Due to amendments made to the Federal Flood Insurance Act, federal agency lenders are now authorized to accept “private flood insurance” that meets the statutory definition to satisfy their flood insurance requirements. Accordingly, lenders may now accept “private flood insurance” to meet the SBA’s flood insurance requirements described in SOP 50 10 5(K) (p. 199). The change is expected to be included in version 6 of the SOP, which is anticipated to take effect on January 1, 2020.
When originating a loan, the lender should always order a flood determination on all real estate collateral locations. If any portion of the building is located in a special flood hazard area, the borrower must obtain flood insurance for the real estate under the National Flood Insurance Program (“NFIP”) or through a private flood insurance provider. If any equipment, fixtures, or inventory (“Personal Property Collateral”) that is collateral for the loan is in a building any portion of which is located in a special flood hazard area and that building is collateral for the loan, the lender must also obtain flood insurance for the Personal Property Collateral under the NFIP or through a private flood insurance provider.
If Personal Property Collateral is located within a building any part of which is located in a special flood hazard area, and that building is not collateral under the loan, the lender may waive the flood insurance requirement for the Personal Property Collateral if: (1) it uses prudent lending standards to determine that flood insurance is not economically feasible or not available; and (2) includes a written justification in the loan file that explains why flood insurance is not economically feasible, or if flood insurance is not available, the steps taken to determine that it is not available.
The flood insurance coverage must be at least equal to the outstanding principal balance of the loan or maximum limit of coverage available, whichever is less. Additionally, the insurance coverage must contain a mortgagee clause for real estate and a lender’s loss payable clause for personal property in favor of the lender and provide that “any action or failure to act by the debtor or owner of the insured property will not invalidate the interests of the lender.” Finally, the policy or endorsements must provide for at least 10 days’ prior written notice to lender of policy cancellation.
According to 42 U.S.C. § 4012, "private flood insurance" is defined as an insurance policy that:
. . .
(A) is issued by an insurance company that is--
(i) licensed, admitted, or otherwise approved to engage in the business of insurance in the State or jurisdiction in which the insured building is located, by the insurance regulator of that State or jurisdiction; or
(ii) in the case of a policy of difference in conditions, multiple peril, all risk, or other blanket coverage insuring nonresidential commercial property, is recognized, or not disapproved, as a surplus lines insurer by the insurance regulator of the State or jurisdiction where the property to be insured is located;
(B) provides flood insurance coverage which is at least as broad as the coverage provided under a standard flood insurance policy under the national flood insurance program, including when considering deductibles, exclusions, and conditions offered by the insurer;
(i) a requirement for the insurer to give 45 days' written notice of cancellation or non-renewal of flood insurance coverage to--
(I) the insured; and
(II) the regulated lending institution or Federal agency lender;
(ii) information about the availability of flood insurance coverage under the national flood insurance program;
(iii) a mortgage interest clause similar to the clause contained in a standard flood insurance policy under the national flood insurance program; and
(iv) a provision requiring an insured to file suit not later than 1 year after date of a written denial of all or part of a claim under the policy; and
(D) contains cancellation provisions that are as restrictive as the provisions contained in a standard flood insurance policy under the national flood insurance program.
. . .
It is important for lenders to identify if any of its collateral, whether real or personal property, is located within a special flood hazard area early in the process. While amendments to the Federal Flood Insurance Act give lenders more options to satisfy the requirements of the SOP, the process of obtaining flood insurance can be costly and time consuming. Therefore, lenders should inform their borrower(s) of the flood insurance requirement(s) as soon as they are known. For more information about flood insurance, or other commercial lending and real estate matters, send an e-mail to Scott Oliver at firstname.lastname@example.org.