Managing Risk: Flood Hazard Insurance

Insurance is the very essence of managing risk. In fact, insurance is designed to cover the loss when what was considered risky actually happens. We have hazard insurance for fires and the like. And we have flood insurance for damages caused by floods.

For some mysterious reason, both lenders and customers are hostile to the concept of flood insurance. These same lenders and customers never question the need for insurance against other hazards, even though they are less likely to occur. Because of the anti-flood insurance attitude, failures in flood insurance compliance are currently one of the top violations as well as one of the most expensive ones.

The goal of a compliance program should be to avoid flood hazard violations. Unfortunately, managing flood insurance requirements is not a straightforward task. The steps necessary for compliance occur at different times, under varying circumstances, and in different departments of the organization.

The first step is the initial determination of whether improved real property securing a loan is located in a high risk flood hazard area. But that is only the beginning. The real violations tend to occur on properties that are, in fact, located in a high risk flood hazard area.

Insurance must be required under certain circumstances. The amount of insurance must be correct. The insurance must be maintained for the life of the loan and in the correct amount. On top of all this, all properties, including those that were not in the high risk flood hazard zones when the loan was made, must be tracked to be certain that map changes do not affect their flood insurance status. The bottom line: mistakes can happen in a variety of places. All of the steps and controls listed below should be part of your compliance program.

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Copyright © 2005 Compliance Action. Originally appeared in Compliance Action, Vol. 10, No. 6, 5/05