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What does it mean to be fully insured when it comes to flood insurance? Hi, Dave Dickinson with Bankers Compliance Consulting. I want to talk about insurable value and making sure that you have enough flood insurance when you are complying with the Flood Insurance Act. One of the things that a lot of lenders don’t understand is this term fully insured. Well, that’s really an insurance industry term that means you’re within 80% of insurance to value. So if you’re within that grace of 80%, then they’re going to say you’re fully insured and then if there’s a damage, the agency is going to provide basically full coverage. When it comes to flood insurance, we can get by with the lesser of these three things, and that is the loan amount, insurable value or the maximum that they can purchase through the National Flood Insurance Program. So when you plug in those numbers, sometimes you come up with scenarios where the lender is not requiring the borrower to have a fully insured value on that property.
Take for instance, that we have a value of a structure of a $100,000, the insurance covers only $50,000, why? Because maybe they own their place free and clear, or they paid it down to $50,000, but that’s the loan balance. Now, that means they get a percentage coverage, in this case, 50% coverage because they’re not fully insured, they’re not within that 80% of insurance to value. So now let’s imagine that there’s some damage that occurs and let’s say there’s $30,000 worth of damage. Now you’re thinking logically, they’ve got a $50,000 policy, there’s $30,000 of the damage, we should be able to have a check for 30,000. They didn’t fully insure, they percentage based covered this property. So we do the math, $30,000, they get 50% coverage or $15,000 less the deductible, whatever they might have on that.
So you need to be aware that you’ve got $100,000 property here, you’re going to get a check for $15,000, are they going to be able to come up with the other $15,000 minus also the deductible in there? If not, you’ve got a Safety and Soundness issue because that’s your collateral. Now there’s some things to think about in do you make people buy fully insured even though the reg requires less, and that’s pretty tough to do if competitors aren’t doing it, but I wanted you to be aware of this terminology called fully insured and what that means and the risks associated when you don’t have it. I hope this helps your understanding about the flood insurance requirements. Thanks for watching.