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Understanding the Unique Facets of Flood Insurance: Unique Flood Policy Definitions

Flood: All three NFIP policies define flood as: 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 who 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.
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.

A "basement" is a basement in the NFIP policy only when the area is 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 in such areas is limited as detailed above. Examples may include a sunken living room or a recessed production area.

Sunken living rooms were fashionable in the 1970s 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.

Note: 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 (FIRM), 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 can 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 is supplied that the building has not been altered in any way that would or could 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 elsewhere in this article).

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. This applies to “Substantial Improvement" and “Substantial Damage."

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 pre-damaged condition would equal or exceed 50 percent of the market value of the building before the damage occurred.

Market Value is generally a term used to define the value 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 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.

Flood Series

This is one of a series of flood articles discussing and detailing the unique facets of the NFIP flood program. To continue researching the unique facets of the NFIP, visit any or all the links provided:

Read the entire series here.

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First Published: August 23, 2021