Federal Regulations

One factor to consider when purchasing a flood insurance policy is federal regulations concerning flooding. Federal regulations affect flood insurance stakeholders – policy holders and lenders – in four key areas: flood hazard determination; purchase requirements; reporting requirements; and coverage restrictions. All these should be covered in a quote.

First, for home and business owners who live in a Special Flood Hazard Area (SFHA), lenders are required to conduct a flood hazard determination before closing on a mortgage loan. Lenders also must maintain written records of the flood hazard determination for the duration of the loan.

Next, federal regulations require that all property owners, in an SFHA, purchase insurance to cover flood damage. The minimum amount of coverage that is required is the lesser of either the outstanding balance of the loan or the maximum amount of insurance available through the NFIP. The coverage amount should always be at least the value of the property being insured.

Third, federal regulations also require any lenders, who make loans to any property owners who are required to have this type of insurance, to report their identities to FEMA whenever "a loan is made, increased, extended, renewed, sold or transferred, or if the loan servicer is changed during the life of the loan." A copy of the notice must be sent to the insurance company or agent that issued the policy.

Fourth, FEMA allows flood insurance to be purchased at any time, whether before, during, or immediately after, a flood. A 30-day waiting period exists between the payment of the premium and the effective date of coverage. However, this insurance does not cover losses from a flood that occurs on the first day of the policy term. FEMA forbids a coverage increase during a loss in progress.

Changes in any of these four areas of federal regulations regarding flood insurance can directly increase or decrease the amount of premiums paid in an SFHA or non-SFHA; can modify the existing SFHAs; and can impact the relationship between a property owner and lender.

Consequently, the impact of federal regulations is an important factor for a potential purchaser of flood insurance.