Six Unique Flood Insurance Definitions

By Christopher J. Boggs, CPCU, ARM, ALCM

September 21, 2009

NFIP flood policies narrowly and specifically define specific terms to make them apply uniquely to the flood insurance policy. As with any policy, since the federal government controls the definition of some extremely important policy terms, more than a cursory review of the terms is required.

Flood: A general and temporary condition of partial or complete inundation of two or more acres (general) or two or more properties (at least one of which is the policyholder's property) of normally dry land area (temporary) from the overflow of inland or tidal waters, unusual and rapid accumulation or runoff of surface waters from any source; or

mudflow.

Flood also includes the collapse or subsidence of land along the shore of a lake or similar body of water as a result of erosion or undermining caused by waves or currents of water exceeding anticipated cyclical levels that result in a flood as defined above.

Four concepts on which to focus in this definition are:

The definition states "two or more properties…," it does not state "structures" or who the owner of the second property must be. If the contiguous flood crosses onto another's property, the inundation qualifies as a "flood;"

The "Southfork Ranch" provision (where the Ewings lived in TV's Dallas). Insureds that own a large amount of land may never qualify for coverage without this two-acre provision;

Mudflow in the flood policy is not synonymous with mudslide. It means a river of liquid and flowing mud on the surfaces of normally dry land areas; and

The collapse or subsidence of land does not mean erosion over long periods of time; this is sudden erosion caused by the inundation by flood waters.

Basement: Any area of the building, including any sunken room or sunken portion of a room, having its floor below ground level (sub-grade) on all sides. A very important definition because there is no coverage for any personal property located in a basement, regardless of the flood zone. Overall, there is very limited coverage for property in a basement. Some coverage is extended to property necessary for the operation of the structure and attached to a power source such as electrical equipment (outlets, switches, junction boxes and circuit breakers), HVAC and AC systems, water heaters, pumps, clothes washers and dryers and freezers (not walk-in).

Coverage for real property in basements is limited to: 1) Drywall for walls and ceilings in a basement to include the cost of labor to nail it, unfinished, un-floated and not taped, to the framing; 2) Elevators, dumbwaiters, and related equipment, except for related equipment installed below the base flood elevation after September 30, 1987; 3) Nonflammable insulation in a basement; 4) Stairways and staircases attached to the building, not separated from it by elevated walkways; and 5) Footings, foundations, posts, pilings, piers, or other foundation walls and anchorage systems required to support a building.

To be considered a basement, the area must be below ground level on ALL sides. Walkout basements not requiring a step up to grade are not considered a basement by definition; that is just the first floor and the reference point for flood rating purposes.

Conversely, the building may be above grade but have an area that is dug into the ground making that area below grade and a basement by definition. Coverage for property is such areas are limited as detailed above. Examples may include a sunken living room or a recessed production area.

Sunken living rooms were fashionable in the 1970's and are returning to vogue in some areas of the country. If these areas are below grade even though the rest of the house is above, they are considered basements and none of the property located in them is covered for damage resulting from flood.

Recessed production areas may be necessary due to the weight of the equipment or the process of manufacturing. Such large scale operations may require some excavation to assure the production floor is on solid footing. If the area is below grade on all sides due to this excavation, it is considered a basement; there will be no coverage for the machinery or equipment in such areas.

**Sometimes, computer rooms are moved to a basement due to the need for security, segregation or to avoid damage by sprinkler leakage. None of the computer equipment kept in these areas is covered by the NFIP policy if flood damage occurs.

Elevated Building: A non-basement building with its lowest elevated floor raised above ground level by foundation walls, shear walls, posts, piers, pilings, or columns. Personal property and real property located below the reference point in an elevated structure are subject to the same conditions and limitations as property located in a basement. Additional problems are created if the reference level is altered in an elevated structure.

Pre-FIRM and/or Post FIRM:

These terms describe the date construction or substantial improvement was completed compared against the date the initial Flood Insurance Rate Map (FIRM) was effective.

Structures completed or substantially improved prior to the issuance of the community's first FIRM are considered Pre-FIRM; and

Structures completed or substantially improved after the issuance of the community's first FIRM are considered Post-FIRM.

Rates differ based on a structure's classification as Pre-FIRM or Post-FIRM. Grandfather laws are also affected by Pre or Post-FIRM designations.

Post-FIRM structures MUST comply with the floodplain management requirements and the FIRM in effect at the time of construction. Nothing should be done to the structure to alter it in violation of the subject FIRM.

Grandfather Laws: These rules were established for the benefit of policyholders who have either built in compliance with the FIRM in effect at the time of construction, and/or have maintained continuous coverage. Insureds qualifying under Grandfather Laws have the option of using the most favorable rating data, either: 1) the most recent Flood Insurance Rate Map; or 2) the rating criteria in effect when the structure was built or coverage was first obtained. The ability to procure coverage based on prior rating criteria is extremely important in at least three situations.

The structure is remapped into a special flood hazard area where it was previously part of a non-special flood hazard area (flood insurance may be required by the mortgagee where it wasn't before);

The Base Flood Elevation (used for rating) changes. The difference between the BFE and the reference point may be less; or the reference level may even move to below the BFE as a result of the remapping, exponentially increasing the cost of flood coverage; or

The expansion of Coastal Barrier Resource System areas.

Qualifications under Grandfather Laws differ based on the insured's history of flood coverage. Insureds already covered by an NFIP policy need only meet a short list of requirements to qualify for Grandfather status:

The structure must have been built in compliance with the FIRM in effect at the time of construction;

Flood coverage must have been continuous; and

No alterations can have been made changing the reference level.

If there has not been previous flood insurance or a prior policy was not renewed, the structure owner can still qualify; but the requirements are a bit more stringent. Rates can be based on the FIRM and Base Flood Elevation in effect when the building was constructed provided:

Proper documentation is submitted indicating the date of the FIRM (when constructed) and the Zone applied at the time of construction;

It must be proven through documentation from a community official that the building was constructed in compliance with the map and flood plain management requirements in effect at the time it was built; and

Proof must be supplied that the building has not been altered in any way that would have changed the original reference point level.

Two actions of the building owner will negate the ability to qualify for the preferred rates offered by Grandfather Laws:

If an elevated building is altered changing the reference level to below the Base Flood Elevation; or

The building undergoes substantial improvement or suffers substantial damage (both terms defined below).

A campaign of remapping and updating FIRMs is underway due to outdated information on current Flood Insurance Rate Maps. Development, updated flood protection and even inadequate flood protection are driving the need for this remapping. More insureds may be pulled into special flood hazard areas. As remapping continues, understanding Grandfather laws is going to become more important for agents.

Substantial: FEMA defines substantial to mean an amount that exceeds 50 percent of the structure's MARKET VALUE (defined below). This applies to "Substantial Improvement" and "Substantial Damage" as follows:

Substantial Improvement: Any reconstruction, rehabilitation, addition, or other improvement to a building, the cost of which equals or exceeds 50 percent of the market value of the building BEFORE the start of construction of the improvement. Substantial improvement includes buildings that have incurred "substantial damage," regardless of the actual repair work performed. The term does not, however, include either any project for improvement of a building to correct existing state or local code violations or any alteration to a "historic building," provided that the alteration will not preclude the building's continued designation as a "historic building."

Substantial Damage: Damage of any origin whereby the cost of restoring the building to its before-damaged condition would equal or exceed 50 percent of the market value of the building BEFORE the damage occurred.

Market value is negotiated between and agreed to by a willing buyer and a willing seller. It can fluctuate up and down based on the economy, condition, use or need and has little relation to the true cost to rebuild a particular structure. Beyond the fact that market value has no fixed basis, two problems are created when market value is used to calculate substantial improvement: 1) improvements do not have to be a structural in nature to increase the market value by 50 percent. The owner may completely remodel and update the kitchen and bathrooms; this could easily increase market value by at least 50 percent; and 2) who knows what the market value was BEFORE the improvements were completed? Unless an analysis was completed by a licensed appraiser before improvements began, this is just a FEMA-induced guess.

How CoBRA Zones and OPA's Affect Flood Coverage

By Christopher J. Boggs, CPCU, ARM, ALCM

September 23, 2009

Rapid development in coastal areas, on barrier islands and near habitat-rich wetland areas prompted the Federal government to pass the Coastal Barrier Resources Act of 1982 (CBRA). This was a legislative effort to minimize loss to human life, wasteful Federal expenditures and damage to fish, wildlife and natural resources in protected areas by discouraging further development. Coastal Barrier Resource System (CBRS) units were delineated by Congress with help from agencies within the Department of the Interior creating areas of land subject to "passive" Federal protection.

Congress expanded the CBRS units with the adoption of the Coastal Barrier Improvement Act of 1990 (CBIA). This act added CBRS units not part of the original act plus it created additional zones known as "Otherwise Protected Areas" (OPA's).

Otherwise Protected Area boundaries generally follow Federal, state or local park boundaries and include land used for recreation or conservation. However, OPA's are not always restricted to these properties. Congress intentionally incorporated undeveloped land located contiguous to defined park land into OPA's. Individuals and private entities own some of this undeveloped land.

These two acts combine to remove 3.1 million acres of land (1.3 million CBRS and 1.8 million OPA's) from eligibility for Federal flood protection through the NFIP.

Federal Funds in Protected Areas

Federal spending is strictly limited in CBRS units. Federal monies are available only to fund emergency assistance (not the same as disaster assistance), military activities necessary for national security, exploration for and removal of energy resources and the maintenance of existing Federal navigation channels. Individuals and entities within a CBRS unit cannot receive Federally-backed loans (i.e. VA, FHA, and Fannie Mae or Freddie Mac loans) nor is Federal flood insurance available.

Only one restriction on Federal money applies in Otherwise Protected Areas. The only limitation on Federal funding in an OPA is Federal flood insurance. Structures located in an OPA cannot purchase flood coverage through the National Flood Insurance Program.

A 2002 US Fish and Wildlife Service study estimates that from 1983 through 2010 Federal fund restrictions mandated by these Acts will have resulted in $1.3 billion in savings to taxpayers. Restrictions on Federal spending for roads, wastewater systems, potable water supply, disaster relief and flood insurance in these restricted areas combine to create this savings.

Grandfather Laws in CBRS and OPA's

Structures existing prior to the adoption of these Acts garner grandfather status and remain eligible for Federal flood coverage provided they were built or substantially improved on or before specified dates and have not suffered substantial damage. Grandfather status is granted as follows:

To any structure in a CBRS unit created by the CBRA of 1982 built or substantially improved on or before October 1, 1983;

To any structure in a CBRS unit added by the CBIA of 1990 built or substantially improved on or before November 1, 1990; or

To any structure in an OPA built or substantially improved on or before November 16, 1991.

Grandfathered buildings suffering substantial damage, from any hazard (fire, wind or flood), or substantially improved after the above dates lose eligibility under the grandfather laws and no longer qualify for flood coverage through the NFIP. Substantial damage and substantial improvement were defined above.

Passive Federal Protection

Restrictions on the availability of Federal money for loans or Federal flood coverage in these protected areas do not preclude the use of "free market" loans or open market flood insurance. Further, these laws do not disallow building and development in these areas; they just don't allow the use of Federal dollars to finance, insure, build roads to or supply potable water to such development.

Owners are allowed to develop their property as they desire (subject to building codes and laws) but without any federal money. The government did not take away property rights, just the availability of Federal funds, thus the term "Passive Federal Protection."

Determination of Coverage Eligibility

Only the US Fish and Wildlife Service can officially determine if a property is located in a CBRS unit or an OPA. Although these zones are indicated on applicable Flood Insurance Rate Maps (FIRMs), boundary lines on older FIRMs are only approximations and can be off by as much as 100 yards (affecting as many as three houses). No local surveyor, building inspector or other town official has the authority to make an official determination.

Standard flood insurance policies require that if ANY part of a structure is in a Special Flood Hazard Area (SFHA), the entire building must be rated in the higher risk zone as per the prior discussion. This rule does not necessarily apply in CBRS units or OPA's. If a building is dissected by a CBRS or OPA boundary line, provisions in the law may allow the property to remain eligible for Federal flood coverage. Decisions are made on a case-by-case basis depending on the specific details and history of the property in question.

Additions made to a structure after an eligibility ruling has been made can be problematic. Expansion on the seaward side of the dissecting boundary line could jeopardize the structure's continued eligibility. However, additions on the leeward side should not result in any coverage issues (provided there is no change in the reference level).

States Infected with CoBRA Zones and OPA's

Twenty-one states, Puerto Rico and the Virgin Islands are home to CBRS units or OPA's. States containing these units are: Alabama, Connecticut, Delaware, Florida, Georgia, Louisiana, Massachusetts, Maryland, Maine, Michigan, Minnesota, Mississippi, North Carolina, New Jersey, Ney York, Ohio, Rhode Island, South Carolina, Texas, Virginia and Wisconsin.

The Coastal Barrier Resources Reauthorization Act of 2000 re-codified these areas through 2010. Changes to these boundary lines and locations can only be made by an act of Congress.