The Short Answer on Flood Insurance Requirements
Federally-regulated lending institutions, which include many residential mortgage companies, are responsible for identifying homes and buildings that are partially or wholly located within a FEMA-designated Special Flood Hazard Area (SHFA) on a FEMA flood map before granting any loan where the home or building will be part of the collateral for the loan. And, if the home is within the SFHA, the mortgage lender will typically require the borrower to purchase adequate flood insurance in order to close the loan. Post-closing, the loan servicer is required to ensure that the borrower maintains the flood insurance for the life of the loan or until such future time that the home is removed from the SFHA.
Put more simply, there are a number of federal laws relating to the National Flood Insurance Program (NFIP) that require federally regulated lenders to mandate flood insurance on certain homes and buildings. If you are being required to obtain flood insurance on your new home or building, then it is likely that it is located in an SFHA, which is a high-risk flood zone on a FEMA flood map. Federally regulated mortgage companies are legally required to ensure sure that these homes and buildings are insured with flood insurance.
To determine if a home or building is located in a SHFA, your mortgage company should be able to provide you with a flood map overlay for you to review. Mortgage borrowers have the right to ask for proof in the form of a flood map overlay and, if it is determined that the home or building is not in the SFHA, the flood insurance requirement may be eliminated. If the home or building is close but not in the SFHA, it may still make sense to consider obtaining a flood insurance policy since about 25% of all flood losses happen outside of an SFHA, in moderate or low risk areas.
The Full Answer on Flood Insurance Requirements
In the late 1960’s, the federal government created the National Flood Insurance Program (NFIP) in order to provide access to flood insurance for homes and buildings in communities that participate in the NFIP. The NFIP is managed by the Federal Emergency Management Agency (FEMA) and consists of three parts:
- Part One offers flood insurance for homes, condominiums and commercial buildings in all flood zone classifications.
- Part Two works with states and local municipalities to create flood maps that designate areas of high, moderate and low flood risk.
- Part Three works with municipalities to incorporate flood-safe building practices into local building codes.
A primary goal of the NFIP is to identify areas of high flood risk and encourage building in a flood-safe manner to help prevent damage as well as bodily injury when a flood occurs in the area.
FEMA flood zone classifications are used to help mortgage companies determine if flood insurance is required to close on a loan. The evolution of technology has allowed FEMA flood zone classification maps to become very accurate, although errors are still possible. For example, the systems which determine the location of a home or building put the pinpoint at the center of the parcel of land or the middle of the property line along the street, neither of which may be the actual location of the home or building.
Since federal law requires flood insurance on structures that are partially or wholly in the SFHA, it is possible that the home or building may not actually be located where the pinpoint is dropped. Thus, some buyers may be improperly required to purchase flood insurance because a portion of their parcel is in the SFHA, while their home or building is not. On the other hand, this means that some buyers may mistakenly be relieved of the obligation to obtain flood insurance because while the home or building may be in the SFHA, the location where the pinpoint is dropped is not.
Therefore, all buyers should check for themselves to determine if a home or building is the subject of the flood insurance requirement.
Flood damage is the most common and costly types of natural disaster damage in the Unites States. Floods are happening more often, with more severity, and in places that do not have a history of flooding. An insurance agent who has expertise in flood risk and flood insurance can help evaluate your flood risk and help you make insurance decisions which make sense for you, your family and your business.
Acrisure’s experienced team of flood professionals understand flood risk and flood insurance, leveraging industry-leading technology to bring you flood insurance options from some of the best flood insurance carriers in the flood insurance marketplace. Reach out to Acrisure to learn more about your flood risk and what options are available to help you protect against losses from potentially devastating flood damage to your home or business and help you find the right flood insurance solution for you.
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About the Author
Dan Freudenthal
President, Flood Practice Leader
Mr. Freudenthal is the national Flood Practice Leader at Acrisure. He is a nationally recognized expert in the area of flood risk and a regular speaker at leading risk management and commercial real estate conferences specializing in flood risk. Mr Freudenthal has also published numerous articles in real estate, risk management and insurance industry publications.