Flood Insurance & Insurable Value
By David Dickinson
As you all know, one of the "hot buttons" of regulatory compliance is flood insurance. Recently, there has been a lot of commotion about "insurable value". If you're not familiar with this, I encourage you to read our Comment Letter - specifically pages 2-4 - concerning FAQ #7.
Unfortunately, some regulatory Regional and Field offices are stating lenders must use Replacement Cost Value (RCV) when calculating the proper amount of flood insurance. I'm aware of guidance from the Dallas OCC Regional Office and the Dallas, Philadelphia and San Francisco Districts of the Federal Reserve Board stating this incorrect information. Now that sounds pretty bold of me (I'm disagreeing with all of those regulatory offices) yet there's no question in my mind that using RCV is NOT what the National Flood Insurance Act requires nor is it a requirement of the regulation. It is simply a "best practice" published in the 2007 FEMA Guidelines (see page 27).
When I have the chance to talk to regulators about this issue, they have always "come around" and "softened" their approach. Many have said they are backing off on this issue - at least until the regulatory FAQs are finalized (we're hoping by the end of 2008) or other guidance is issued.
I'm not against purchasing RCV when it will pay. If my home flooded, I would hope I was adequately insured. However, you can't get a RCV payout on non-primary dwellings and even in many instances when you are insuring a primary dwelling. So why should a lender require insurance that won't pay? I believe to require insurance when it won't pay is not only a bad PR issue for lenders, but it can also be seen as a deceptive act - something none of us want to be associated with. So why would our regulatory agencies ask us to do just that? Good question, one that I don't have the answer to.
Stay tuned and good luck.