Flood Zone Discrepancies

FEMA issued a memo to the insurance industry that should put to rest the conflicts arising when a lender and insurance agent have a flood zone discrepancy. The memo, entitled “Procedures Relating to Flood Zone Discrepancies” is really your “trump card”. The memo states FEMA:

“. . . understands flood zone discrepancies are occurring because some WYO companies are no longer accepting the flood zone determinations provided by lenders to rate flood policies. WYO companies are either providing their own flood zone determinations or requiring agents to determine the flood zone. As a result, lenders are frequently finding the flood zone indicated on a flood insurance policy declarations page is different from the lender’s flood zone determination, and they are seeking resolution.

“Effective May 1, 2008, WYO companies and the NFIP Servicing Agent are hereby directed to use the most hazardous flood zone for rating when presented with two different flood zones, unless the building qualifies for the “grandfathering rule.”

Let me explain. You ask your borrower’s insurance agent (Write Your Own company or “WYO” as FEMA referenced) to write a flood policy. When the agent underwrites the policy, they automatically get a zone rating (another determination if you will). The insurance agent may be getting pressure from the borrower to write the policy under the lowest risk zone resulting in the lowest premium. This is where the conflict begins.

This new guidance makes it much easier for all parties. The insurance company is required to take the determination that has the most hazardous rating (i.e. Zone A over Zone B) – whether it is yours or the agents. It is the path of least resistance. If the borrower doesn’t agree with the most hazardous rating, they can appeal with FEMA through the Letter of Determination Review process (see the FEMA memo for more information).

We still believe you should:

  1. ask your flood vendor to recheck their information
  2. forward documentation if they insist they are right
  3. take this documentation to the agent and ask them to recheck their information.

If they still insist they are right, pull out your “Trump Card”.

Jerod Moyer of Bankers Compliance Consulting in Lincoln, Nebraska will be speaking the Iowa Bankers Association Compliance Conference, November 15-16.


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