Flood Insurance Update Proposed Private Flood Insurance Regulations On November 7, 2016, the FDIC, OCC, Board of Governors of the Federal Reserve System, National Credit Union Administration and Farm Credit Administration (collectively, Agencies) published a joint proposed rule to implement private flood insurance provisions of the Biggert-Waters Act of 2012 (Act). The Act requires regulated lending institutions to accept private flood insurance policies if they meet the requirements of the Act. The Agencies newly proposed regulations are based upon comments the Agencies received to their October 2013 proposed regulations. Based on comments received, the Agencies determined the following topics required additional dialogue, each of which will be covered in more detail below: Regulatory definitions of private flood insurance and at least as broad as terms Use of a regulatory safe harbor to facilitate compliance Whether policies that do not conform to the statutory definition of private flood insurance should be accepted Whether alternative criteria for non-conforming policies should be developed by the Agencies Whether regulated lenders should be permitted to accept policies from mutual aid societies 1. Private Flood Insurance Lenders Must Accept The Agencies proposed regulations would mandate a regulated lender to accept a private flood insurance policy that meets the statutory definition of private flood insurance. A. Private Flood Insurance The Agencies generally adopted the definition private flood insurance found in the Act, with minor clarifications. Private flood insurance is defined in the proposal as a policy that: Is issued by an insurance company that is licensed, admitted, or otherwise approved to engage in the business of insurance by the insurance regulator of the State in which the insured property is located; or, 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 State insurance regulator; Provides flood insurance coverage at least as broad as insurance offered under a standard flood insurance policy (SFIP), including deductibles, exclusions, and conditions; Includes a 45 day written notice of cancellation or non-renewal to the insured and the lender; Includes information regarding availability of flood insurance under the NFIP; Includes a mortgagee clause similar to that contained in an SFIP; 1 Page 5225 Crooks Road, Troy, MI 48098-2823 www.pfic.com
Requires an insured to file suit no later than one year after the date of a written denial under the policy; and Includes cancellation provisions as restrictive as those in an SFIP. For purposes of clarity, the Agencies defined SFIP to mean the NFIP standard flood insurance policy form at the time the lender is provided the private flood insurance policy. B. At Least as Broad The Agencies emphasize that regulated lenders will be required to determine whether a private flood insurance policy is at least as board as SFIP coverage. Many commenters to the previously proposed rules indicated it would be difficult for lenders to determine if a private flood policy is at least as broad as coverage provided in an SFIP. As a result, the Agencies attempted to clarify the meaning of the term and provided that lenders should review private flood policies using the following criteria to determine whether a private policy is at least as broad as SFIP coverage: Defines the term flood to include events defined as a flood in SFIP; Covers both the mortgagor(s) and mortgagee(s) as loss payees; Contains the coverage provisions specified within an SFIP (including building property coverage, personal property coverage, and cost of compliance); Contains deductibles no higher than the NFIP and similar non-applicability provisions; Provides coverage for direct physical loss caused by a flood and may exclude other causes of loss specified in an SFIP; Does not narrow the coverage that would be provided in an SFIP. C. Compliance Aid The Agencies believe it would be appropriate to include a compliance aid provision to assist consumers and regulated lenders in determining whether a flood policy meets the definition of private flood insurance and if the institution is required to accept the policy. The Agencies are proposing to allow regulated lenders to utilize information received from insurance companies in making such determinations. However, according to the Agency s proposal, an insurance company s indication of compliance alone would not be sufficient. A regulated lender would still need to perform its own due diligence to confirm the information received from the insurance company. The three compliance aid criteria proposed by the Agencies are as follows: A written summary, provided by the insurance company, explaining how the policy meets the definition of private flood insurance and identifying the provisions of the policy that meet each part of the definition; Regulated lender verifies in writing, after performing its own due diligence, that the policy includes the provisions identified by the insurer and that the provisions satisfy the criteria in the definition; and Policy includes the following assurance clause: This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a (b)(7) and the corresponding regulation. 2 Page 5225 Crooks Road, Troy, MI 48098-2823 www.pfic.com
The Agencies believe the criteria would assist the regulated lender in performing its own due diligence before accepting the policy rather than solely relying upon the insurance company s claim that it meets the regulatory definition. Lenders should note that they are not relieved of the requirement to accept a policy that meets the definition of private flood insurance even if the policy does not include the written summary or assurance clause. 2. Private Flood Insurance Lenders Have Discretion to Accept The Agencies are proposing to permit lenders to accept private flood insurance policies in certain circumstances, even if such policies would not meet the definition of private flood insurance under the Act. The Agencies noted that because the Act provides a detailed definition of what constitutes private flood insurance, the Agencies were not given much leeway in further defining or modifying the term. However, the Act only provides when a lender must accept a private policy. The Act is silent on situations when and if a lender may accept a private policy that may not meet the statutory definition of private flood insurance. A. General Discretionary Acceptance The Agencies propose to permit a regulated lender to accept private policies that wouldn t otherwise meet the criteria of private flood insurance if the private policy meets the following requirements: The insurer is licensed, admitted, or otherwise approved to engage in the business of insurance. For policies of difference in conditions, multiple peril, all risk or other blanket coverage insuring nonresidential commercial property, the flood insurance issued by a surplus lines insurer recognized, or not disapproved, by the insurance regulator; Both the mortgagor(s) and mortgagee(s) must be covered as loss payees; The policy holder will receive reasonable notice of cancellation and cancellation is only permitted for limited reasons allowed under an SFIP, in cases of non-payment or when cancellation is required pursuant to State law; Policy must either be at least as broad as the coverage in an SFIP or provide coverage that is similar, including deductibles, exclusions and conditions offered by the insurer; o Lenders will be required to follow the criteria below to determine if the private insurer s flood policy is similar to an SFIP. The Agencies believe the following criteria will safeguard the lender from accepting inadequate flood insurance policies. Compare the private policy with an SFIP to determine the differences; Reasonably conclude that the private policy provides sufficient protection of the loan; and Document its findings. Under this provision, the Agencies believe that lenders will have more flexibility and will be able to accept private flood policies that: Do not contain a mortgage interest clause similar to an SFIP Do not contain notice about the availability of flood insurance coverage under the NFIP 3 Page 5225 Crooks Road, Troy, MI 48098-2823 www.pfic.com
Provide for cancellation following reasonable notice to the borrower, rather than the 45 days provided under an NFIP Permit cancellation for reasons of non-payment or when state law mandates cancellation Do not require the insured to file suit within one year after the date of a written denial of a claim Are similar to an SFIP, rather than at least as broad as B. Mutual Aid Societies Additionally, under the proposed regulations, regulated lending institutions may be able to accept flood policies issued by mutual aid societies that do not meet the statutory definition of private flood insurance in the Act. Agencies intend to add the definition of a mutual aid society to their rules as well as provide standards for acceptance of these types of policies. To qualify as a mutual aid society, an organization would need to meet three conditions: Members must share a common religious, charitable, educational or fraternal bond; Must cover losses caused by damage to members property by flooding; and Must have demonstrated a history of fulfilling the terms of agreements to cover flood losses to members property. Lenders would be permitted to accept private flood insurance policies offered by mutual aid societies if the following conditions are met: The lender s primary supervisory Agency determines that policies offered by mutual aid societies meet the requirements of the Federal flood insurance statues. According to the proposed rules, each Agency has the discretion to independently determine which mutual aid policies will be acceptable; The policy meets the coverage amount and term requirements in the mandatory flood insurance purchase requirement; Both mortgagor(s) and mortgagee(s) are covered as loss payees; The lender determines that policy provides sufficient protection of the loan. When determining if a policy provides sufficient protection the lender will be required to: o Verify policy is consistent with general safety and soundness principles (e.g. deductibles are reasonable based on borrower s financial condition); o Consider policy provider s ability to satisfy claims and record of covering losses; and o Document its conclusions. C. Nonresidential Properties The Agencies acknowledged that flood insurance policies issued by private insurers covering loans secured by nonresidential properties may be customized for specific circumstances and may have coverage, deductibles, exclusions and conditions that differ from NFIP policies. The Agencies are 4 Page 5225 Crooks Road, Troy, MI 48098-2823 www.pfic.com
considering adopting different rules for such nonresidential policies and are requesting comments on whether the proposed definition of private flood insurance or discretionary acceptance provision would prevent lenders from accepting flood policies from private insurers in nonresidential lending. 5 Page 5225 Crooks Road, Troy, MI 48098-2823 www.pfic.com