We have a loan secured by a mortgage on a non-residential building and a UCC financing statement covering the contents in the building. The flood insurance policy provides separate categories for the building and the inventory. How do we determine what amount of flood insurance should cover the building and what amount should cover the contents?

We believe your bank may choose any reasonable allocation of the required flood insurance coverage between the building and its contents, provided that at least some flood insurance coverage is allocated to each category and the total amount of coverage meets the National Flood Insurance Program’s (NFIP) minimum requirements.

The minimum amount of flood insurance required under the NFIP is the lesser of the (1) outstanding principal balance of the loan, (2) maximum amount of coverage available under the NFIP for the type of structure, or (3) value of the building or mobile home and personal property securing the loan (the value of the property minus the value of the land on which the property is located). For loans secured by a non-residential structure and contents, the maximum amount of flood insurance available under the NFIP is $500,000 for non-residential structures and $500,000 for contents.

The Interagency Q&As Regarding Flood Insurance were amended in 2009 to clarify that when a loan is secured by both a building and its contents, the lender may allocate “some reasonable amount of insurance” to the building and its contents, “as long as some amount of insurance is allocated to each category.” In an example, a lender makes a $200,000 loan secured by a warehouse with an insurable value of $150,000 and contents with an insurable value of $100,000. In this scenario, the minimum amount of flood insurance is $200,000, and this minimum is satisfied by placing $150,000 worth of flood insurance coverage on the warehouse, and $50,000 worth of flood insurance coverage on the contents (even though the insurable value of the contents exceeds $50,000).

For resources related to our guidance, please see:

FDIC Flood Insurance Regulations, 12 CFR 339.3 (“(a) . . . The amount of insurance must be at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property under the Act. Flood insurance coverage under the Act is limited to the building or mobile home and any personal property that secures a loan and not the land itself.”)

FDIC Compliance Examination Manual, Lending – Flood Disaster Protection, V-6.18 (April 2016) (“In addition to the maximum caps under the NFIP, the Regulation also provides that ‘flood insurance coverage under the Act is limited to the overall value of the property securing the designated loan minus the value of the land on which the property is located,’ which is commonly referred to as the ‘insurable value’ of a structure. The NFIP does not insure land; therefore, land values should not be included in the calculation.”)

FDIC Compliance Examination Manual, Lending – Flood Disaster Protection, V-6.3 (April 2016) (“Flood insurance coverage under the NFIP is limited to the building or mobile home and any personal property that secures the loan and not the land itself. The limits of coverage for flood policies are: . . . $500,000 for non-residential structures and $500,000 for contents.”)

Interagency Q&As Regarding Flood Insurance, Question 39 (July 21, 2009) (“Is flood insurance required if a building and its contents both secure a loan, and the building is located in an SFHA in which flood insurance is available? Answer: Yes. Flood insurance is required for the building located in the SFHA and any contents stored in that building.”)

Federal Register Notice, Interagency Q&As Regarding Flood Insurance, 74 Fed. Reg. 35913, 35924–35925 (July 21, 2009) (“The Agencies agree that the practice for flood insurance coverage for multiple buildings would also be applicable to coverage for both contents and building. That is, both contents and building will be considered to have a sufficient amount of flood insurance coverage for regulatory purposes as long as some reasonable amount of insurance is allocated to each category. The Agencies have added an example to this question and answer to illustrate this point.”)
Interagency Q&As Regarding Flood Insurance, Question 39 (July 21, 2009) (“Example: Lender A makes a loan for $200,000 that is secured by a warehouse with an insurable value of $150,000 and inventory in the warehouse worth $100,000. The Act and Regulation require that flood insurance coverage be obtained for the lesser of the outstanding principal balance of the loan or the maximum amount of flood insurance that is available under the NFIP. The maximum amount of insurance that is available for both building and contents is $500,000 for each category. In this situation, Federal flood insurance requirements could be satisfied by placing $150,000 worth of flood insurance coverage on the warehouse, thus insuring it to its insurable value, and $50,000 worth of contents flood insurance coverage on the inventory, thus providing total coverage in the amount of the outstanding principal balance of the loan. Note that this holds true even though the inventory is worth $200,000.”)