that the private policy provides sufficient protection of the loan secured by the property located in a special flood hazard area; and
(3) Documented its findings under paragraphs (c)(3)(iv)(B)(1) and (2) of this section.”)