Flood Insurance Purchase
Relationship to Floodplain Management Requirements
When HUD recipients comply with the flood insurance purchase requirements, is that sufficient, or must recipients also comply with HUD's floodplain management requirements?
Compliance with mandatory flood insurance purchase discussed below does not constitute compliance with floodplain management requirements discussed elsewhere under the heading of Floodplain Management.
Flood Insurance Purchase: Protecting financial loss due to flooding damage
When is flood insurance purchase mandatory?
Owners of HUD-assisted properties that are located within Special Flood Hazard Areas (SFHA) must purchase and maintain flood insurance protection as a condition of approval of any HUD financial assistance for proposed property acquisition, rehabilitation, conversion, repair or construction. For HUD policy, see 24CFR 58.6(a) and 24 CFR 50.4(a)(2). The standard documentation for compliance is the policy "Declarations" form issued by the National Flood Insurance Program (NFIP) or issued by any property insurance company offering coverage under the NFIP. In cases, where a HUD grantee provides assistance to a SFHA-property owner, the grantee's file for any such property shall contain "proof of purchase" of flood insurance protection. For guidance, see" Mandatory Purchase of Flood Insurance Guidelines" issued by the Federal Emergency Management Agency (FEMA).
Special Flood Hazard Areas
Where are Special Flood Hazards Areas (SFHA) located?
Information on where SFHA are located is available on Flood Insurance Rate Maps (FIRM) published by the Federal Emergency Management Agency (FEMA). The SFHA is represented on the flood map by darkly shaded areas designated with the letter "A" or "V."FEMA uses engineering studies to determine the delineation of these areas or zones subject to flooding. The flood maps are available for public review at the local planning agency or building permit agency. Local appraisers and companies that make flood hazard determinations for banks and other lenders in connection with property loans also have access to these maps and data bases.
What duration and amount of flood insurance coverage is required?
The Flood Disaster Protection Act of 1973 ( 42 U.S.C. 4001-4128) as amended by the National Flood Insurance Reform Act of 1994 (Pub.L. 103-325, 108 Stat. 2160) prescribes the duration and dollar amount of flood insurance under Sections 3 and 102 of the Act.
Duration of Coverage:
The statutory period for such coverage may extend beyond project completion. For loans, loan insurance or guaranty, coverage must be continued for the term of the loan. For grants and other non-loan forms of assistance, coverage must be continued for the life of the property, regardless of transfer of ownership of such property. Section 582(c) of the Community Development and Regulatory Improvement Act of 1994 mandates that "...The requirement of maintaining flood insurance shall apply during the life of the property, regardless of transfer of ownership of such property." ( 42 U.S.C. 5154a)
Dollar Amount of Coverage
For loans, loan insurance or guarantees, the amount of flood insurance coverage must at least equal the outstanding principal balance of the loan or the maximum limit of coverage made available under the National Flood Insurance Program, whichever is less. For grants and other non-loan forms of assistance, the amount of coverage must be at least equal to the development or project cost (less estimated land cost, if any) or to the maximum limit of coverage made available by the Act with respect to the particular type of building involved (i.e., single family, other residential, or non-residential), whichever is less. The development or project cost is the total cost for acquiring, constructing, reconstructing, repairing, or improving the building. This cost must include both the Federally assisted and non-Federally assisted portion of the cost, including any machinery, equipment, fixtures, and furnishing. If the Federal assistance includes any portion of the cost of any machinery, equipment, fixtures or furnishing, the total cost of that item must be covered.
Are there any exceptions to the flood insurance purchase requirements?
There are four exceptions: (a) formula grants made to States; (b) State-owned property; (c) small loans ($5,000 or less); and (d) assisted leasing that does not involve repairs, improvements, and acquisition. Each category of exception is explained as follows:
- HUD State-administered assistance such as Community Development Block Grants (CDBG), Emergency Shelter Grants (ESG), and HOME Investment Partnership Grants are considered "formula grants made to States." By law, "formula grants made to States" and along with "general and special revenue sharing" are exempt from the flood insurance purchase requirements by Section 3(a)(3) of the Act. For HUD policy, see 24 CFR 58.6(a)(3).
- Flood insurance purchase is not required for any State-owned property that is covered under an adequate State policy of self-insurance satisfactory to FEMA as published in a list of States to which Section 102(c)(1) of the Act applies. Local governments and other organizations are not authorized by this Act to be self-insurers under the National Flood Insurance Program. If the State agency has authority under State regulations, it may require the property owner to purchase and maintain flood insurance to protect the federal investment benefiting HUD assisted SFHA-property.
- Flood insurance is not required for loans having an original outstanding principal balance of $5,000 (or less) and repayment term of 1 year (or less) as authorized by Section 102(c)(2) of the Act.
- Flood insurance is not required for HUD assisted leasing of a building or structure provided that the assistance is not used for repairs, improvements, and acquisition.
Effect of Non-participation in the National Flood Insurance Program
What if flood insurance is not any longer available in the community in which the assisted SFHA property is located?
Section 202(a) of the Act prohibits the approval of HUD assistance for a property located within the Special Flood Hazard Area unless the community in which the SFHA is situated is then participating in the National Flood Insurance Program (NFIP). Check the website for a community's status in the NFIP and dates of the current flood insurance rate maps. Information is also available from the FEMA Regional Office serving that community or from local planning agency or building permit agency.
Federal Disaster Relief Assistance
What if the property owner failed to maintain flood insurance on a SFHA property previously assisted with Federal disaster relief assistance?
No Federal disaster relief assistance made available in a flood disaster area may be used to make a payment (including any loan assistance payment) to a person for repair, replacement, or restoration for damage to any personal, residential, or commercial property if that person at any time has received flood disaster assistance that was conditional on the person first having obtained flood insurance under the applicable Federal law and subsequently having failed to obtain and maintain flood insurance as required under applicable Federal law on such property (Section 582(a) of the Act). For HUD policy, see 24 CFR 58.6(b).
Does HUD financial assistance for small repairs require compliance with the flood insurance purchase requirement?
Yes. or improvements of any publicly or privately owned SFHA building or mobile home requires compliance with the flood insurance purchase requirements (see Section 3(a)(4)) of the Act.
Does HUD financial assistance for maintenance activities require compliance with flood insurance purchase requirement?
No. HUD assisted "routine maintenance" activity for a SFHA building does not require compliance with the flood insurance purchase requirement. "Routine maintenance" activities should be carefully distinguished from "repair" or "improvement" of any SFHA building. "Routine maintenance" merely keeps a building in good order and an ordinary, efficient operating condition. It does not materially add to the value of a structure, appreciably prolong its useful life, or adapt it to new uses, whereas "repairs" or "improvements" might do so. Some examples of building maintenance are:
- painting either the exterior or interior of a building,
- fixing gutters or floors,
- mending leaks or plastering, and
- replacing thermostats, broken windowpanes or door locks.
In contrast, adding a room, putting in a new system of plumbing or electrical writing or air conditioning, installing a new roof, replacing a boiler, or fixing of damages sustained by a building from flooding or other hazards are considered to be "repairs" or "improvements". However, if items that would otherwise be considered "routine maintenance" are done as part of an extensive remodeling or renovation of a building, the entire job is considered "a repair" or "an improvement". (May 5, 1989 from CPD Deputy Assistant Secretary to Regional Administrators: Attn Regional Environmental Officers)
Environmental Exemptions and Categorical Exclusions
Is compliance with flood insurance purchase requirements required for the exempt activities listed in 24 CFR 58.34 or to the categorical exclusions listed in 24 CFR 58.35?
Yes. The flood insurance purchase requirements are cited at 24 CFR 58.6(a) and (b) as "Other requirements" in order to highlight that flood insurance is not regulated by provisions of the rule that govern environmentally exempt activities cited at 24 CFR 58.34 or environmental categorical exclusions cited at 24 CFR 58.35.
Homeowner Property Casualty Insurance
Doesn't the homeowner property casualty insurance cover financial loss due to flooding damage?
Generally, homeowner and other property casualty insurance policies do not provide coverage for potential financial loss that may be caused by flooding damage. Many of the private insurance companies are now marketing policies offered by the National Flood Insurance Program along with their own property casualty insurance policies. FEMA refers to these companies as "Write-Your-Own (WYO) Companies, 44 CFR Part 62, Subpart C.
HUD Subsidy and Limited-income Property Owners
Can HUD grant assistance be used to subsidize the purchase and maintenance of flood insurance protection for low-income owners of SFHA property?
Yes, only if the specific HUD program regulations allow grant assistance to be used for this purpose. For example, CDBG program regulations at 24 CFR 570.202(b)(7)(iii) specifically allow the use of grant assistance for "flood insurance premiums for properties covered by the Flood Disaster Protection Act of 1973, pursuant to 24 CFR 570.605" in connection with rehabilitation and preservation activities. Limited income homeowners and small business owners without other financial assets may need such financial protection, if their property is located within the Special Flood Hazard Area. In the case of hardship cases, the responsible entity or the recipient agency (if other than a responsible entity) is encouraged to provide such subsidy, if warranted.