Is your home required to have flood insurance FOREVER?

Oftentimes a potential buyer is looking for that certain something special when shopping for a new home or investment property. As a buyer, it is important to fully understand the financial obligation of such a huge commitment. Sometimes that commitment includes a buyer’s acceptance of the property’s increased risk from certain naturaldisasters such as being located a high-risk flood zone (as identified on FEMA’s Flood Insurance Rate Maps, FIRMs). Protecting your new investment against various perils may require improvements to the existing structure and ensuring appropriate insurance is taken out on the property.

The Flood Disaster Protection Act of 1973, made the purchase of flood insurance a mandatory requirement for homes and businesses located in a Special Flood Hazard Area (SFHA) when secured by a loan from a federally regulated lending institution for the life of the loan. Often, this lender requirement is the only motivation for a property owner to purchase flood insurance. Thus, once the financial obligation to the lending institution has ended, many property owners choose to discontinue flood insurance coverage.

However, there is another condition where mandatory flood insurance purchase could still be required, regardless of the existence of a mortgage. Title 44 of the Code of Federal Regulations §206.110(k)(3)(i), states that if a flood damaged property in a SFHA receives federal individual or household assistance for acquisition or construction purposes, then flood insurance coverage must be maintained at the address of a flood-damaged property for as long as the address exists. The mandatory flood insurance requirement remains in effect even if the owner no longer has a mortgage on the property, rebuilds the damaged structure to current floodplain management regulations, and/or sells the property.

Pursuant to the National Flood Insurance Reform Act (NFIRA) of 1994 [Section 582], a seller of a flood damage property (as described in the previous paragraph) is required to notify the buyer in writing of the requirement to obtain and maintain flood insurance. Failure to comply with this requirement may have unintended consequences for both the buyer and seller.

Most property owners are aware that Federal regulated lending institution notify borrowers that flood insurance is required as a condition of a mortgage for structures located in a SFHA. So at first blush, it may seem unnecessary and/or redundant for a seller to have to provide written notification to the buyer that flood insurance coverage is mandatory on the property. However, as the seller, you have a duty to notify the buyer of the flood insurance mandate as a condition of previously receiving disaster assistance.

One method of providing a property’s flooding history and/or any mandatory flood insurance requirement can be through a real estate disclosure statement. A seller’s disclosure statement can be a valuable tool to protect the seller from possible litigation for failing to disclose vital information regarding the property. If a property owner desires to avoid a NFIRA requirement to maintain flood insurance, they must return all disaster assistance received for flood-insurable real and personal property to FEMA no later than 30 days from the date of the award determination letter from FEMA. (Source: FEMA Publication Individual and Household Program Unified Guidance FP 104-009-03, September 2016)

TIPS FOR SELLERS

It is not uncommon for a seller to answer questions on a real estate disclosure with a response such as “NOT TO MY KNOWLEDGE” or “NOT APPLICABLE”. Hawaii Association of Realtors Seller’s Real Property Disclosure Statement form specifically asks if the subject property is located within a SFHA based on FEMA’s FIRM. A SFHA is an area subject to the one-percent annual chance flood and will be identified on the FIRMs as either an A, AO, AH, AE, AE(Floodway), V, or VE flood zone. FEMA has produced FIRMs for the State of Hawaii. Therefore, this question should be answered with a “YES” or “NO” response. The FEMA FIRMs are publicly available through several sources such as FEMA’s National Flood Hazard Layer, FEMA’s Map Service Center, the Department of Land and Natural Resource’s Flood Hazard Assessment Tool, and the individual county GIS websites. If you received disaster assistance on the subject property and/or have knowledge that disaster assistance was provided to a previous owner, then this information should be noted on the disclosure form. Without the proper disclosure, the buyer may unknowingly drop their flood insurance coverage when their mortgage in paid in full or not even obtain coverage on a cash purchase. This could expose the seller to have to repay any disaster relief that may be paid out to the uninsured owner.

TIPS FOR BUYERS

Review the FEMA FIRMs and verify the property’s flood zones. If the property is in a SFHA (A, AO, AH, AE, AE (Floodway), V, or VE flood zones), then it doesn’t hurt to ask the seller, if not already disclosed, whether they were recipients of disaster assistance or have knowledge that a prior owner received disaster assistance. Knowing this information should be an indicator to the buyer that flood insurance may be required beyond the terms of their mortgage, otherwise risk eligibility for future disaster assistance. It is important to understand the difference between flood insurance and disaster assistance. Flood insurance claims are not considered disaster assistance. Flood insurance claims are paid even if a disaster is not declared by the President. For more information, on “The Benefits of Flood Insurance Versus Disaster Assistance”, download the FEMA flier, here 

This article is not meant to be a comprehensive explanation of all the NFIRA requirements. Should you have further questions, we advise you contact your appropriate FEMA office. It is important to remember that although the mandatory flood insurance purchase requirements may no longer exist, the risk of flooding still does and each owner should ensure they take the appropriate steps to protect their family and property.

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