Commercial flood insurance helps to protect invested parties (business owners, lenders, etc.) from the costs of flood water damage. It covers both a building and its contents.
Most commercial property insurance does not cover flood damage, so flood insurance is extremely important to protect one’s interest in a building.
Commercial flood insurance is available through the National Flood Insurance Program as well as private insurers.
Not only is financial protection important, but in some cases, flood insurance is also a requirement.
Regulation dictates that flood insurance coverage is required for commercial loans secured by buildings located in areas having special flood hazards.
Understanding Commercial Flood Insurance Lender Compliance
Commercial real estate lending can be quite complex. When you combine that with the complexity of flood insurance regulation, lenders are bound to have questions.
In May 2022, the Joint Agencies released a set of new and reorganized Q&As regarding flood insurance regulation.
In these Q&As, the Joint Agencies address a variety of topics, including:
- flood insurance requirements for non-residential buildings,
- loans extended for primarily commercial purposes,
- and much more.
From a compliance standpoint, it’s important to understand what qualifies as a non-residential building because sometimes, they have different rules when it comes to flood insurance.
NFIP: Defining Non-Residential Buildings for Commercial Flood Insurance
In “Amount 4”, the Flood Q&As define non-residential buildings (using the NFIP Flood Insurance Manual) as:
- A building in which the named insured is a commercial enterprise primarily carried out to generate income and coverage is for:
- A building not designed for residential uses;
- A mixed-use building in which the total floor area devoted to residential uses is 50 percent or less of the total floor area within the building if the residential building is a single-family property; or 75 percent or less of the total floor area within the building for all other residential properties; or
- A building designed for use as office or retail space, wholesale space, hospitality space, or for similar uses. The following buildings where the normal occupancy of a guest is less than six months: condominiums, apartments, hotels, tourist homes, or rooming houses.
- Other non-residential buildings including, but not limited to the following: houses of worship, schools, agricultural structures, garages, pool houses, clubhouses, and recreational buildings.
Per regulation, non-residential buildings in areas having special flood hazards must be covered by commercial flood insurance when securing a commercial loan.
Why the Rules are Different for Commercial Flood Insurance Regarding Loans
Loans extended primarily for business, commercial, or agricultural purposes are exempt from flood insurance escrow requirements, even if the loan is secured by residential improved real estate.
This means that a lender is not required to escrow all premiums and fees for flood insurance, which differs from mortgage loans secured by residential buildings.
Commercial flood insurance regulation for non-residential buildings follows the same rules as regulation for residential buildings when it comes to the minimum required coverage amount, which is the lesser of the following:
- Outstanding principal balance
- Maximum coverage available under the NFIP, which is the lesser of:
- Maximum limit available for the structure type ($500,000 per building or $1.5 million total)
- Insurable value
Although the minimum coverage amount concept is the same, required coverage calculation can be quite tricky for multi-collateral and cross-collateral commercial loans, especially during the force-placement process.
If you want to ensure your processes for flood compliance are airtight, join us at our upcoming webinar: 2022 Flood Regulation: Commercial Flood Insurance & Lender Flood Compliance.
Confidently work on these accounts without overlooking regulatory issues. Come learn more about the complexities of commercial flood insurance. We'll focus on collateral valuation for multi-collateral and cross-collateral commercial real estate lending.
Please feel free to reach out anytime and Ask Us Anything.