Why Flood insurance is About To Get More Complicated

January 6, 2017 at 9:53 am Leave a comment

floodComments are due today on proposed regulations implementing one of the most important provisions of the Biggert-Waters Act. This is an example of a regulation that may be a wolf in sheep’s clothing.

Here is why. The federal law is designed to spur the growth of a truly competitive flood insurance market by allowing insurance companies to sell their own flood insurance directly to the consumer. Since 1993, insurance companies have been allowed to effectively act as agents for the program by selling National Flood Insurance Program policies.  Federal law now mandates that lenders must accept private flood insurance so long as the insurance meets NFIP standards.  The question is who is going to be responsible for making the determination that policies meet the necessary requirements? And who is going to be on the hook in the event that such policies do not? Which brings us to the regulations that are currently being considered.

The final mandate should include a “Safe Harbor” lobbied for by the industry.  Under this approach, insurance companies would certify to lenders that their policies meet federal requirements and insurance companies would be on the only ones on the  hook when an irate member calls after experiencing a natural disaster and finds out that their coverage is inadequate.

Regulators are squeamish about this approach; instead, they want to provide lenders a “compliance aid.” The regulations would give credit unions the option of mandating that a private flood insurance policy includes a written summary that demonstrates how the policy meets NFIP’s requirements by identifying the relevant provisions. They could also mandate the inclusion of a  “provision or endorsement” that the policy meets the definition of flood insurance.  Unfortunately  the regulations also  require that credit unions verify in writing that the identified provisions satisfy the definition of flood insurance.  This qualifier, if it remains, in the regulation, means that your credit union will have to have the expertise to independently verify that a policy meets the  National Flood Insurance criteria.

In other words, in order to expand the use of truly private flood insurance regulators are proposing that lenders  be placed in a  Heads I win Tells you Lose situation:  They will face heavy fines for refusing to accept valid flood insurance and face the possibility of lawsuits in the event that they accept flood insurance which ultimately doesn’t meet the criteria as mandated by the NFIP.

In fairness to the regulators, NFIP insurance is a very unique animal. Almost all insurance is regulated on a state-by-state basis. In contrast the NFIP has always been administered by the federal government. But this very unique aspect of the program doesn’t explain why regulators aren’t willing to give lenders a complete Safe Harbor to the extent that they rely in good faith on insurance companies’ representations. After all, insurance companies and the federal government are the experts when it comes to this insurance, not lenders.

Entry filed under: Regulatory.

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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