Federal guidelines indicate that flood insurance should be purchased in an amount equal to the outstanding loan balances OR the maximum coverage amount allowable under the flood insurance program.

How do lenders determine the maximum amount allowable? Is this available from FEMA? Rely on something from the insurance agent? Somehow determine the land value and deduct this from the total property value?

Interested in learning some best practices. Thanks....

Banks must insure that borrowers purchase flood insurance coverage at least equal to the following minimums:
1. Outstanding principal balance of all loans secured by the property;
2. The appraised value of the property minus the land value (the improved property value); and
3. The maximum insurance available under the principal flood insurance program.

I have a table that shows the FEMA maximums but it doesn't copy correctly into this page. It is basically $250,000 for residences and $500,000 for commercial buildings.
If you go to FEMA's website for their Mandatory Purchase of Flood Insurance Guidelines book. If you click on the Mandatory Purchase Guideline link you will be taken to http://www.fema.gov/nfip/mandpur1.pdf

On page 22, you will find a table that provides complete information on amount available by type of building.

One word of caution - if you are selling secondary market loans to FHLMC or FNMA, check their rules also. They are different than the federal guidelines and require additional coverage in most cases - their rules base the coverage amount on the "replacement value" of the property.