Flood Insurance – Part 3

Laurie Jorgensen – Senior Compliance Auditor

This is part 3 of Laurie’s series on Flood Insurance Requirements. See Part 1, which gives a general overview of the requirements here, and part 2, a deep dive into the Standard Flood Hazard Determination Form here.

This month, we are going to discuss the amount of flood insurance coverage that is required when the dwelling or structure is located in a flood zone. Flood insurance continues to be a complex component of real estate lending. For financial institutions operating in communities that participate in the National Flood Insurance Program (NFIP), understanding how much and when flood insurance is required is fundamental to maintaining regulatory compliance.

Dwellings or structures on property located in a flood zone beginning with an A or a V require flood insurance. These areas represent higher risk, including coastal regions with the potential for storm surge. Flood insurance is not required for properties located in moderate or minimal risk zones such as B, C, or X; although coverage can still be purchased voluntarily. Lenders may accept policies issued through the NFIP or from private insurers offering comparable coverage that meets regulatory standards.

Flood coverage limits are based on the type of property, whether the contents of the building will be covered, and whether the property is residential or commercial.

Residential Properties

• Maximum structure coverage: $250,000
• Maximum contents coverage: $100,000 (required only if contents secure the loan)

These limits include additions, and attached structures such as a decks, carports, or garages must be included in the insurable value calculation. Even uninhabitable dwellings located on the securing property may require coverage. For residential condominium buildings, the $250,000 coverage is per unit.

Residential Building Classifications

The following definitions apply to a residential building for flood insurance purposes:

• A single-family dwelling is defined as a residential dwelling or a mixed-use dwelling where 50% or more of the building is devoted to a residence.  
• A 2-4 family residential building is defined as a building containing 2-4 residential units and non-residential use of the building is limited to less than 25% of the building’s total floor area. Apartment buildings and condominiums are included in this category. Hotels and motels with normal room rentals for less than six months are excluded.
• Other residential buildings are defined as buildings with five or more residential units or a mixed-use building where less than 25% of the total floor area is devoted to non-residential purposes. These include condominium and apartment buildings, hotels, motels, tourist homes, dormitories, assisted-living facilities, and rooming houses where normal occupancy of a guest is six months or more.

Non-Residential Properties

• Maximum structure coverage: $500,000
• Maximum contents coverage: $500,000 (required only if contents secure the loan)

Non-Residential Building Classifications

Non-residential buildings are defined as:

• A commercial business that carries out activities that generate income and coverage is for:
  • A building not designed for residential or habitation purposes;
  • A mixed-use building in which 50% or less of the total floor area is devoted to residential uses if the residential building is a single-family unit; or 75% or less of the total floor area within the buildings for all other residential units;
  • The building is designed for office or retail space, wholesale, hospitality, or similar uses; or
  • Condominiums, apartment buildings, hotels, motels, tourist homes, or rooming houses where the normal occupancy of a guest is less than six months.

Non‑residential buildings may include office and retail space, hospitality facilities, houses of worship, schools, agricultural structures, and more.

Determining Insurable Value

The insurable value of a property may be more or less than the $250,000 or $500,000 limits. Accurate coverage calculations begin with establishing the insurable value of each structure securing the loan. Insurable value is determined by:

• An appraisal on the cost value (not market value);
• A construction cost calculation;
• The insurable value used in a hazard insurance policy (adjustments may be necessary, as this value does not usually include the value of the foundation); or
• Another reasonable approach that is supportable.

Calculating Coverage

Lenders must ensure that flood insurance meets the minimum required amount, which is the lowest of:

1. The outstanding principal balance of the loan
2. The NFIP maximum coverage limit
3. The insurable value of the structure

Here are some examples of how to determine how much flood insurance coverage is required. These examples will apply to most of the loans made by your bank or credit union.

Example 1: For a residential building in an SFHA and a participating community with no other structures, the maximum amount of required flood insurance coverage is $250,000. The lowest value between the loan’s outstanding balance, the maximum amount required, and the insurance value is the minimum amount of insurance required. For example, if the loan’s outstanding balance is $200,000, the maximum amount of insurance required is $250,000, and the insurable value is $280,000; $200,000 is the minimum amount of insurance required.

Example 2: If a residential loan also includes multiple buildings securing a loan, the calculations expand to include at least some of the other buildings. Each building has its own coverage limit. In this example, there is a residential structure with an insurable value of $150,000; that structure requires $150,000 in flood insurance. There is also a barn, used for commercial purposes, with an insurable value of $100,000; that structure requires $100,000 in flood insurance. Finally, there is a commercial silo with an insurable value of $600,000; that structure requires $500,000 in flood insurance. The total amount of flood insurance required for this example is $750,000. If the contents of any of these structures also secure the loan flood insurance on the contents will also be required.

Example 3: Contents insurance is required when the contents of a building are also collateral for a loan; for example, a commercial loan for a restaurant that includes all equipment as collateral. If the building has an insurable value of $1,000,000, then $500,000 of flood insurance coverage is required for the structure. If the equipment has an insurable value of $50,000, then $50,000 of flood insurance coverage for the equipment is required. The total amount of flood insurance required is $550,000.

Example 4: Mixed-use properties are used for both residential and non-residential purposes. If a residential building is not eligible for a Residential Condominium Building Association Policy (RCBAP), then the maximum available coverage through the NFIP is $500,000. For example, a loan is secured by an apartment building with a convenience store on-site and five apartments with occupancy expected to be six months or more. It has an insurable value of $1,000,000. This structure would require $500,000 in flood insurance. The total square footage of the building is 15,000 square feet, and the convenience store occupies 7,000 square feet, which is 46.67% of the total floor area of the building. This example meets the 25% threshold established in the regulations to classify this loan as a mix-use building. Because mixed‑use properties follow non‑residential limits, the NFIP maximum is $500,000, which becomes the required coverage amount.

Accurately determining flood insurance requirements is essential not only for regulatory compliance, but also for protecting borrowers, lenders, and communities from significant loss. As lending scenarios become more complex, financial institutions must stay informed about NFIP rules, structure classifications, and coverage calculation methods.

For assistance navigating these requirements, Compliance Services Group is available to support your bank or credit union with all aspects of flood insurance compliance, ensuring your institution remains protected and compliant.  If you have any questions or would like to explore what a Flood Act Compliance Audit could do for your institution, please contact us. 

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