Flood Coverage Forms in Participating Communities

Compared to more common property insurance policies, National Flood Insurance Program (NFIP) policy forms are actually quite intriguing. First, the Federal Government wrote them; and second, they use terms and conditions not found in other property policy forms. The three most commonly used NFIP coverage forms are highlighted below. Again, the aim of this series is to provide important details that may have been skimmed over in the required flood course, as well as providing some interesting facts.

Three Policy Forms

Each Standard Flood Insurance Policy (SFIP) form issued by the Federal Emergency Management Agency (FEMA) specifies the terms, conditions and agreement between FEMA (as the insurer) and the named insured. Provisions are essentially the same among the three forms with the only differences being the qualifications for coverage, the limits available and the property valuation methods applied.

As of March 31, 2008, there were 5,566,712 NFIP policies in force across the United States. These policies are divided among three main forms the: 1) Dwelling Form; 2) General Property Form; and 3) Residential Condominium Building Association Policy (RCBAP).

Dwelling Form: Approximately 85 percent of current NFIP policies are the dwelling form. It is designed for one to four family structures primarily occupied as a residence. Homeowners, residential renters, owners of two to four unit residential structures, residential townhouse or row house and the owner of an individual unit in a condominium building are eligible for the dwelling form.

Property insured on the dwelling form is valued at replacement cost provided two requirements are met:
• Property is insured to at least 80 percent of its value (or the maximum coverage available); and
• The insured lives in the residence at least 80 percent of the year.
If either of these requirements is not met, the most the insured is going to receive is the property's actual cash value.

Although the policy states that replacement cost is paid if 80 percent of the value is carried, this is not a coinsurance form. Like the homeowners' form, the dwelling form will pay the greater of actual cash value or the amount developed in the coinsurance calculation; but only if the insured lives there 80 percent of the year. If both conditions are not met, losses are paid at actual cash value; the reason this is not the equivalent of a coinsurance form.

In regular program communities, the maximum amount of building coverage available to cover structures insured on the dwelling form is $250,000. Contents coverage is limited to $100,000.

General Property Form: Owners or lessees of "other residential" and non-residential structures or units are eligible for protection under the general property form. Residential structures with five or more units, hotel or motels, apartment buildings, cooperative condominiums, assisted living facilities and dormitories are examples of "other residential" structures insurable on the general property form. Non-residential structures, as is evidenced by the name, are any structures where people do not live and includes stores, office buildings, manufacturers, warehouses, churches, schools, detached garages commercial condominiums and any other eligible structure not normally considered a place of residence.

Structures and contents insured on the general property form are valued at actual cash value. There are no other options available.

Maximum limits differ depending on the classification of the structure. "Other residential" structures are limited to $250,000 on the structure and $100,000 on the contents. Non-residential structures are eligible for up to $500,000 on the building and another $500,000 for the contents.

Residential Condominium Building Association Policy (RCBAP): Provides building coverage and if desired can be used to provide contents coverage for common use personal property for residential condominium buildings provided 75 percent or more of the building is residential use. Coverage is written in the name of the association for the benefit of the association and the unit owners. Only buildings with a condominium form of ownership are eligible for this coverage form. The unit owners must take title and deed to specific units.

Cooperative condominiums are NOT eligible for the RCBAP as title to a specific unit is not passed to the occupier of the unit; an "owner" buys stock in the cooperative and is allowed to live in a particular unit (based on the amount of stock purchased). Timeshare buildings MAY be eligible for the RCBAP if condominium-style ownership is offered in jurisdictions which allow title to individual units be vested in the owners names (a fee simple-type arrangement allowing the title to be transferred to heirs).

Property insured on the residential condominium building association policy is valued at replacement cost. In fact, this is the only form that offers a true coinsurance clause similar to the homeowners' policy.

Much higher limits are available for buildings insurable under the RCBAP. Up to $250,000 per unit, per building is available. A 10-unit building, for example, can purchase up to $2.5 million in protection. Coverage for commonly owned personal property is limited to $100,000 per building.

Participating Communities in the Regular Program

Two requirements must be met before owners or lessees can avail themselves of the coverage and limits highlighted above:
• The structure must be in a participating community (currently over 20,400); and
• The community must have transitioned into the Regular Program.

A participating community is one that 1) has been notified by FEMA through the Federal Insurance and Mitigation Administration (FIMA) that there are flood-prone areas within the community (usually resulting from previous floods); 2) have been notified of the location of those areas by publication of a Flood Hazard Boundary Map; 3) within one year of notification agrees to join NFIP; and 4) agrees to participate in the development of local flood plain management guidelines. Being labeled a participating community is the first step toward becoming a regular community.

Immediately following a community's decision to participate with NFIP, the emergency program is made available to residents and businesses in the community. During the emergency program phase, very limited amounts of coverage are available.

Regular Program: Moving from the emergency program to the regular program requires completion of a more detailed flood insurance study (FIS) by FIMA and the Army Corps of Engineers, more clearly defining the community's flood hazards. Simultaneously, the community, in conjunction with FEMA, is developing and codifying the flood plain ordinances and laws to regulate construction and maintenance in flood zones and flood ways.

After the flood insurance studies are completed and FEMA is satisfied with the locally adopted flood plain management ordinances, the community moves to the regular program. Once the community enters the regular program, the limits presented above become available.

Flood Plain Management

Flood plain management is the local community's responsibility. Reviewing and updating existing laws are solely the duty of the participating community; FEMA does not take part in this process. However, if the community fails to comply with its own flood plain management requirements, FEMA may place the community on probation for one year.

During that year, every flood policy in that community has a $50 surcharge tacked on to the current premium: 1) to help finance the increased risk the community is presenting; and 2) as a political move to encourage policy holders to call the community to push for resolution.

The community is no longer considered a "participating community" as they are not working with FEMA to mitigate losses. If deficiencies are not corrected within that year, the community is suspended and no flood policies can be written or renewed.

Coming Up

As we get deeper into hurricane and the summer storm season, flood insurance ads on television and other media will become more prevalent. Clients will likely be calling as stories of flood damage make their way across the airwaves, so let's be prepared. Flood related definitions will be the focus of our next article.

Flood Insurance Series Series

1. Midwest Flooding Prompts Flood Insurance Review
2. Flood Damage Not Limited to 'Flood Zones'
3. Flood Coverage Forms in Participating Communities
4. Flood Policy Definitions
5. Flood Policy Terms and Conditions Unique to Coverage
6. Legistative Limits on and the Legislative Future of the NFIP

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