The
30-day waiting period before flood insurance goes into effect is a
pretty basic rule that lenders need to be aware of when they are making
a loan for a property in a Special Flood Hazard Area (SFHA). However,
applying this “basic” rule can be a little complex, so let’s take a
look at the background of the 30-day rule and what its exceptions are.
Why Require a 30-Day Wait?
The
National Flood Insurance Reform Act (NFIRA) of 1994 lengthened the waiting
period required before a National Flood Insurance Program (NFIP) policy
can go into effect from 5 to 30 days. This 30-day wait is for “coverage
under a new contract for flood insurance” and “any modification to
coverage under an existing flood insurance contract.” The express
intent of Congress in mandating a 30-day waiting period was to prevent
the purchase of flood insurance just before a flood hits. Unless an
exception applies, as described in the following two sections, a 30-day
waiting period is required before NFIP flood insurance goes into effect.
In
layman’s terms, Congress sought to avoid a situation in which property
owners in high-risk areas such as the Atlantic and Gulf Coast states
played “hurricane roulette” by letting their policies expire when the
hurricane forecast was good and then, when the forecast showed a
hurricane developing off the African west coast, “re-upping” with only
a 5-day wait. Hence, the name “hurricane roulette,” since it usually
takes longer than 5 days for a hurricane to cross the Atlantic. After
the hurricane seasons we had in 2004 and 2005, it’s hard to imagine a
“good year” for hurricanes, but treating the threat like roulette in a
year with a relatively less active hurricane season has been known to
happen.
Playing
roulette with insurance coverage is clearly shortsighted because it’s
not just hurricanes that flood homes. “Small storms” with little
warning can also tear a house apart. A 30-day waiting requirement
promotes a longer view of financial protection from flood losses.
The Two Exceptions
The
following two exceptions are crucial to a variety of situations that
lenders deal with every day. They apply when coverage is placed in
conjunction with loan activity or the remapping of a community. The
NFIRA contains what is called the “initial purchase” provision, which
states that the 30-day waiting period does not apply to the following
instances: (1) “The initial purchase of flood insurance… when the
purchase is in connection with the making, increasing extension, or
renewal of a loan,” or (2) “The initial purchase of flood insurance…
pursuant to a [map] revision or updating of floodplain areas of flood
zones,” within a 1-year period.
The
effective date of coverage begins at 12:01 a.m. local time on the first
calendar day after the application date and the presentment of payment
of the premium.
It is
significant to note that the first exception described above is much
broader than it may appear. FEMA has interpreted the exception to the
30-day waiting period to apply in situations pertaining to refinancing,
placement of second mortgages, and modification of existing mortgages.
This also applies to lender placement, increased limits at renewal, and
map revisions.
Applying the Exceptions
Following
are two examples of how the exceptions to the 30-day waiting period may
get a little tricky.
When a Community Changes to the
“Regular Program”
If a
community’s status changes from the NFIP’s Emergency Program to the
Regular Program, thereby increasing the amount of federal flood
insurance available, must a lender require a borrower to increase the
amount of flood insurance as soon as it has knowledge of that charge?
Or may the borrower wait until the flood policy renews to increase the
amount of coverage?
A lender
should require the increase to get the best coverage available for the
homeowner. Policyholders in Regular Program communities are eligible
for the maximum amount of NFIP food insurance available.
Usually
when a community changes from the Emergency Program to the Regular
Program, its map changes from a Flood Hazard Boundary Map (FHBM) to a
Flood Insurance Rate Map (FIRM). The FHBM is a basic “in-or-out” map,
showing only areas at high and low flood risk, while the FIRM has a
variety of risk zones clearly delineated.
So, if
the property in question was shown as a moderate risk on the FHBM but
is now in the SFHA on the FIRM, a lender would apply only a 1-day
waiting period for the purchase of the higher amount of insurance. If
the property was at high risk on the FHBM and is now in the SFHA on the
FIRM (and thus, there is no change – change being the key to applying
the exception), that policy is subject to the 30-day waiting period.
When the Policy Changes Hands
There is
no waiting period when an existing policy is assigned to a purchaser of
improved real estate. But the intention to assign the contract must be
clear.
Prior to
NFIRA, the regulations provided for no wait if the policy was applied
for and the premium was paid at or prior to the time the title transfer
or assignment of the policy occurred. Now, unless there is an
assignment of the policy from the seller to the buyer where the
purchaser does not obtain a mortgage, a 30-day wait is required.
The
General Conditions article of the
Standard Flood Insurance Policy form contains an assignment provision – “D.
Amendments, Waivers, Assignment” – which allows an assignment upon
transfer of title.
Looking for More Information?
Watch for
upcoming legislative changes in this area. The NFIP’s manual on lender
issues is the Mandatory Purchase of Flood Insurance Guidelines,
available
online.
Reprinted with permission from
Watermark.