Acceptance of Private Flood InsuranceFrequently Asked Questions

2/18/2019 - By Jennifer Paradise

The long-awaited final rule regarding the acceptance of private flood insurance policies has been released. The rule, effective July 1, 2019, requires regulated lending institutions to accept policies that meet the statutory definition of “private flood insurance”, as defined in the Biggert-Waters Flood Insurance Reform Act of 2012 (BWA). The BWA also allows institutions to exercise their discretion to accept flood policies issued by private insurers or coverage plans issued by “mutual aid societies” that do not meet the statutory definition (if certain criteria are met).

We have already received and answered several questions regarding the final rule and want to share these here with the assumption that other industry participants have the same questions.

1. What is the statutory definition of Private Flood Insurance?

An insurance policy that:
(1) provides coverage that is “at least as broad as” (discussed below) the coverage provided under a standard flood insurance policy issued under the NFIP (SFIP);

(2) includes a requirement for the insurer to give written notice 45 days before cancellation or non- renewal of flood insurance;

(3) includes information about the availability of flood insurance coverage under the NFIP;

(4) includes a mortgage interest clause similar to the clause contained in an SFIP;

(5) includes a provision requiring an insured to file suit not later than one year after the date of a written denial for all or part of a claim under a policy; and

(6) contains cancellation provisions that are as restrictive as in an SFIP.

2. What is a private insurer and a mutual aid society?

A Private Insurer is a company that:
(1) is licensed, admitted, or otherwise approved to engage in the business of insurance in the State or jurisdiction in which the property to be insured is located, by the respective insurance regulator; or

(2) in the case of “Difference of Conditions” policy, multiple peril, all risk, or other blanket coverage insuring nonresidential commercial property, is recognized, or not disapproved, as a surplus lines insurer by the State insurance regulator of the State or jurisdiction where the property to be insured is located.

Mutual Aid Societies are defined as organizations in which:
(1) the members share a common religious, charitable, educational, or fraternal bond;

(2) the organization covers losses caused by damage to members’ property pursuant to an agreement, including damage caused by flooding, in accordance with this common bond; and

(3) the organization has a demonstrated history of fulfilling the terms of agreements to cover losses to members’ property caused by flooding.

3. How will you know if a private flood policy is “at least as broad as” a standard flood policy?

To meet this standard, the policy must, at a minimum:
(1) define the term “flood” to include the events defined as a “flood” in an SFIP;

(2) cover both the mortgagor(s) and the mortgagee(s) as loss payees;

(3) contain the coverage and provisions specified in an SFIP, including those relating to building property coverage; personal property coverage, if purchased by the insured mortgagor(s); other coverages; and the increased cost of compliance;

(4) contain deductibles no higher than the specified NFIP maximums, and includes similar non- applicability provisions as under an SFIP, for any total policy coverage amount up to the maximum available under the NFIP;

(5) provide coverage for direct physical loss caused by a flood and may exclude other causes of loss identified in an SFIP (any additional or different exclusions than those in an SFIP may only pertain to coverage that is in addition to the amount and type of coverage that could be provided by an SFIP); and

(6) does not contain conditions that narrow the coverage that would be provided in an SFIP.

4. Is there a safe harbor for institutions accepting private policies?

Not a specific safe harbor, however, the rule provides a Compliance Aid that says if the policy (or endorsement thereof) states: “This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation”, the institution can rely on the statement and no further review is required. Alternatively, the institution may choose not to rely on the statement and conduct its own review to determine whether the policy meets the definition of “private flood insurance.”

5. Are lenders required to accept private flood insurance policies?

Yes, if the policy meets the definition of “private flood insurance,” mandatory acceptance is required.

6. Are policies/procedures recommended surrounding private flood insurance policies?

Most definitely. We believe that policies and procedures are necessary surrounding the discretionary acceptance of flood insurance policies and will protect the institution from scrutiny during its next Compliance Examination.

We hope more insurers than not will include the Compliance Aid policy statement but it’s not a requirement. Therefore, it is important to know what criteria must be met to meet the standards, because beginning July 1, 2019, all institutions must accept eligible policies.

This FAQ is current as of May 6, 2019, and may not be updated for regulatory changes occurring after this date.

The opinion expressed in this FAQ is for informational purposes only and readers are encouraged to review any current state or federal law and regulation that applies in all jurisdictions where a company operates, and to seek legal counsel as necessary.

About the Author | Jennifer Paradise, CRCM
Jennifer is a consultant in the Financial Institutions Advisory Group at Saltmarsh, Cleaveland & Gund and has been serving the financial institutions industry since 1990. She is primarily involved in performing fair lending, loan internal audit, loan compliance, and other consulting services for the firm’s financial institution clients throughout the region.