FLOOD INSURANCE – CHANGES TO MAXIMUM COVERAGE LIMITS

Section 100204 of the Biggert-Waters Flood Insurance Reform Act of 2012 revised the maximum limits of building coverage available for non-condominium residentialĀ buildings designed for use for five or more families (Other Residential) to match the limits of commercial and other non-residential properties insured under the Standard Flood Insurance Policy (SFIP) General Property Form. This is an increase of available building coverage from $250,000 per building to $500,000.

New Business and Renewals

The new coverage limits are available for new business, renewals, or change endorsements that are effective on or after June 1, 2014. At least 90 days prior to June 1, 2014, insurers will send a letter to all Other Residential policyholders to inform them of the new maximum limits. Insurers will also include a message on the Renewal Notice advising affected policyholders that higher limits are available.

Force Placement

It appears that creditors must identify all borrowers with Other Residential policies that will have inadequate coverage after the effective date of the change. Those borrowers must receive a notice:

  • Informing the borrower of the change and the new amount of required coverage;
  • Instructing the borrower to purchase a policy in an adequate amount within 45 days, to avoid force-placement by the lender.

Example

A borrower has a loan with a balance of $480,000 secured by a multifamily building with improvements valued at $575,000. The current policy is in the amount of $250,000 (FEMA’s maximum). After June 1, 2014 FEMA’s maximum amount increases to $500,000. To remain in compliance the borrower must have a policy in the amount of $480,000.

The recently enacted Homeowner Flood Insurance Affordability Act of 2014 does not appear to impact this requirement.

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