The Right Rate: Low- Versus High-Rise Buildings
The bottom line in rating flood insurance coverage is ascertaining the flood risk of the building it will protect. Unfortunately, determining the risk of flood loss is not always a simple task, even for insurance agents who are experienced in writing NFIP policies. By miscalculating the number of floors in a condominium building, it can make a significant difference in the cost those policyholders will pay for NFIP coverage.
How hard can it be to calculate the number of floors in the building? How can the number of floors in the building impact the rating? The number of floors and number of units in the building determine whether the building should be rated as a low-rise or high-rise. Generally, low-rise structures have a larger portion of building value at a higher flood risk. Therefore, low-rise structures require a higher premium for the first layer of coverage.
The Residential Condominium Building Association Policy (RCBAP) is the NFIP form used by condo associations. Only condos located in communities participating in the Regular phase of the NFIP are eligible for this coverage. Residential condo buildings operated as hotels or motels (or rented short- or long-term) must use the RCBAP for NFIP coverage; cooperative ownership buildings are not eligible for the RCBAP. However, timeshare buildings employing a condominium form of ownership are eligible for the RCBAP if they are located in jurisdictions where the title is vested in individual unit owners.
Is the Building Low-Rise or High-Rise?
The NFIP groups condo buildings in two types- low-rise and high-rise - according to the expected exposure to flood losses. The NFIP defines low-rise buildings as those containing less than five units, regardless of the number of floors, or containing five or more units in buildings with fewer than three floors, including the basement. For example, single-family homes owned by a condominium association are considered low-rise buildings. A row of units on fewer than three floors or a series of five or fewer units stacked on any number of floors are also considered low-rise buildings. Townhouse and rowhouse buildings are always rated as low-rise, no matter how many units or floors they contain. Usually property in low-rise buildings have more building value positioned closer to the floodplain. Therefore, the premiums for the first layers of flood insurance coverage are higher.
The NFIP defines high-rise buildings as those that contain five or more units and have at least three floors, excluding any enclosures below the lowest habitable floor, even if - for rating purposes - the enclosure floor is used as the lowest floor. A condo unit can be insured separately under the Dwelling policy form with the single family dwelling limits.
The determination whether a condominium building is low- or high-rise, impacts the basic limit of coverage and the rates used to calculate the policyholder's premium. However, misrating the building may expose the insurance agent to errors and omissions litigation and negatively impact his or her reputation.
The Lowest-Floor Dilemma
Why is it easy to mistake a low-rise for a high-rise building?
It's all about the location of the lowest floor.
If a single-family home is elevated above the ground and has a non compliant enclosure such as a garage or storage room beneath the elevated floor of the building, the enclosure is counted as a floor in determining the rate. So, agents could mistakenly use this same logic in determining the number of floors of a building when calculating the rate using the RCBAP tables.
However, when rating an RCBAP, the enclosure floor is not counted in determining whether the building is considered a low- or high-rise building.
Let's compare. Building coverage purchased under the RCBAP is on a Replacement Cost Value (RCV) basis. This means the NFIP will cover the cost to replace property with the same kind of material and construction without deducting for depreciation.
The maximum amount of building coverage that can be purchased on a low- or high-rise condominium building is the RCV of the building or $250,000 multiplied by the number of units in it, whichever is less.
Contents coverage is another but separate matter. The maximum allowable coverage for contents of a condominium building is the Actual Cash Value (ACV) of commonly owned contents such as lobby furniture and carpeting and heating/air-conditioning systems up to a maximum of $100,000 for each building. According to the Flood Insurance Manual, the ACV is the cost to replace an insured item of property at the time of loss, less the value of its physical depreciation.
The "Basic Limit Amount" used to calculate the premium differs depending on whether the building is categorized as a low-rise or high-rise structure. Generally, the rates for the Basic Limit of coverage are higher than the rates applied to the Additional Limit of coverage. If coverage is being purchased for a low-rise condo, the Basic Limit is $50,000 multiplied by the number of units in the building. If a high-rise condo is being rated, the Basic Limit is $150,000, regardless of the number of units. In either case, there is a Basic Limit of $20,000 coverage for contents.
Let's say an agent is writing an RCBAP on a building with 10 units. The building is elevated and has two living floors above a row of partially enclosed carports. If the agent makes the determination it is a high-rise condo by counting the enclosures as a floor, this building will appear to have 3 floors with more than 5 units. Remember, the Basic Limit Amount for high-rise condos is $150,000, regardless of the number of units. Therefore, the Basic Limit Amount for this high-rise would be $150,000, and the Basic Limit rate would be applied to that amount of coverage.
However, let's say the agent correctly determines it is a low-rise building because it has only two floors and, although the agent notes the enclosure, he does not use it in determining the total number of floors. The Basic Limit Amount for low-rise buildings is $50,000 multiplied by the number of units in the building. This building has 10 units, so the Basic Limit Amount would be $500,000. The higher Basic Limit rate would be applied to the first $500,000 of coverage versus the first $150,000. There you have it: Basic Limit of $150,000 if the building is incorrectly identified as a high-rise versus $500,000 if the building is correctly identified as a low-rise. Because the Basic Limit Amount is multiplied by a higher rate, the property owner of the low-rise will pay a higher premium than if the building were a high-rise.
Let's continue to hypothetically rate this building at the high- and low-rise rates. The Basic Limit Amount if it is rated incorrectly as a high-rise building at a +4 elevation difference with more than one floor and without an enclosure would be $150,000 x .33 (from Rate Table 3A for building on page CONDO 10) = $495.00. The Basic Limit Amount for this same building rated correctly as a low-rise building would be $500,000 x .18 (from Rate Table 4B for building on page CONDO 15) = $900.00. There is a difference of $405.00 between the premiums for the Basic Limit Amount for these two. Each additional $100 of coverage beyond the Basic Limit Amount represents a difference of $.05 between the two. And, if this were a 20-unit condo we were rating, the premium would be twice this amount.
The Flood Insurance Manual is the underwriting reference document used by all NFIP stakeholders. It is available online or a printed copy can be ordered from the FEMA Map Service Center at 1-800-358-9616.