With all the recent flooding incidents in the country, it may be useful to review some of the steps to determine the amount of flood insurance for each collateral improved piece of real estate located in a special flood hazard area (INCLUDING ABUNDANCE OF CAUTION OR INCIDENTAL COLLATERAL) or for a LOAN SECURED BY A MOBILE HOME located in a special flood hazard area (whether or not loan is secured by the real estate).

Not that there should be a separate flood insurance policy for each insurable structure. Evidence of flood insurance must be provided on or before loan closing even on construction loans.

FEMA’s Mandatory Purchase of Flood Insurance Guidelines declare a building’s insurable value is the same as 100% replacement cost value (RCV) of the insured building. RVC is the cost to replace property with the same kind of material and construction without deduction for depreciation. Some properties are only eligible for Actual Cost Value (ACV) (RCV at the time of the loss less physical depreciation). FEMA’S GUIDELINES ALSO INSTRUCT LENDERS TO AVOID REQUIRING A BORROWER TO PAY FOR MORE COVERAGE THAN THE NFIP PAYS IN THE EVENT OF A LOSS.

For policy rating, FEMA defines a primary residence as a building that will be lived in by an insured or an insured’s spouse >50% of the 365 days following the policy effective date. If at the time of a loss the dwelling only meets the SFIP definition of a “primary residence” and not the definition of “principal residence” (a residence lived in 80% or more of prior 265 days), then any building claim will be paid using ACV.

On Non-Residential Structures in the coverage calculation, it is acceptable to use:

  • Actual cost per a cost value appraisal
  • Construction cost calculation
  • Insured value in Hazard Policy plus foundation cost
  • Insurance replacement cost minus depreciation


On Residential Structures for the calculation use:

· Replacement Cost Value (RCV)

The old method of appraisal value minus land value is still acceptable, but has been replaced by RCV.

To continue the calculation process, the financial institution takes its loan balance plus any superior lien balance and adds the forced placed insurance cost (as applicable) and comes up with a total.

The next step is the coverage calculation discussed above.

Finally, the institution considers the maximum National Flood Insurance Program Coverage Available (Residence $250,000; Residential greater than four units $500,000; Commercial Building $500,000).

The least of the values above is the calculation for the amount for flood insurance required from a flood compliance perspective.

Condo coverage is a bit different, as consideration must be given to the total coverage carried on the policy coverage for the entire building to determine per unit coverage.

Hopefully, the information provided in this quick summary review will be of benefit.