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DHS FEMA NFIP Services - eWaterwark Article
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How Long Must You Wait?
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 an 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. 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 bank require a borrower to increase the amount of flood insurance as soon as it has
knowledge of that change? 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. Check pages 6-7 of the Mandatory
Purchase of Flood Insurance Guidelines booklet for a discussion of studies and maps. Policyholders in Regular Program
communities are eligible for the maximum amount of NFIP flood 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 the waiting period for flood insurance. The NFIP's manual
on lender issues is the
Mandatory Purchase of Flood Insurance Guidelines, available online or in hard copy by
calling FEMA (800-480-2520) and asking for publication "FEMA-186."
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| Last Modified:
Friday, 21 January 2011 |
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