(Private Flood Insurance Effective July 1, 2019)
The Private Flood Insurance rules became effective July 1, 2019. Since private flood insurance growth is increasing due to:
• Actions in private market limiting risk
• Poor financial condition of National Flood Insurance program
The purpose of this article is to briefly review some of the key points of the Private Flood Insurance Rules.
Agencies, including the FDIC, amended their regulations regarding loans in special flood hazard areas to implement the private flood insurance provision of the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act). Specifically, the final rule requires regulated lending institutions to accept policies that meet the statutory definition of “private flood insurance” and permits regulated lending institutions to exercise their DISCRETION to accept flood insurance policies issued by mutual aid societies that do not meet the statutory definition of “private flood insurance” subject to certain restrictions. These changes affect the model language included in the Notice of Special Flood Hazards and Availability of Federal Disaster Relief Assistance.
As a result, many financial institutions have opted to accept ONLY the following as REQUIRED:
• Policies that meet the definition of Private Flood Insurance and/or contain a specific Certification or are the NFIP policies traditionally accepted.
Upon determining the necessity for coverage, many institutions are providing the borrower with a form referencing Private Flood Insurance coverage and if the borrower so elects, the form is given to the Private Flood Insurance Agent by the borrower for the agent to certify that each of the Private Flood Insurance required criteria are met or that the Certification is contained in the policy. If the agent completes and returns to the institution the form, the institution verifies all certified by the agent. If the agent does not complete, the institution goes through the verification process for each of the required criteria of the Certification. Hence, there is a necessity for institution personnel to understand the criteria.
For many institutions, the agent on the form also CERTIFIES the ability of the company to do business in the state. The State Department of Insurance is a verification source.
Institution MUST accept private flood insurance in satisfaction of the flood insurance purchase requirements if the policy meets the requirements for coverage. Institutions may determine that a policy meets the definition of private flood insurance, if the following statement is included within the policy or as an endorsement to the policy. “This policy meets the definition of private flood insurance contained in 42 USC4012a(b)(7) and the corresponding regulation.” This statement is known as the “Certification.”
• You can’t reject a policy simply because it doesn’t have the statement.
Private Flood insurance must provide flood insurance coverage that is at least as broad as the coverage provided under the SFIP for the same type of property, considering deductibles, exclusions, and conditions offered by the insurer. The policy must, at a minimum:
• Define the term “flood” to include the events defined as a “flood” in an SFIP.
• Contain deductibles no higher the specified maximum, and include similar non-
applicability provisions, as under an SFIP, for any total policy coverage up to maximum
available under the NFIP;
• Provide coverage for direct physical loss caused by a flood and may only exclude other
causes of loss that are excluded in an SFIP.
Private Flood Insurance must also include:
• A requirement to give written notice 45 days before cancellation or non-renewal of flood insurance to:
• The insured; and
• The supervised institution that made the designated loan or the servicer acting on its behalf;
• Information about the availability of flood insurance coverage under the NFIP;
• A mortgage interest clause similar to the clause contained in an SFIP; and
• 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
• The policy must contain cancellation provisions that are as restrictive as the provisions contained in a SFIP.
As Private Flood Insurance policies are becoming more common, hopefully this brief review will be both beneficial and provide insight as to how some institutions are handling the requirements.