We have a guy who’s financing a dwelling and he’s got homeowner’s insurance for $25,000; the loan is $30,000. The policy doesn’t say what the replacement value of the dwelling is. He’s got flood insurance for $25,000. Are we OK with $25K of flood insurance or should we make him get $30K?

It's the lender's responsibility to determine an adequate amount of insurance. This includes determining the insurable value of the building. Once you do that, you need insurance for the lesser of:
1. The loan amount;
2. The insurable value of the building;
3. The maximum amount available through the NFIP.

IF the insurable value is $25,000, then that would the lesser of the 3. If the building is worth $30,000 or more, you'll need to have insurance at the loan amount.

Don't shoot me - but did this change? I have looked at 12 CFR 339 and I see no mention of insurable value, but I see it in the FAQs. If I need to cite to the calculation - what am I going to use to ensure they use RCV (or the appropriate equivalent)?

It's the lender's responsibility to determine an adequate amount of insurance. This includes determining the insurable value of the building. Once you do that, you need insurance for the lesser of:
1. The loan amount;
2. The insurable value of the building;
3. The maximum amount available through the NFIP.

.

I don't understand your question. You want a regulatory citation? If the insurable value is less than the loan amount or the maximum available, you cannot insure the building for more than what the insurance will pay if it floods. That piece does not have to be codified in the regulation.

Sorry if my question was unclear (and I didn't get a message you had responded). I just want to be sure I am explaining this properly- it is the lesser of three things rather than the way it reads in 12 CFR 339- the lesser of the principal outstanding balance and the lesser of the NFIP max and RCV. I guess you come to the same conclusion either way, right?

Yes - but it is only RCV for a 1-4 primary dwelling. Everything else is insured at ACV.

I understand the the maximum insurable amounts. That isn't my question. I don't have a "replacement cost value" which I need to determine if it's more than the amount of the loan. If the RCV is $35,000 then I need $30,000 in coverage for the loan amount. But the insurance dec page just says "insured value" is $25,000 and the insurance company won't provide a replacement cost value. My question is whether the $25,000 in "insured value" is an OK figure to go with as opposed to "replacement cost value" which I don't have.

See Q# 9 : https://www.bankersonline.com/sites/default/files/tools/flood_faq_2011_10_17.pdf

Get another insurance agent involved that knows what they are doing.

In calculating the amount of insurance to require, the lender and borrower (either by themselves or in consultation with the flood insurance provider or other appropriate professional) may choose from a variety of approaches or methods to establish the insurable value. They may use an appraisal based on a cost-value (not market-value) approach, a construction-cost calculation, the insurable value used in a hazard insurance policy (recognizing that the insurable value for flood insurance purposes may differ from the coverage provided by the hazard insurance and that adjustments may be necessary; for example, most hazard policies do not cover foundations), or any other reasonable approach, so long as it can be supported.

If you have to use the insurable coverage on the hazard policy, how are you adding in the value of foundations? Do you use a formula based on square footage of the home? Do you use a flat percentage, like 5%, of the hazard policy value to represent the foundation?

Nanda: Hazard insurance and flood insurance are two different things. As you pointed out, hazard insurance doesn't give a dollar for dollar value to anything below ground (such as foundations). You can't take hazard insurance and add a percentage to determine flood insurance values.

Most examiners will "pass" if flood insurance is equal to flood insurance, but that's not actually right. Also, flood insurance has a lot of exempt coverage limitations that hazard insurance does cover. For instance, flood insurance doesn't cover anything below ground (in a basement) unless it's needed to run the upstairs. In my basement there is carpet, 2 hot water heaters (only 1 is covered), etc. None of that is covered by flood. Thus, my flood insurance RCV is less than my hazard insurance RCV.

The point of this is comparing hazard insurance to flood insurance is like apples and oranges.

Wasn't there a letter issued by FEMA directing insurance agents or someone like that to provide RCV on insurance policies or am I confusing this with something else? I have been searching FEMA's website for about an hour - so I am beginning to think I am crazy.

On Condo (RCBAP) policies, the value per unit is required.

RCV must be on all NFIP declaration pages - with a very limited exception:

https://nfip-iservice.com/Stakeholder/FE...equirements.pdf

Reviving this one ::CLEAR::

I've always stuck with the notion that an appraisal (cost approach) was the best value, followed by the RCV/ACV on a hazard policy because that's what guidance has said. What's the argument for not accepting the RCV/ACV on a flood policy in an area where there are no basements?

Inevitably I'm going to be challenged on why the flood policy RCV/ACV is inferior to that of the hazard.

bump

Hazard (fire/wind/etc.) insurance usually covers more than a flood policy, i.e. decks, fences, etc. But is there is a very large discrepancies, one of them is wrong. What are we talking about here as far as differences??

We follow the same waterfall as Norman. We have found when there are significant discrepancies, the flood policy is almost always the inaccurate one. We'll see RCV of $250,000 on a lot of flood policies rather than the actual RCV of the property. I think our agents just really hate doing flood policies, so they cut corners wherever they can.

Thank you both. I can't point to some wild discrepancy, but I'm looking at a different shop than I'm accustomed to.

They appear to be solely using RCV from flood policies and not obtaining a cost approach appraisal. I'm of the opinion that an appraiser developing a cost approach will give the best value. I go to hazard policies only because that's what the guidance says, but can see those agents cutting corners in the same way.

I guess I was looking for a way to articulate a response to- "Why can't we use the flood RCV over the hazard RCV?" I'm on board with the correct method, but need to articulate why.

Well, this is a sword upon which you fall when you do not make it a policy to always get a cost approach appraisal on property in a SFHA.

lol. New shop for me Randy. Trying to right the ship over here. My old shop was running smooth when I left it.