Private Flood Insurance

Congress passed the Biggert-Waters Flood Insurance Reform Act of 2012 to increase acceptance of flood insurance from the private sector. Effective July 1, 2019, in addition to traditional NFIP policies, credit unions can accept private flood insurance and mutual aid society flood plans. Prudent credit unions have written policies for accepting private flood insurance, and comply with provisions for accepting such policies and plans under NCUA regulation part 760, Loans in Areas Having Special Flood Hazards .

The updated flood regulation expands acceptance of private flood insurance through two pillars: mandatory acceptance and discretionary acceptance. For more information, review NCUA Regulatory Alert 19-RA-01, Flood Insurance Alternatives.

Mandatory Acceptance

A credit union must accept private flood insurance policies that meet the legal definition of private flood insurance under NCUA regulation § 760.2, Definitions. A credit union may determine that a policy meets the definition of private flood insurance in § 760.2 without further review of the policy if the following statement is included within the policy or as an endorsement to the policy (known as the compliance aid assurance clause):

“This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.”

Policies without the compliance aid assurance clause may still meet the definition of private flood insurance. Credit unions must still perform a review even if the policy does not include the compliance aid assurance clause and must accept the policy if it meets the definition of private flood insurance.

Discretionary Acceptance

Non-Mandatory Private Flood Insurance Policies

A credit union may accept a private flood insurance policy that does not meet the definition of private flood insurance under NCUA regulation § 760.2, Definitions, subject to the following conditions:

  1. The amount of insurance is equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property under the Flood Acts;

  2. Is issued by an insurer that is licensed, admitted, or otherwise approved to engage in the business of insurance by the insurance regulator of the State or jurisdiction in which the property to be insured is located; or in the case of a policy of difference in conditions, multiple peril, all risk, or other blanket coverage insuring nonresidential commercial property, is issued by a surplus lines insurer recognized, or not disapproved, by the insurance regulator of the State or jurisdiction where the property to be insured is located;

  3. Covers both the mortgagor(s) and the mortgagee(s) as loss payees, except in the case of a policy that is provided by a condominium association, cooperative, homeowners association, or other applicable group and for which the premium is paid by the condominium association, cooperative, homeowners association, or other applicable group as a common expense; and

  4. Provides sufficient protection of the designated loan, consistent with general safety and soundness principles, and the credit union documents its conclusion regarding sufficiency of the protection of the loan in writing.

Credit unions can consider the following non-exhaustive factors to determine whether a flood insurance policy provides sufficient protection for a loan.

  • Are the flood insurance policy’s deductibles reasonable based on the borrower’s financial condition?

  • Does the insurer provide adequate notice of cancellation to the lender and borrower to secure timely force placement of flood insurance, if necessary?

  • Are the payment terms and conditions of the flood insurance policy per occurrence or per loss? Are the aggregate limits adequate to protect the credit union’s interest in the collateral?

  • Does the policy comply with applicable state insurance laws?

  • Does the private insurance company have the financial solvency, strength, and ability to satisfy claims?

Mutual Aid Society Flood Plans

A mutual aid society is defined under NCUA regulation § 760.2, Definitions. A credit union may accept a flood plan issued by a mutual aid society if:

  1. The NCUA has determined that such plans qualify as flood insurance for purposes of the Flood Acts;

  2. The amount of insurance must be at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property under the Flood Acts;

  3. The plan covers both the mortgagor(s) and the mortgagee(s) as loss payees; and

  4. The plan provides sufficient protection of the designated loan, consistent with general safety and soundness principles, and the credit union documents its conclusion regarding sufficiency of the protection of the loan in writing.

A prudent credit union reviews a mutual aid society flood insurance plan to determine whether the plan addresses the factors listed above for non-mandatory private flood insurance policies. This review is intended to confirm and document that the mutual aid flood plan provides sufficient protection of the loan.

Last updated on December 01, 2022