Flood Insurance Fundamentals: Part 8

Flood Insurance Fundamentals: Part 8 is the unexpected continuation of the “flood of information” we received in Part 7 of this comprehensive series on NFIP Flood Insurance

In this Final part, and I really mean it this time, we will cover the weighty but important subject of Loss Settlement Provisions in the Standard Flood Insurance Policy (SFIP)

Let’s not waste time and just dive right in!

Loss Settlement Provisions

The Loss Settlement Provisions in the Standard Flood Insurance Policy (SFIP) outline how the insurance company will determine the amount paid for a covered loss. 

• In this Part we will cover:
  • Minimum Deductables
  • The three approaches to loss settlement
  • The co-insurance clause in the RCBAP

Minimum Deductibles

A deductible is the amount of money a policyholder must pay out-of-pocket before their insurance coverage kicks in to cover the remaining costs of a claim

• Minimum building deductibles vary based on:
  • Building occupancy
  • Pre-Firm or Post Firm construction
  • Statutory discounts
  • Amount of building coverage

Starting With The Amount of Building Coverage Variable

The table provided below represents the available deductibles that fall under the minimum deductible variable category of “Amount of building coverage”

The bold numbers are the minimum Deductibles available

Note: This is an excellent time to remember the Pre-Firm Discount that we discussed in Part 6

Standard Building Options

Exception Building Options: Pre-FIRM Building Receiving Any Statutory Discount

Building Coverage of $100,00 or Less	Building Coverage Over $100,000	Building Coverage of $100,000 or Less	Building Coverage Over $100,000
$1,000	$1,250	$1,500	N/A
$2,000	$2,000	$2,000	$2,000
$5,000	$5,000	$5,000	$5,000
$10,000	$10,000	$10,000	$10,000

Note: Deductible doubles for building under construction prior to being walled and roofed

Building Occupancy Variable: Table 1

The following table will show the available deductibles based on building occupancy for a Single-Family Home, Residential Manufactured/Mobile Home, Residential Unit, and Two-to-Four Family Building

Effectively, this applies to buildings covered under the NFIP’s Standard Flood Insurance Policy: Dwelling Policy

Note: I have added a column for the Contents Option that is purchased separately from the Building coverage

Standard Building Options	Standard Building Options	Exception Building Options: Pre-FIRM Building Receiving Any Statutory Discount	Exception Building Options: Pre-FIRM Building Receiving Any Statutory Discount	Contents Options
Building Coverage of $100,00 or Less	Building Coverage Over $100,000	Building Coverage of $100,000 or Less	Building Coverage Over $100,000	Contents Coverage of Any Amount
$1,000	$1,250	$1,500	N/A	$1,000
$2,000	$2,000	$2,000	$2,000	$2,000
$5,000	$5,000	$5,000	$5,000	$5,000
$10,000	$10,000	$10,000	$10,000	$10,000

Note: Deductible doubles for building under construction prior to being walled and roofed

Building Occupancy Variable: Table 2

The following table will show the available deductibles based on building occupancy for an Other Residential Building, Non-Residential Building, Non-Residential Manufactured/Mobile Building, and a Non-Residential Unit

These building occupancies correlate with using the General Property Form covered in Part 7

Note: The building occupancies using this form and purchasing both Building and Contents Coverage have separate but equal deductibles that, with the exception of Building Coverage of $100,000 or Less, will generally cost more than the minimum deductible available for Building Occupancies covered by the Dwelling Form

Standard Building Options	Standard Building Options	Exception Building Options: Pre-FIRM Building Receiving Any Statutory Discount	Exception Building Options: Pre-FIRM Building Receiving Any Statutory Discount	Contents Options
Building Coverage of $100,00 or Less	Building Coverage Over $100,000	Building Coverage of $100,000 or Less	Building Coverage Over $100,000	Contents Only Coverage
$1,000 / $1,000	$1,250 / $1,250	$1,500 / $1,500	N/A	$1,000
$2,000 / $2,000	$2,000 / $2,000	$2,000 / $2,000	$2,000 / $2,000	$2,000
$5,000 / $5,000	$5,000 / $5,000	$5,000 / $5,000	$5,000 / $5,000	$5,000
$10,000 / $10,000	$10,000 / $10,000	$10,000 / $10,000	$10,000 / $10,000	$10,000
$25,000 / $25,000	$25,000 / $25,000	$25,000 / $25,000	$25,000 / $25,000	$25,000
$50,000 / $50,000	$50,000 / $50,000	$50,000 / $50,000	$50,000 / $50,000	$50,000

Note: Deductible doubles for building under construction prior to being walled and roofed

Building Occupancy Variable: Table 3

The following table will show the available deductibles based on building occupancy for Residential Condominium Buildings

This building occupancy correlates with the use of the Residential Condominium Building Association Policy (RCBAP)

Note: There is no “Contents-Only Coverage” option for this Building Occupancy type under the RCBAP

Building-Only Coverage can be provided

The RCBAP allows for coverage of both the building structure and commonly owned contents, with contents coverage being optional

Standard Building Options

Exception Building Options: Pre-FIRM Building Receiving Any Statutory Discount

Building Coverage of $100,00 or Less	Building Coverage Over $100,000	Building Coverage of $100,000 or Less	Building Coverage Over $100,000
$1,000 / $1,000	$1,250 / $1,250	$1,500 / $1,500	N/A
$2,000 / $2,000	$2,000 / $2,000	$2,000 / $2,000	$2,000 / $2,000
$5,000 / $5,000	$5,000 / $5,000	$5,000 / $5,000	$5,000 / $5,000
$10,000 / $10,000	$10,000 / $10,000	$10,000 / $10,000	$10,000 / $10,000
$25,000 / $25,000	$25,000 / $25,000	$25,000 / $25,000	$25,000 / $25,000

Note: Deductible doubles for building under construction prior to being walled and roofed

What Else Do We Know

• When we examine the tables above it becomes clear that there are a few more items we can glean from them:
  • Optional deductibles are available for all of the building Occupancy types
  • There is a Maximum deductible for each building occupancy type
  • There are separate deductibles for the building and the contents
  • And we know that the deductible doubles for a building under construction prior to it being walled and roofed

Now that we are all Deductible Dynamos, let’s go figure out how the NFIP manages loss settlements

Loss Settlements & The SFIP

A Loss Settlement represents the funds provided to a policyholder to compensate for damages or losses covered by the insurance policy

• The NFIP, through the Standard Flood Insurance Policy (SFIP), has three approaches to Loss Settlement
  • Replacement Cost Value (RCV): The cost to replace an item with a brand-new one of similar kind and quality
  • Actual Cash Value (ACV): The value after subtracting depreciation (its current worth).
  • Special Loss Settlements

Start With Replacement Cost Value

Replacement Cost Valuation is only applied by the NFIP to the Dwelling Form and the Residential Condominium Building Association Policy (RCBAP)

Under the Dwelling Form, only one building occupancy type can qualify for RCV

The only building occupancy type that can qualify for RCV under the Dwelling Form is the Single-Family Dwelling

Replacement Cost Loss Settlement Applies to the Dwelling Form:

• Single-Family Dwelling
  • Only the Building can qualify for RCV
  • Contents are considered at ACV
• Requirements to Qualify
  • The dwelling must be the principal residence
  • The home must be Insured-to-Value

Note: The insured or the insured’s spouse must have lived at the residence for at least 80% of 365 days immediately before the loss

Replacement Cost Loss Settlement Applies to the RCBAP:

The Replacement Cost Loss Settlement does apply to residential condominium buildings owned by a condominium association but there are a couple of strings attached

• The Replacement cost loss settlement only applies to condos other than manufactured homes or travel trailers; and
• The condominium association must be insured to at least 80% of its Replacement Cost Value at the time of the loss or to the maximum limit to avoid a co-insurance penalty

The RCBAP Has a Maximum Limit of Insurance

• The RCBAP maximum limit of insurance is either:
  • Equal to the Replacement Cost Value of the building; or
  • $250,000 per unit times the number of units, whichever is less

Note: The $250,000 per unit figure is used because it represents the maximum coverage limit for individual residential units

• Example 1: A Condominium Building has 10 units
  • $250,000 x 10 Units = $2,500,000 Limit
• Example 2: A condominium Building has 100 units
  • $250,000 x 100 Units = $25,000,000 Limit

Note: Cost to rebuild is likely to be higher than the limit set forth above in both cases.  In such cases, the limits of insurance for the RCBAP would be as noted above

The Co-Insurance Penalty Calculation

The RCBAP is the only form with a co-insurance penalty

A coinsurance penalty is a financial consequence imposed on policyholders who underinsure their property

It occurs when the insured amount is less than the required percentage of the property’s actual value, as specified in the policy’s coinsurance clause

If the insured amount is below this threshold, the insurance company reduces the claim payout

• The penalty is calculated using this formula:
  • (Amount of insurance carried / Amount of insurance required) × Loss amount = Claim payout

Actual Cash Value (ACV)

• The Actual Cash Value loss settlement applies to: Basically, everything else
  • Two-to-Four Family Buildings
  • Single-family that are not eligible for RCV
  • Other Residential Buildings
  • Non-Residential Buildings
  • Detached garages
  • Personal property
  • Mobile homes/travel trailers (see Special Loss Settlement)

Why?

• The NFIP applies ACV to these property types for several reasons:
  • Risk Management: ACV helps control the program’s financial exposure by accounting for depreciation.
  • Fairness: It reflects the true current value of items, considering wear and tear over time.
  • Premium Affordability: Using ACV allows the NFIP to offer more affordable premiums while still providing coverage.
  • Consistency: For personal property and certain building types, ACV provides a standardized approach to valuation.
  • Practicality: For non-residential properties and other structures, ACV is often more practical than determining replacement cost.
  • Program Sustainability: By using ACV, the NFIP can maintain financial stability while still offering valuable coverage to policyholders

Special Loss Settlement

The NFIP uses the special loss settlement for mobile homes and travel trailers in order to provide a balanced approach to valuing these structures

• There are some qualifications:
  • The Mobile homes and travel trailers must be at least 16’ wide and at least 600 square feet; and
  • It must be the insured’s principle residence

Why?

• Unique nature: These structures are different from traditional buildings, being more similar to vehicles in terms of depreciation and value.
• Rapid depreciation: Mobile homes and travel trailers typically depreciate faster than conventional homes.
• Balanced approach: Special loss settlement provides a middle ground between replacement cost value and actual cash value for these specific dwellings.
• Fair compensation: It ensures policyholders receive adequate compensation while accounting for the structure’s unique characteristics.
• Risk management: This approach helps the NFIP manage its financial exposure while still providing valuable coverage.
• Encouragement of proper coverage: The special loss settlement incentivizes policyholders to maintain appropriate insurance levels for these structures

When Losses Happen

• Partial Losses: NFIP defines a partial loss as damage to a manufactured home or travel trailer where repair is economically feasible
  • Where repair is economically feasible, the settlement follows Replacement Cost conditions
• Total Loss: A total loss occurs when a manufactured home or travel trailer is either completely destroyed or damaged to such an extent that repairing it to its pre-damage condition is not economically feasible
  • In such cases, the policy pays the least of:
    • The building’s limit of liability shown on the Declaration Page
    • 1.5 times the actual cash value
    • The replacement cost of the dwelling

Wow!  Here We Are At the End of Our Journey

You have completed Part 8 of an 8 part series and they weren’t exactly short.  Look at you go!

You guys are CHAMPS!  I truly hope that you have enjoyed this journey and for your efforts, I will give you the last gems I’ve got to give

Final Thoughts

• Minimum deductibles vary based on policy rating and amount of coverage
• The Standard Flood Insurance Policy features three approaches to loss settlement depending on the form used:
  1. Actual Cash Value Loss Settlement
  2. Replacement Cash Value Loss Settlement
  3. Special Loss Settlement
• The Residential Condominium Building Association Policy is the only policy form with a co-insurance clause

And Just Like That, We’re Done!

Armor Insurance Agency

Want to be explore how you can be protected from floods?

Call: (406) 416-1096

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