We believe that this flood insurance policy could meet the definition of “private flood insurance,” even though the policy was issued by an “unauthorized insurer” with the Section 445 disclaimer. Of course, the policy also would have to meet the many other requirements in the “private flood insurance” definition. Additionally, we believe that this policy could be eligible for discretionary acceptance, provided that the policy meets the other criteria in the flood insurance regulations.

In general, the flood insurance regulations require a bank to accept a flood insurance policy that meets the “private flood insurance” definition. If a policy does not meet that definition but fulfills four criteria described in the discretionary acceptance provisions of the regulations, a bank may choose to accept the policy.

Both the “private flood insurance” definition and the discretionary acceptance criteria require that the flood insurance policy be issued by an insurance company 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.” (For nonresidential policy of “difference in conditions, multiple peril, all risk, or other blanket coverage” issued by a surplus lines insurer, the insurance company must be “[r]ecognized, 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.”) As stated in the publication of the final private flood insurance rule, a policy issued by a surplus lines insurer (which would not necessarily be licensed by a state) could be acceptable, even for noncommercial properties, provided that the insurer is “otherwise approved to engage in the business of insurance” in the state.

We believe that the insurer described in your question is an eligible surplus lines insurer that is “otherwise approved” in Illinois. Because it is a non-domestic surplus lines insurer, it is treated as an “unauthorized issuer” and must print the “Notice to Policyholder” language described in your question on the policy to alert the policyholder that the company is “not authorized and licensed to transact business in Illinois” and that the policy is “not covered by the Illinois Insurance Guaranty Fund.”

However, the “unauthorized issuer” label means that the insurance company lacks a certificate of authority in Illinois — it does not mean that the company is ineligible to issue policies in Illinois. Because this company is listed as “Active” on the Illinois Department of Insurance’s company lookup and does not appear on the list of ineligible surplus lines insurers, we believe it is “otherwise approved to engage in the business of insurance” in Illinois. Consequently, a flood insurance policy issued by this company may meet the definition of “private flood insurance” or the discretionary acceptance criteria in the flood insurance regulations, provided that the policy itself meets the requirements enumerated in those provisions.

For resources related to our guidance, please see:

• Final Rule, Private Flood Insurance, 84 Fed. Reg. 4953, 4960 (February 20, 2019) (“[T]he Agencies note the important role that State insurance laws and regulators play regarding the oversight of insurance activities in each State. This role is acknowledged in the discretionary acceptance provision, which provides that a regulated lending institution may only accept a flood insurance policy issued by a private insurer, including a policy for residential property issued by a surplus lines insurer, that is licensed, admitted, or otherwise approved to engage in the business of insurance by a State insurance regulator. In the case of a policy insuring nonresidential commercial property issued by a surplus lines insurer, the insurer must be recognized, or not disapproved, by a State insurance regulator.”)

• Final Rule, Private Flood Insurance, 84 Fed. Reg. 4953, 4962 (February 20, 2019) (“As noted previously in the discussion of mandatory acceptance, the Agencies believe that surplus lines insurers for noncommercial properties are covered as insurance companies that are ‘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.’”)

• FDIC Flood Insurance Regulations, 12 CFR 339.3(c)(1) (“Mandatory acceptance. An FDIC-supervised institution must accept private flood insurance, as defined in § 339.2, in satisfaction of the flood insurance purchase requirement in paragraph (a) of this section if the policy meets the requirements for coverage in paragraph (a) of this section. . . .”)

• FDIC Flood Insurance Regulations, 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 by the insurance regulator of the State or jurisdiction in which the property to be insured is located; 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