Proposed Rule2024-02204
National Flood Insurance Program: Standard Flood Insurance Policy, Homeowner Flood Form
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
February 6, 2024
Issuing agencies
Homeland Security DepartmentFederal Emergency Management Agency
Abstract
The National Flood Insurance Program (NFIP), established pursuant to the National Flood Insurance Act of 1968, is a voluntary program in which participating communities adopt and enforce a set of minimum floodplain management requirements to reduce future flood damages. Property owners within participating communities are eligible to purchase NFIP flood insurance. This proposed rule would revise the Standard Flood Insurance Policy by adding a new Homeowner Flood Form and five accompanying endorsements. The new Homeowner Flood Form would replace the Dwelling Form as a source of coverage for homeowners of one-to-four family residences. Together, the new Homeowner Flood Form and endorsements would more closely align with property and casualty homeowners insurance and provide increased options and coverage in a more user-friendly and comprehensible format.
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[Federal Register Volume 89, Number 25 (Tuesday, February 6, 2024)]
[Proposed Rules]
[Pages 8282-8327]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-02204]
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Vol. 89
Tuesday,
No. 25
February 6, 2024
Part II
Department of Homeland Security
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Federal Emergency Management Agency
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44 CFR Part 61
National Flood Insurance Program: Standard Flood Insurance Policy,
Homeowner Flood Form; Proposed Rule
Federal Register / Vol. 89 , No. 25 / Tuesday, February 6, 2024 /
Proposed Rules
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DEPARTMENT OF HOMELAND SECURITY
Federal Emergency Management Agency
44 CFR Part 61
[Docket ID FEMA-2024-0004]
RIN 1660-AB06
National Flood Insurance Program: Standard Flood Insurance
Policy, Homeowner Flood Form
AGENCY: Federal Emergency Management Agency, DHS.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The National Flood Insurance Program (NFIP), established
pursuant to the National Flood Insurance Act of 1968, is a voluntary
program in which participating communities adopt and enforce a set of
minimum floodplain management requirements to reduce future flood
damages. Property owners within participating communities are eligible
to purchase NFIP flood insurance. This proposed rule would revise the
Standard Flood Insurance Policy by adding a new Homeowner Flood Form
and five accompanying endorsements. The new Homeowner Flood Form would
replace the Dwelling Form as a source of coverage for homeowners of
one-to-four family residences. Together, the new Homeowner Flood Form
and endorsements would more closely align with property and casualty
homeowners insurance and provide increased options and coverage in a
more user-friendly and comprehensible format.
DATES: Comments must be received on or before April 8, 2024.
ADDRESSES: You may submit comments, identified by Docket ID FEMA-2024-
0004, via the Federal eRulemaking Portal: <a href="http://www.regulations.gov">http://www.regulations.gov</a>.
Follow the instructions for submitting comments.
FOR FURTHER INFORMATION CONTACT: Kelly Bronowicz, Product and Policy
Development Division Director, Federal Insurance Directorate,
Resilience, (202) 646-2559, <a href="/cdn-cgi/l/email-protection#7c3a39313d51323a352c513a1918190e1d105135120f090e1d121f19512c1310151f053c1a19111d5218140f521b130a"><span class="__cf_email__" data-cfemail="397f7c747814777f7069147f5c5d5c4b58551470574a4c4b58575a5c14695655505a40795f5c5458175d514a175e564f">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
I. Public Participation
Interested persons are invited to participate in this rulemaking by
submitting comments and related materials. We will consider all
comments and material received during the comment period.
If you submit a comment, include the Docket ID FEMA-2024-0004,
indicate the specific section of this document to which each comment
applies, and give the reason for each comment. All submissions may be
posted, without change, to the Federal e-Rulemaking Portal at <a href="http://www.regulations.gov">http://www.regulations.gov</a>, and will include any personal information you
provide. Therefore, submitting this information makes it public. For
more information about privacy and the docket, visit <a href="https://www.regulations.gov/document?D=DHS-2018-0029-0001">https://www.regulations.gov/document?D=DHS-2018-0029-0001</a>.
Viewing comments and documents: For access to the docket to read
background documents or comments received, go to the Federal e-
Rulemaking Portal at <a href="http://www.regulations.gov">http://www.regulations.gov</a>.
II. Executive Summary
The United States is experiencing increased flooding and flood risk
from climate change.\1\ In a recent study, researchers found that
changes in precipitation contributed to one-third of the flooding
financial costs in the United States over the past three decades,
totaling almost $75 billion of the estimated $199 billion in flood
damages from 1988 to 2017.\2\ Intensifying precipitation associated
with climate change, and the associated increases in precipitation
extremes and flooding, thus presents a significant financial risk to
homeowners.\3\
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\1\ Climate change means that flood events are on the rise.
Climate change is increasing flood risk through (1) more ``extreme''
rainfall events, caused by a warmer atmosphere holding more water
vapor and changes in regional precipitation patterns; and (2) sea-
level rise. See Rob Bailey, Claudio Saffioti, and Sumer Drall, Sunk
Costs: The Socioeconomic Impacts of Flooding 3 and 8, MarshMcLennan
(2021), found at <a href="https://www.marshmclennan.com/content/dam/mmc-web/insights/publications/2021/june/Sunk-Cost_Socioeconomic-impacts-of-flooding_vF.pdf">https://www.marshmclennan.com/content/dam/mmc-web/insights/publications/2021/june/Sunk-Cost_Socioeconomic-impacts-of-flooding_vF.pdf</a> (last accessed Aug. 28, 2023).
\2\ Frances V. Davenport, Marshall Burke, and Noah S.
Diffenbaugh, Contribution of historical precipitation change to US
flood damages, Proceedings of the National Academy of Sciences of
the United States of America, Jan. 2021, 118 (4) e2017524118; DOI:
10.1073/pnas.2017524118, found at <a href="https://www.pnas.org/content/118/4/e2017524118">https://www.pnas.org/content/118/4/e2017524118</a> (last accessed Aug. 28, 2023).
\3\ See also Don Jergler, ``Climate Change Could Push Flood
Losses in U.S. to $40B by 2050,'' Insurance Journal (Feb. 17, 2022),
found at <a href="https://www.insurancejournal.com/news/national/2022/02/17/654831.htm">https://www.insurancejournal.com/news/national/2022/02/17/654831.htm</a> (last accessed Aug. 28, 2023) (noting annual flood losses
forecasted to increase by 26.4% from $32B to $40.6B).
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There are four main ways to manage any risk: (1) acceptance; (2)
avoidance; (3) mitigation; and (4) transference. Flood risk is a
reality. No home is completely safe from potential flooding. Just one
inch of flood water in a home can cost more than $25,000 in damage.\4\
Homeowners must accept that the risk of flooding is increasing and with
it, the potential for damage to their property. Homeowners can seek to
reduce risk by building or purchasing homes away from natural flood
hazards and can seek to mitigate risk by building or modifying homes to
reduce potential damage from flooding. Homeowners can also transfer the
risk by purchasing flood insurance.\5\
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\4\ See <a href="http://www.floodsmart.gov/flood-insurance/why">http://www.floodsmart.gov/flood-insurance/why</a> (last
accessed Aug. 28, 2023).
\5\ Flood insurance is one risk management tool. ``Governments
tend to spend significantly more on disaster response than disaster
prevention.'' Rob Bailey, Claudio Saffioti & Sumer Drall, Sunk
Costs: The Socioeconomic Impacts of Flooding 9, MarshMcLennan
(2021), found at <a href="https://www.marshmclennan.com/content/dam/mmc-web/insights/publications/2021/june/Sunk-Cost_Socioeconomic-impacts-of-flooding_vF.pdf">https://www.marshmclennan.com/content/dam/mmc-web/insights/publications/2021/june/Sunk-Cost_Socioeconomic-impacts-of-flooding_vF.pdf</a> (last accessed Aug. 28, 2023).
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Congress created the National Flood Insurance Program (NFIP) in
1968 to help share the risk of flood losses through an insurance
program to provide flood insurance coverage to those who need such
protection.\6\ In the context of risk, the NFIP helps communities avoid
and mitigate flood risk through adoption of floodplain management
ordinances and helps policyholders transfer flood risk to the Federal
Government.
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\6\ See 42 U.S.C. 4001(a).
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Over the past five decades, the NFIP has been implemented primarily
by FEMA (the ``Agency'') to provide insurance to reduce the economic
impact of floods.\7\ The Agency seeks to update the current Standard
Flood Insurance Policy (SFIP) Dwelling Form to better serve a growing
percentage of the public looking for ways to manage their risk through
insurance, as they are now threatened by the increased risk of
flooding. Most homeowners do not have flood insurance. Some homeowners
are required to purchase flood insurance as a condition of any federal
financial assistance for acquisition or construction of buildings in
the special flood hazard area (SFHA) (e.g., mortgages, flood disaster
grants) or as a condition of a loan secured by property in the SFHA
while some homeowners choose to purchase it of their own volition. The
decision to purchase flood insurance is frequently driven by whether
they are subject to the mandatory purchase requirement rather than the
actual flood risk to the property. Homeowners generally find it
difficult to understand low probability/high impact risks such as flood
damage to their property.\8\ If purchasing flood
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insurance is not mandatory, then homeowners may not be convinced that
they should purchase it. Given the cost of customer acquisition is
high, private insurance companies generally are not focused on
homeowners that are not required to purchase flood insurance.\9\
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\7\ From 1968 to 1979, the Department of Housing and Urban
Development housed the Federal Insurance Administration, which
administered the NFIP until its transfer to FEMA in Executive Order
12127, 44 FR 19367, 3 CFR, 1979 Comp., p. 376.
\8\ See Peter John Robinson, W.J. Wouter Botzen, Howard
Kunreuther, Shereen J. Chaudhry, Default Options and Insurance
Demand, Journal of Economic Behavior and Organization at 2 (2020),
found at <a href="https://www.sciencedirect.com/science/article/pii/S0167268120304765">https://www.sciencedirect.com/science/article/pii/S0167268120304765</a> (last accessed Aug. 28, 2023). See also Rachel
Cleetus Overwhelming Risk: Rethinking Flood Insurance in a World of
Rising Seas, found at <a href="https://www.ucsusa.org/sites/default/files/2019-09/Overwhelming-Risk-Full-Report.pdf">https://www.ucsusa.org/sites/default/files/2019-09/Overwhelming-Risk-Full-Report.pdf</a> (last accessed Aug. 28,
2023) at 9: ``In the wake of Sandy, it was estimated that only 15 to
25 percent of at-risk properties in Special Flood Hazard Areas
(SFHAs) in the Northeast were insured for flood losses. Many coastal
property owners do not carry adequate insurance or are simply not
insured at all. It is estimated that, nationally, only 18 percent of
households in flood zone areas, which include inland (lakeside and
riverside) and coastal areas, have flood insurance.''
\9\ See Rob Bailey, Claudio Saffioti & Sumer Drall, Sunk Costs:
The Socioeconomic Impacts of Flooding 24, MarshMcLennan (2021),
found at <a href="https://www.marshmclennan.com/content/dam/mmc-web/insights/publications/2021/june/Sunk-Cost_Socioeconomic-impacts-of-flooding_vF.pdf">https://www.marshmclennan.com/content/dam/mmc-web/insights/publications/2021/june/Sunk-Cost_Socioeconomic-impacts-of-flooding_vF.pdf</a> (last viewed accessed May 2, 2022Aug. 28, 2023). See
also Noelwah R. Netusil, Carolyn Kousky, Shulav Neupane, Will Daniel
& Howard Kunreuther, The Willingness to Pay for Flood Insurance at
33. ``Among those who can afford a policy, they may not feel it
provides value--that it is not `worth it'--if they fail to
understand the role of insurance in their recovery, have challenges
in assessing low probability events, or the policy terms do not meet
their need,'' found at <a href="https://le.uwpress.org/content/wple/97/1/17.full.pdf">https://le.uwpress.org/content/wple/97/1/17.full.pdf</a> (last accessed Aug. 28, 2023). See also Tom Hammond
Lowering Costs of Customer Acquisition found at <a href="https://www.insurancethoughtleadership.com/customer-experience/lowering-costs-customer-acquisition">https://www.insurancethoughtleadership.com/customer-experience/lowering-costs-customer-acquisition</a> (last accessed Aug. 28, 2023); Becky
Yerak Direct insurers paying less to attract customers, found at
<a href="https://www.chicagotribune.com/business/ct-customer-acquisition-costs-0515-biz-20150515-story.html">https://www.chicagotribune.com/business/ct-customer-acquisition-costs-0515-biz-20150515-story.html</a> (last accessed Aug. 28, 2023);
How to Lower Customer Acquisition Cost in the Insurance Industry
found at <a href="https://www.amsive.com/2021/09/14/how-to-lower-customer-acquisition-cost-in-the-insurance-industry-amsive/">https://www.amsive.com/2021/09/14/how-to-lower-customer-acquisition-cost-in-the-insurance-industry-amsive/</a> (last accessed
Aug. 28, 2023); and Insurtechs Need to Ace Customer Acquisition Cost
(CAC) Optimization found at <a href="https://rintupatnaik.medium.com/insurtechs-need-to-ace-customer-acquisition-cost-cac-optimization-b695bc45bf7b">https://rintupatnaik.medium.com/insurtechs-need-to-ace-customer-acquisition-cost-cac-optimization-b695bc45bf7b</a> (last accessed Aug. 28, 2023).
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FEMA has not substantively updated its flood insurance products--
the Dwelling Form, the General Property Form, and the Residential
Condominium Building Association Policy (RCBAP)--since 2000. While
these products have performed ably over two decades of service, they
are overdue for revision. Consistent with the National Flood Insurance
Act (NFIA) of 1968, FEMA must provide by regulation the general terms
and conditions of insurability for properties eligible for flood
insurance coverage. 42 U.S.C. 4013(a). Further, Executive Order 13563,
``Improving Regulation and Regulatory Review,'' requires agencies to
complete retrospective analyses of existing rules and periodically
review existing significant regulations to determine whether they
should be modified, streamlined, expanded, or repealed to better
achieve the Agency's regulatory objective. 76 FR 3821 (Jan. 21, 2011).
FEMA seeks to make these revisions consistent with the requirements
under the NFIA and Executive Order 13563. The proposed new Homeowner
Flood Form would update the general terms and conditions of
insurability under the NFIP while also modifying the existing
regulations and policy to make the program more effective and less
burdensome for homeowner policyholders as explained below.
Additionally, consistent with Executive Order 14058, ``Transforming
Federal Customer Experience and Service Delivery to Rebuild Trust in
Government,'' \10\ FEMA seeks to improve the homeowner policyholder
experience with the NFIP through the proposed Homeowner Flood Form, by
simplifying coverage terms, reducing complexity, and resolving key
challenges faced by homeowner policyholders.
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\10\ 86 FR 71357 (Dec. 16, 2021).
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The proposed new Homeowner Flood Form provides a more personalized,
customizable product than the NFIP has ever offered during its more
than 50 years in existence. Currently, the Dwelling Form serves
homeowners, renters, landlords, mobile homeowners, and condo unit
owners all in a single policy. The Dwelling Form also includes
different coverage terms for certain buildings constructed, or
substantially damaged or improved, on or after the effective date of
the community's initial Flood Insurance Rate Map (generally referred to
as ``post-FIRM buildings'') in an attempt to capture all possibilities.
The current structure results in confusion for the homeowner
policyholders looking for the specific coverage that applies directly
to their situation, and imposes a series of choices onto consumers
without offering an ability to change them.
The proposed new Homeowner Flood Form offers more choices to
policyholders who own their own homes,\11\ which help inform
policyholders and prospective policyholders of increased risk of
flooding and flood damage, and how best to cover their property as a
result. The proposed new Homeowner Flood Form offers enhanced
comprehensive default coverages. For example, while much of the default
coverage proposed would mirror existing default coverage in the
Dwelling Form, FEMA is proposing to shift the default loss settlement
from actual cash value to replacement cost value to help policyholders
more effectively and more fully recover from loss. These decisions FEMA
made in setting coverage defaults (1) nudge homeowner policyholders
toward the more appropriate coverage to insure against their risk, and
(2) represent FEMA's strategic objective of positioning individuals to
understand their risk and take well-informed actions.\12\ This
rulemaking also proposes new endorsements for additional coverages that
homeowner policyholders may want in order to recover from flood events.
A homeowner policyholder may want to expand their coverage and
therefore increase their policy's flood risk exposure (i.e., purchase
the basement coverage endorsement) even if it means they will pay more
for the additional coverage, or they may wish to reduce their premium
(i.e., purchase the actual cash value endorsement) even if it means
they stand to receive a smaller benefit post-loss. Until now, homeowner
policyholders have been unable to make any personalized selections.
FEMA is introducing choices consumers can make in several ways, through
the use of endorsements that modify coverage. These choices will help
homeowner policyholders learn about their coverages prior to loss.
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\11\ The proposed Homeowner Flood Form would be offered to
individuals owning a one-to-four family residential building. FEMA
will evaluate any changes needed to forms for other types of
policyholders (e.g., other residential and commercial) based on
public comment associated with this rulemaking.
\12\ FEMA, 2022-2026 FEMA Strategic Plan, found at <a href="https://www.fema.gov/about/strategic-plan">https://www.fema.gov/about/strategic-plan</a> (last accessed Aug. 28, 2023).
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The proposed new Homeowner Flood Form does not presuppose that
homeowner policyholders are knowledgeable about floodplain management
and flood risk. By changing coverage based on pre- or post-FIRM status,
and by having certain terms only apply to certain zones, the Dwelling
Form presupposes a level of homeowner policyholder floodplain
management and flood risk knowledge. Unlike in the Dwelling Form, FEMA
is not proposing to change coverage if the building covered is not a
primary or principal residence, or if it is pre- or post-FIRM, or for
any other reason. Ultimately, flood insurance coverage under the
proposed new Homeowner Flood Form is there to help the homeowner
policyholder recover. The premiums tied to the coverage choices
homeowner policyholders make would
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signal the underlying risk and prompt mitigation efforts.
The proposed new Homeowner Flood Form adds directly into the policy
terms flexibilities the Agency has had to implement via bulletin or
other means, such as special procedures during catastrophic flood
events and advance payments. These changes would help homeowner
policyholders better understand the options available to them and learn
about special procedures under the policy up front, rather than making
them wait to find out via a bulletin after a flood event.
The proposed new Homeowner Flood Form also allows for a single
deductible rather than multiple deductibles, reducing unnecessary
administrative burdens for the homeowner policyholder. Additionally,
the proposed new Homeowner Flood Form would provide FEMA with greater
flexibility in implementing the flood insurance program. The proposed
new Homeowner Flood Form removes unnecessary provisions of the current
Dwelling Form policy, reducing the reliance on lists and pushing
certain provisions to the declarations page for clarity. The insurance
industry recognizes that many policyholders will not read their
insurance policy \13\ and has endeavored to put critical information
onto the declarations page to increase policyholder understanding of
what is and is not covered. In the context of the NFIP, policyholders
with basements continue to be surprised that under the current Dwelling
Form, the policy provides limited coverage in a basement. Under the
proposed new Homeowner Flood Form, the declarations page would include
language along the lines that ``This property includes a basement. The
Homeowner Flood Form provides limited coverage in a basement.'' This
upfront tailoring of the policy to suit the homeowner policyholder's
choices and the placement of critical information on the declarations
page would reduce the administrative sludge a homeowner policyholder
faces during the claims process. Homeowner policyholders would better
understand the coverages they have selected, information would be
easily accessible on their declarations page, and their claims should
reflect a better understanding of their coverages. This better
understanding of their coverages should result in fewer denials, faster
claims payments, and an improved customer experience during a difficult
time.
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\13\ See Louise Castoria, ``Is there a duty to read insurance
contracts?'' available at <a href="https://www.propertycasualty360.com/2019/11/07/is-there-a-duty-to-read-insurance-contracts/">https://www.propertycasualty360.com/2019/11/07/is-there-a-duty-to-read-insurance-contracts/</a> (last accessed on
Aug. 28, 2023).
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By making these changes and updating coverage, FEMA seeks to
address the increased risk of flooding from climate change in several
ways. These ways include (1) re-baselining the market, (2) introducing
optionality, (3) creating market buzz, (4) creating the opportunity to
build back in more resilient ways to reduce future flood risk post-
loss, and (5) revamping increased cost of compliance coverage. First,
the proposed rule would reset the market. Currently the existing and
small private market for flood insurance sets the Dwelling Form as a
baseline level of coverage. By revising the coverage in the proposed
Homeowner Form, FEMA would drive the market in the right direction to
ensure that homeowner policyholders are able to effectively transfer
their flood risk. By increasing coverage, people are able to recover
faster so that the last flood does not leave them more vulnerable to
the next flood.\14\
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\14\ See Rob Bailey, Claudio Saffioti & Sumer Drall, Sunk Costs:
The Socioeconomic Impacts of Flooding 3, MarshMcLennan (2021), found
at <a href="https://www.marshmclennan.com/content/dam/mmc-web/insights/publications/2021/june/Sunk-Cost_Socioeconomic-impacts-of-flooding_vF.pdf">https://www.marshmclennan.com/content/dam/mmc-web/insights/publications/2021/june/Sunk-Cost_Socioeconomic-impacts-of-flooding_vF.pdf</a> (last accessed Aug. 28, 2023).
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Second, FEMA has utilized the ``one size fits all'' coverage for
policyholders for 50 years. The proposed Homeowner Form seeks to
address specific needs of specific homeowner policyholders through the
choices being made available. FEMA proposes to increase optionality and
require homeowners to assess their own risks, communicating those risks
through coverage options and the costs associated with them.
Third, FEMA also anticipates that the changes in the proposed
Homeowner Form would generate more interest in flood insurance as the
last update occurred over 20 years ago. This interest could include
insurance agents, for whom it will be easier to learn about flood
insurance coverage. The proposed Homeowner Form would make flood
insurance align more with other insurance products and thus more
accessible to agents, who may then seek to sell more flood insurance as
they better see the value of coverage for their clients.
Fourth, FEMA proposes to create the opportunity to build more
resiliently by introducing provisions in its loss settlement clause
that would enable homeowner policyholders to replace their damaged
building elements with flood damage resistant materials. In addition,
these same provisions would enable homeowner policyholders to elevate
flood damaged machinery and equipment to reduce the likelihood of
future flood damage.
Finally, FEMA proposes to revamp its increased cost of compliance
(ICC) provision. Previously, ICC appeared in the Dwelling Form as
Coverage D, and its inclusion there was incongruous with the other
coverages because it set out an eligibility framework and specifically
listed out all the covered and uncovered compliance activities. FEMA
proposes to simplify ICC so homeowner policyholders can better
understand their ICC coverage, adjusters can more easily advise
homeowner policyholders to consult their local floodplain management
requirements, and local floodplain managers have appropriate
discretion.
What follows below is an overview of the major changes in each
section in the proposed Homeowner Flood Form as well as an analysis of
the degree of change compared to the Dwelling Form. A detailed
description of the changes is found later in this preamble.
Section I: Insuring Agreement. This section proposes a low level of
change from the current Dwelling Form. It would simplify the language
and organization of the global aspects of the Form, and replace
references to Federal laws (e.g., the Coastal Barrier Resources Act and
section 1316 of the NFIA) with a broader statement about conflicts with
Federal law.
Section II: Definitions. This section proposes a moderate to high
level of change from the current Dwelling Form. It would eliminate
definitions for words only used once within the policy that are
currently defined in the Dwelling Form; refine definitions for
simplicity and clarity; make substantive changes to the definitions for
``Basement,'' ``Building,'' and ``Flood''; and add definitions for new
concepts such as ``Flood Damage Resistant Materials'' and ``Replacement
Cost Value.''
Section III: What We Cover. This section proposes a moderate to
high level of change from the current Dwelling Form. It would combine
sections III and IV from the Dwelling Form to present in one place all
aspects of coverage (i.e., what is covered, what receives limited
coverage, and what is not covered). It would also incorporate plain
language, remove lists, and rephrase coverage currently phrased in the
negative. In contrast to the Dwelling Form that offers different
coverage based on flood zone and pre- or post-FIRM designation, the
proposed Homeowner's Form provides uniform coverage. In addition:
<bullet> Coverage A. It would allow homeowner policyholders to more
[[Page 8285]]
easily determine the existence of a basement for coverage purposes as
further explained below.
<bullet> Coverage B. Similar to homeowners insurance coverage,
Coverage B would provide coverage to restore certain other, non-
dwelling buildings to a functional level. The amount of coverage would
be a sublimit of the amount selected for Coverage A, without requiring
a separate insurance policy.
<bullet> Coverage C. Due to the recharacterization of Coverage B
for other buildings, and to align with homeowners coverage, Coverage C
would address contents coverage and would expand personal property
coverage to contents located anywhere in the United States. It would
also clarify that coverage for items stored in digital format (like
cryptocurrency) is excluded given challenges with proving loss.
Section IV: Exclusions. This section proposes a low to moderate
level of change from the current Dwelling Form. It would limit items
excluded from coverage in this section to those items excluded based on
cause of the loss consistent with industry practice. It would address
earth movement, pollutants, increase in hazard, and other excluded
losses under the general heading of ``Excluded Losses,'' consistent
with other lines of property coverage. It would keep ``Flood in
Progress'' as a separate provision, and explicitly exclude coverage for
pre-existing damage in a standalone provision.
Section V: Policy Conditions. This section proposes a moderate to
high level of change from the current Dwelling Form. It would separate
out the provisions from section VII of the current Dwelling Form that
specifically apply to how the policy is administered, the policyholder-
facing underwriting aspects of the policy. It would state in simple,
plain language the reasons a homeowner policyholder may cancel the
policy in accordance with current regulation.\15\ It would give FEMA
discretion to extend the deadline to submit proof of loss to 365 days
from the date of loss, and the deadline for policy renewal to 60 days
from the policy's expiration date (referred to as a ``grace period''),
following a presidentially-declared flood disaster in accordance with
the Robert T. Stafford Disaster Relief and Emergency Assistance Act.
FEMA has established a business practice of issuing proof of loss
extensions for claims following a major flood event and grace period
extensions for flood insurance renewals. The proposed Homeowner Flood
Form would normalize this course of business and make the provision
discretionary, not mandatory, so that these flexibilities not found in
the current Dwelling Form can be leveraged where appropriate. It would
also allow insurers to accept and make payment on the adjuster's
reports and allow FEMA to issue special terms for advance payments not
currently provided in the Dwelling Form.
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\15\ See 44 CFR 62.5.
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Section VI: Procedures and Duties When A Loss Occurs. This section
proposes a moderate to high level of change from the current Dwelling
Form. The current Dwelling Form includes various provisions under its
section VII (General Conditions) and the proposed Homeowner Flood Form
would separate out the provisions that specifically apply to how losses
are proven and paid for the homeowner policyholder in this section
(i.e., claims issues). It would simplify the options after a loss and
extend the proof of loss deadline from the current Dwelling Form
deadline of 60 days to 90 days. It would allow insurers to issue a de
minimis advance payment to insureds up to five percent of the Coverage
A limit of liability (without requiring the mortgage company to be on
the check). The proposed Homeowner Flood Form would fold the deductible
section from the Dwelling Form into a larger section and introduce
language that presents the deductible as a single deductible rather
than separate deductibles. It would also simplify loss settlement by
removing distinctions between principal and primary residences, using
replacement cost value as the default rather than the current Dwelling
Form's actual cash value default, and removing all special situations
where only actual cash value applies.
Section VII: General Conditions. This section proposes a low to
moderate level of change from the current Dwelling Form. It would
reorganize the sections alphabetically and simplify language, add
language to capture the ability to have other insurance from a private
flood carrier not in the current Dwelling Form, and add sections on
``Death,'' ``Headings and Captions,'' and ``Your Options After Our
Denial.'' FEMA is proposing to add a section on death to address
situations where there are questions regarding the household residents,
and to help alleviate the challenges associated with claims involving a
deceased homeowner policyholder for their survivors. Under the Dwelling
Form, FEMA observed instances where the family of deceased
policyholders would have their claims denied by insurers participating
in the NFIP, on grounds that the SFIP prohibits assignment of claims.
FEMA is therefore proposing to add a section on death to address and
alleviate the challenges associated with claims involving a deceased
homeowner policyholder for their survivors. FEMA proposes the ``Your
Options After Our Denial'' section to present in one location the
homeowner policyholder's options after denial. This proposed section
would reaffirm to homeowner policyholders that there are additional
administrative options to work with the insurer to reach a resolution
to a claim, but also incorporate requirements from the Bunning-
Bereuter-Blumenauer Flood Insurance Reform Act of 2004 \16\ explaining
the appeals process not currently found in the Dwelling Form.
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\16\ Public Law 108-264 (June 30, 2004).
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III. Background
Congress created the National Flood Insurance Program (NFIP)
through enactment of the National Flood Insurance Act of 1968 (NFIA)
(Title XIII of Pub. L. 90-448, 82 Stat. 572), found at 42 U.S.C. 4001
et seq. The NFIP is a voluntary Federal program enabling property
owners in participating communities to purchase flood insurance as a
protection against flood losses. In exchange, participating communities
must enact floodplain management regulations that incorporate the NFIP
minimum floodplain management criteria. The minimum floodplain
management criteria are designed to: (1) constrict the development of
land which is exposed to flood damage where appropriate; (2) guide the
development of proposed construction away from locations which are
threatened by flood hazards; (3) assist in reducing damage caused by
floods; and (4) otherwise improve the long-range land management and
use of flood-prone areas. 42 U.S.C. 4102(c). These NFIP requirements
apply to areas known as special flood hazard areas (SFHA) in
participating communities.
FEMA administers the NFIP so that the provision of insurance and
adoption of minimum floodplain management criteria are mutually
reinforcing. NFIP flood insurance indemnifies property owners from
flood losses, reducing the need for Federal disaster assistance. And
NFIP floodplain management requirements reduce future flood damages,
thus further reducing the need for Federal disaster assistance.
In addition to providing flood insurance and reducing flood damages
through floodplain management, the NFIP identifies and maps the
Nation's floodplains. FEMA disseminates maps
[[Page 8286]]
depicting flood hazard information to create broad-based awareness of
flood hazards and to identify the areas where the minimum floodplain
management requirements apply.
Section 102 of the Flood Disaster Protection Act of 1973 (42 U.S.C.
4012a) makes flood insurance mandatory for all federally-backed
mortgages of properties located in special flood hazard areas. This is
commonly referred to as the ``mandatory purchase requirement.''
Additionally, Federal agencies are prohibited from providing loans and
grants to any property located in a special flood hazard area unless
the property is covered by flood insurance. See 42 U.S.C. 4012a(a).
In general, the NFIP charges premium rates sufficient to cover the
expected claims payouts and operating expenses. Such premium rates are
commonly referred to as risk-based or actuarial rates. See 42 U.S.C.
4014(a)(1), 4015(b). In general, FEMA offers only actuarial rates to
all buildings constructed, or substantially damaged or improved, on or
after the effective date of the community's initial Flood Insurance
Rate Map (FIRM), generally referred to as ``post-FIRM buildings.'' See
42 U.S.C. 4015(c)(1). However, the NFIA makes available discounted
rates for certain classes of properties. The most common discount is
for certain policies covering buildings built or substantially improved
prior to the community's adoption of its initial FIRM, generally
referred to as ``pre-FIRM buildings.'' See 42 U.S.C. 4014(a)(2), 42
U.S.C. 4015(a).
FEMA must also provide discounted rates for properties newly mapped
into a SFHA for the first time. See 42 U.S.C. 4015(i). FEMA gradually
phases out these discounts within the premium increase caps set by
statute. For the ``first policy year,'' FEMA must provide homeowner
policyholders of newly mapped-in properties the newly mapped discount
and increase the premium ``in accordance with'' the Act's annual
limitation of premium increases until the premium reaches its full-risk
rate. Id.; see also 42 U.S.C. 4014(a)(1) (full-risk rates); 42 U.S.C.
4015(e) (annual limitation).
The NFIA limits annual premium increases to not more than 18
percent for any property, with limited exceptions. 42 U.S.C.
4015(e)(1). However, this premium increase cap does not apply (1) to
certain pre-FIRM properties for which the NFIA mandates FEMA to
increase premiums by 25 percent a year until they reach full-risk
rates; (2) to properties within a community which has experienced a
downgrade in the NFIP's community rating system; \17\ (3) where the
homeowner policyholder has changed the amount of coverage or deductible
amounts; and (4) where the property was misrated.<SUP>18 19</SUP>
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\17\ The Community Rating System (CRS) is a voluntary program
for communities participating in the NFIP. The CRS offers NFIP
policy premium discounts in communities that develop and execute
extra measures beyond minimum floodplain management requirements to
provide protection from flooding. See 42 U.S.C. 4022(b).
\18\ A misrated policy occurs when a policy premium is incorrect
because one or more rating characteristics are incorrect. Rating
characteristics used to determine premium include items such as:
loss history, building occupancy, building use, and primary
residency status, among others. For more information, see <a href="https://www.fema.gov/sites/default/files/documents/fema_nfip-flood-insurance-manual-sections-1-6_oct2021.pdf">https://www.fema.gov/sites/default/files/documents/fema_nfip-flood-insurance-manual-sections-1-6_oct2021.pdf</a> (last accessd Aug. 28,
2023).
\19\ There are other exceptions, which are seldom triggered, for
properties where the policy has lapsed (42 U.S.C. 4014(g)(1)) and
where the owner has refused mitigation assistance (42 U.S.C.
4014(g)(2)).
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The NFIA requires FEMA to provide by regulation the ``general terms
and conditions of insurability . . . applicable to properties eligible
for flood insurance coverage.'' 42 U.S.C. 4013(a). To comply with this
requirement, FEMA adopts the Standard Flood Insurance Policy (SFIP) in
regulation, which sets out the terms and conditions of insurance. See
44 CFR part 61, Appendix A. FEMA must use the SFIP for all flood
insurance policies sold through the NFIP. See 44 CFR 61.13.
The SFIP is a single-peril (flood) policy that pays for direct
physical damage to insured property. There are three forms of the SFIP:
the Dwelling Form, the General Property Form, and the Residential
Condominium Building Association Policy (RCBAP) Form. The Dwelling Form
insures a one-to-four family residential building or a single-family
dwelling unit in a condominium building. See 44 CFR part 61, Appendix
A(1). Policies under the Dwelling Form offer coverage for building
property, up to $250,000, and personal property up to $100,000.\20\ The
General Property Form insures a five-or-more family residential
building or a non-residential building. See 44 CFR part 61, Appendix
A(2). The General Property Form offers coverage for building and
contents up to $500,000 each.\21\ The RCBAP Form insures residential
condominium association buildings and offers building coverage up to
$250,000 multiplied by the number of units and contents coverage up to
$100,000 per building. See 44 CFR part 61, Appendix A(3). RCBAP
contents coverage insures property owned by the insured condominium
association. Individual unit owners must purchase their own Dwelling
Form policy in order to insure their own contents.
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\20\ See 42 U.S.C. 4013(b).
\21\ Id.
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In addition to coverage for building or contents losses, most NFIP
policies also include Increased Cost of Compliance (ICC) coverage.\22\
ICC coverage applies when flood damages are so severe that the local
government declares the building ``substantially damaged,'' thus
requiring the building owner to bring the building up to current
community standards. If a community has a repetitive loss ordinance,
ICC coverage will also cover compliance requirements for a repetitive
loss structure. ICC coverage provides up to $30,000 of the cost to
elevate, demolish, floodproof, or relocate an insured building or any
combination thereof.
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\22\ ICC is authorized in 42 U.S.C. 4011(b).
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IV. Discussion of the Proposed Rule
FEMA last substantively revised the SFIP in 2000. See 65 FR 60758
(Oct. 12, 2000).\23\ In 2020, FEMA published a final rule that made
non-substantive clarifying and plain language improvements to the SFIP.
See 85 FR 43946 (July 20, 2020). However, many policyholders, agents,
and adjusters continue to find the SFIP difficult to read and interpret
compared to other, more modern, property and casualty insurance
products found in the private market.\24\ To achieve Objective 2.2 of
FEMA's 2022-2026 Strategic Plan of building a climate resilient nation
(i.e.,
[[Page 8287]]
increasing the number of properties with flood insurance and ensuring
adequate insurance coverage),\25\ FEMA consulted with property and
casualty experts over time \26\ and received valuable suggestions on
ways to align the SFIP's design with industry standards and practices
and improve its readability. Accordingly, FEMA incorporated these
suggestions into a new form of the SFIP, the Homeowner Flood Form, as
well as several accompanying endorsements to that form.\27\ FEMA now
proposes to adopt this new Homeowner Flood Form and its endorsements.
FEMA intends that this new Homeowner Flood Form will be more user-
friendly and comprehensible and, as a result, will make it easier for
agents to sell flood insurance and close the insurance gap.
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\23\ FEMA adopted another substantive change in 2003 when it
increased the limits for ICC coverage from $20,000 to $30,000. See
68 FR 9895 (Mar. 3, 2003).
\24\ See, e.g., The Institutes' Handbook of Insurance Policies,
American Institute for Chartered Property Casualty Underwriters,
12th ed. (2018) (containing copies of modern property casualty
forms). The Insurance Services Office (ISO)'s template homeowners
form (``HO-3'' form) appears on page 5 and demonstrates the
simplicity of this policy compared to the SFIP. The NFIP receives a
high volume of inquiries on the SFIP, further demonstrating the
challenges in reading and interpreting the SFIP. Policy inquiries
generally make up 43 percent of the total inquiries received by
FEMA's ``Ask the Experts'' tracking system between 2019 and May
2021. See also Barlow, Christine G., Personal Flood Insurance
Coverage Guide (2018) at 51: ``The historic flooding from hurricanes
in 2017 has only continued to highlight the issues with the current
NFIP program and its ability to provide coverage for the claims that
continue to occur. Because of this . . . ISO has developed a
personal flood program to provide the industry with standalone
private flood forms.'' The Chapter (Chapter 4) goes on to compare
the coverage to standard homeowner coverage and reference existing
endorsements that agents can use with their flood form. See also id.
at chapter 6 (p. 85): ``Because [the private flood form] was
developed by ISO it bears similarities to the ISO Homeowners Policy,
making it easier to dovetail coverages so that the insured has no
gaps in coverage. Because of this, many sections of the flood policy
are identical or very similar to the homeowners policy.''
\25\ FEMA. 2022-2026 FEMA Strategic Plan. <a href="https://www.fema.gov/sites/default/files/documents/fema_2022-2026-strategic-plan.pdf">https://www.fema.gov/sites/default/files/documents/fema_2022-2026-strategic-plan.pdf</a>.
\26\ FEMA conducted interviews with flood insurance
professionals in its loaned executive officer program in spring of
2017. FEMA procured insurance product expertise from Milliman,
Stanley Parsons, and Hinshaw between 2017-2019. FEMA engaged with
and sought feedback from ten Write Your Own companies in the summer
of 2019.
\27\ An endorsement is a written document attached to an
insurance policy that modifies the policy by changing the coverage
provided by the policy. Also known as a ``rider,'' ``addendum,'' or
``attachment,'' an endorsement can add coverage for acts or things
not covered by the original policy, limit or subtract coverage, add
or remove exclusions or conditions, or otherwise modify the policy.
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FEMA is committed to building a culture of preparedness, and such a
culture necessarily includes individuals, communities, and businesses
managing risks through proper insurance coverage. One of FEMA's roles
is to help people understand their risk and the available options to
best manage those risks. Flood insurance is an effective tool to
transfer risk and enable rapid recovery. The proposed Homeowner Flood
form would help build this culture by better advising homeowners of
their flood risks and options to manage those risks.
Flooding can be an emotionally and financially devastating event.
Experience has shown repeatedly that individuals, communities, and
businesses who manage risk through insurance accelerate their financial
recovery after a disaster.\28\ If an individual does not have adequate
savings to repair or replace their property, flood insurance will help
fill that gap when a flood occurs. Flood insurance allows homeowners to
recover quicker by providing the funds needed to repair or replace
property after a disaster. The proposed Homeowner Flood Form would
provide homeowners with options to more quickly receive funds to help
accelerate their financial recovery.
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\28\ In 2017, a costly year due to Hurricanes Harvey, Irma, and
Maria, the NFIP paid an average claim amount of more than $90,000,
while the average disaster assistance grant was just $9,000. See
FEMA Fact Sheet on Flood Insurance: A Small Price to Pay for Peace
of Mind at: <a href="https://agents.floodsmart.gov/sites/default/files/flood-insurance-small-price-pay-peace-mind_fact-sheet_jun20.pdf">https://agents.floodsmart.gov/sites/default/files/flood-insurance-small-price-pay-peace-mind_fact-sheet_jun20.pdf</a> (last
accessed Aug. 28, 2023).
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With flood insurance, individuals are able to financially recover
faster. While grants provided under the Robert T. Stafford Disaster
Relief and Emergency Assistance Act (``Stafford Act'') \29\ may support
survivors in the immediate aftermath of a presidentially-declared
disaster, this Federal support is only intended to meet basic needs as
a survivor moves forward with recovery. Federal disaster assistance
typically comes in two forms to individuals: a loan, which must be paid
back with interest, or a FEMA disaster grant, which averages
approximately $5,000 per household.\30\ A disaster grant is not
intended to make survivors whole and is not a substitute for insurance.
The average flood insurance claim in 2019 was more than $50,000.\31\
Maintaining flood insurance is therefore critical to rebuilding a home
and replacing belongings following a flood.
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\29\ Public Law 93-288; 42 U.S.C. 5121 et seq.
\30\ See <a href="http://www.floodsmart.gov/flood-insurance/requirements">http://www.floodsmart.gov/flood-insurance/requirements</a>
(last accessed Aug. 28, 2023).
\31\ Id. See also <a href="https://www.fema.gov/data-visualization/historical-flood-risk-and-costs">https://www.fema.gov/data-visualization/historical-flood-risk-and-costs</a> (last accessed Aug. 28, 2023).
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Moreover, when a flood results in a presidentially-declared
disaster, flood insurance not only benefits those directly affected by
a flood, it also reduces the need for Federal disaster assistance and
lowers costs for taxpayers. Because one of FEMA's goals is to close the
Nation's insurance gap, and because homeowners make up the majority of
NFIP policyholders, FEMA is working to encourage homeowners to better
understand their risk and purchase adequate insurance coverage to
reduce their losses from flood.\32\ FEMA is proposing this new Form for
that purpose.
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\32\ Although the NFIP does not maintain data on the ownership
status of policyholders, FEMA estimates that a majority of
policyholders are homeowners. This estimation stems from certain
assumptions based on NFIP eligibility rules and coverage type (for
instance, a policyholder with building coverage must own the
building, and a policyholder with contents coverage only is likely a
renter).
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The new Homeowner Flood Form, which FEMA proposes to add to its
regulations at 44 CFR 61 Appendix A(4), would protect property owners
in a one-to-four family residence. Upon adoption, the Homeowner Flood
Form would replace the Dwelling Form as a source of coverage for this
class of residential properties.\33\ FEMA would continue to use the
Dwelling Form to insure landlords, renters, and owners of mobile homes,
travel trailers, and condominium units. (FEMA will evaluate any changes
needed for these other types of residential policyholders, as well as
commercial policyholders, based on public comment associated with this
rulemaking). Compared to the current Dwelling Form, the new Homeowner
Flood Form would clarify coverage and more clearly highlight
conditions, limitations, and exclusions in coverage as well as add and
modify coverages and coverage options. FEMA also proposes adding to its
regulations five endorsements to accompany the new Form: Increased Cost
of Compliance Coverage, Actual Cash Value Loss Settlement, Temporary
Housing Expense, Basement Coverage, and Builder's Risk. These
endorsements, which FEMA proposes to codify at 44 CFR 61 Appendices
A(101)-(105), respectively, would give homeowner policyholders the
option of amending the Homeowner Flood Form to modify coverage with a
commensurate adjustment to premiums charged.\34\ Together, the
Homeowner Flood Form and accompanying endorsements would increase
options and coverage for owners of one-to-four family residences.
---------------------------------------------------------------------------
\33\ FEMA estimates that roughly 88.4% of current Dwelling Form
policyholders are homeowners and therefore would use the proposed
Homeowner Flood Form. Homeowners as a percentage of policyholders
was estimated using data from the PIVOT database from 2010 through
2019. The PIVOT database is the NFIP's official system of record
which contains NFIP information.
\34\ These endorsements would be available to homeowner
policyholders to amend only the Homeowner Flood Form; they would not
be available to amend the current SFIP forms for other types of
policyholders.
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A. 44 CFR 61.2: Definitions
44 CFR 61.2 provides that the definitions set forth in 44 CFR part
59 apply to 44 CFR part 61. FEMA proposes to revise this provision to
clarify that the definitions set forth in part 59 apply to part 61,
including appendices, but if an appendix defines a term differently,
that definition controls for the purposes of that appendix. FEMA
proposes this revision for clarity and accuracy.
B. 44 CFR 61.13: Standard Flood Insurance Policy
44 CFR 61.13 describes the Standard Flood Insurance Policy. Section
61.13(a), ``Incorporation of forms,'' states that each of the SFIP
forms included in Appendix A hereto (General
[[Page 8288]]
Property, Dwelling, and Residential Condominium Building Association)
and incorporated herein shall be incorporated into the SFIP. FEMA
proposes to remove ``(General Property, Dwelling, and Residential
Condominium Building Association)'' so that the provision states simply
that each of the SFIP forms included in Appendix A hereto and by
reference incorporated herein shall be incorporated into the SFIP. The
removal of this phrase would allow FEMA to incorporate the new
Homeowner Flood Form, as well as any additional forms that FEMA may
implement in the future, without having to revise this section upon
issuance of each new form.
C. Appendix A(4): Homeowner Flood Form
As mentioned above, FEMA has not substantively updated the SFIP
since 2000. While the SFIP has performed ably over the last two
decades, FEMA recognizes that changes in consumer expectations,
technology, and the insurance industry over the last 20 years warrant
an update to it. The new Homeowner Flood Form and its accompanying
endorsements would provide a more personalized, customizable product
than the NFIP has offered during its 50 years. In addition to aligning
with property and casualty homeowners insurance, the result would
increase consumer choice. For instance, rather than universally
limiting basement coverage, the new Form allows homeowner policyholders
to choose their coverage based on their understanding of flood risk and
the coverage they desire. The Form would also simplify coverage, such
as offering the same coverage on a building regardless of whether it is
a primary residence or not, or pre- or post-FIRM, and removing the
importance of flood zones for purposes of coverage.\35\ Ultimately, the
purpose of coverage is to help homeowner policyholders recover, and
FEMA anticipates that the premiums tied to homeowner policyholders'
coverage choices would signal the underlying risk and prompt mitigation
efforts.
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\35\ Although the Form would offer the same coverage regardless
of flood zone, the premiums charged would continue to differ based
on risk. For instance, owners of riskier buildings, such as pre-FIRM
buildings and buildings with the lowest level below Base Flood
Elevation, would continue to pay more in premiums for the same level
of coverage compared to a building carrying less risk. This is
because the NFIP will continue charging the most accurate actuarial
rates it can based not just on flood maps, but other information
(such as distance to water sources and elevations) as improvements
in technology allow, as discussed in greater detail below.
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The following chart illustrates how homeowner policyholders could
customize their policy at the point of sale:
BILLING CODE 9111-52-P
[[Page 8289]]
[GRAPHIC] [TIFF OMITTED] TP06FE24.021
BILLING CODE 9111-52-C
Simplifying the Policy for Homeowner Policyholders and Plain Language
Efforts
The Form would provide FEMA with greater flexibility in
administering flood insurance. Unlike the Dwelling Form, which is
highly prescriptive and includes long lists of covered items, the new
Form would further incorporate plain language, remove unnecessary
provisions, reduce reliance on lists, and highlight certain specifics
on the declarations page. Moreover, the Form would add in
flexibilities, like special procedures during catastrophic flood
events.\36\ Altogether, the proposed products would allow FEMA to
provide homeowners with better, more tailored coverage.
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\36\ FEMA currently provides special procedures for catastrophic
events through bulletins issued on a catastrophe-by-catastrophe
basis. See e.g., Bulletin W-17030, ``Activation of NFIP Catastrophic
Event Enhanced Claim Payment Process for Hurricane Harvey,'' (Sept.
3, 2017), found at <a href="https://nfipservices.floodsmart.gov/sites/default/files/w-17030.pdf">https://nfipservices.floodsmart.gov/sites/default/files/w-17030.pdf</a> (last accessed Aug. 28, 2023); Bulletin W-
17031a, ``Guidance for Advance Payments for Hurricane Harvey,''
(Sept. 4, 2017), found at <a href="https://nfipservices.floodsmart.gov/sites/default/files/w-17031a.pdf">https://nfipservices.floodsmart.gov/sites/default/files/w-17031a.pdf</a> (last accessed Aug. 28, 2023); Bulletin
W-17035, ``Hurricane Harvey Enhanced Claim Handling for Prior Loss
and Contents Claims under the Dwelling Form of the SFIP,'' (Sept. 9,
2017), found at <a href="https://nfipservices.floodsmart.gov/sites/default/files/w-17035.pdf">https://nfipservices.floodsmart.gov/sites/default/files/w-17035.pdf</a> (last accessed Aug. 28 2023). FEMA proposes to
incorporate these special procedures into the Homeowner Flood Form
for ease of administration and to increase transparency.
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[[Page 8290]]
As an insurance contract, the new Form has to be capable of being
read from start to finish as well as quickly navigable to find the
specific information in the event of an issue or a loss. To maintain
certain decades-old foundational concepts, limit implementation errors,
and minimize disruption to the administration of the NFIP, FEMA found
it necessary to favor certain flood insurance terminology and/or terms
of art even where the phrasing may seem stuffy or overworked. FEMA is
proposing several changes with plain language in mind and seeks comment
on whether the proposed changes result in the desired clarity.
Specifically, FEMA proposed to change the organization of the policy,
such that fewer sections are provided in the overall policy and similar
concepts are grouped together to allow the reader to know what is and
is not covered without having to review a section and then have to
return to it again for clarity. FEMA is also proposing to add headers
and captions to guide the reader and improve comprehension. Insurance
professionals often ``speak by citation,'' quoting the policy
provisions by location rather than name. The headers and captions will
help non-insurance professionals quickly understand what is in those
citations. FEMA proposes italicizing defined terms throughout the
policy as a signal to the reader that this is one of those defined
terms they read and thus allowing the reader to refer back to the
definitions as appropriate. FEMA is also proposing to define specific
terms not used elsewhere in the policy within the clause. For example,
``pollutants'' is defined in the proposed III.A.3.d, rather than in the
proposed section II. FEMA is proposing to remove technical information.
The Dwelling Form makes reference to specific flood zones, post-FIRM
buildings, and defines numerous terms not relevant to the policyholder
with coverage under the SFIP. FEMA also seeks comment on other ways the
Form can be revised to improve the policy's language and decrease
confusion.
Potential Benefits and Impacts on Disadvantaged Communities
FEMA believes that the proposed changes to the Homeowner Flood Form
will reduce burdens on low-income and other disadvantaged communities
particularly affected by changing conditions and increased flooding.
FEMA's current authority requires actuarial rates, which can impact
low-income and other disadvantaged communities. By offering choices
such as options for actual cash value or replacement cost value
coverage and basement coverage options, FEMA believes that homeowner
policyholders can make a value judgment regarding the extent of their
coverage.\37\ FEMA seeks specific comment on the potential benefits and
impacts of this proposed rulemaking on various geographic regions and
communities, including based on income, insurance access, and
affordability.
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\37\ FEMA believes additional equitable and affordability
solutions require legislative change. See generally <a href="https://www.fema.gov/flood-insurance/rules-legislation/congressional-reauthorization/legislative-proposals">https://www.fema.gov/flood-insurance/rules-legislation/congressional-reauthorization/legislative-proposals</a> (last accessed Aug. 28, 2023).
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Premium Rates
The changes proposed in this rule would generally not impact the
NFIP's premium structure. A decision to select more robust coverage, as
with all insurance coverage, would result in increased premiums.
Homeowner Flood Form
1. Section I: Insuring Agreement
FEMA proposes to consolidate multiple sections from the Dwelling
Form into one larger section. Specifically, elements of sections I and
X of the Dwelling Form appear in proposed section I.A on governing law
to make clear that this is a Federal policy and is governed by Federal
law.\38\ Proposed section I.A would retain the language indicating that
Federal law governs all disputes regarding the policy and claims
handling. Standard Flood Insurance Policies are sold by private WYO
insurance companies and directly to the public by FEMA's direct
servicing agent, NFIP Direct. Because the NFIP is national in scope and
accomplishes a number of programmatic missions in addition to making
affordable flood insurance generally available to the public, the SFIP
provides that its terms cannot be altered, varied, or waived except by
the written authority of the Federal Insurance Administrator.\39\ The
Administrator intends that the same benefits should be available to all
those insured wherever the insured property is located, or whether the
policy is purchased from a WYO insurance company or from NFIP Direct.
There is a continued need for uniformity in the interpretation of and
standards applicable to the policies and their administration. FEMA is
reiterating the policy language pertaining to applicable law to
emphasize that matters pertaining to the SFIP are governed exclusively
by Federal law. Proposed section I.B on conflicts with Federal law
would eliminate the need to list specific legal authorities that
currently or could eventually conflict with the policy.\40\ Listing all
potentially applicable laws here is unnecessary, unwieldly, and
constrains any future flexibility. Consistent with the goals of
updating the SFIP, this revised section would increase readability and
comprehensibility.
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\38\ See generally 42 U.S.C. 4011(a), 4053, 4072; 44 CFR 59.2,
61.5(e), 62.22, 62.23(g).
\39\ See also Nelson v. Becton, 929 F.2d 1287, 1291 (8th Cir.
1991) (``The purpose of the National Flood Insurance Program is to
provide flood insurance, which otherwise would not be available, on
a uniform nationwide basis. To apply the varying reasonable
expectations doctrines of the insurance laws of individual states
would `frustrate [these] specific objectives of the Federal program[
]' '' (citing United States v. Kimbell Foods, 440 U.S. 715, 728
(1979))).
\40\ For example, the current Dwelling Form contains references
to other legal authority throughout, such as in sections IV.15
(referencing the Coastal Barrier Resources Act, the Coastal Barrier
Improvement Act, and related amendments) and V.E (discussing leasing
land from the Federal Government).
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Like the Dwelling Form at section I.C, proposed section I.C of the
new Form would detail the terms of the agreement to pay for direct
physical loss by or from flood and would also state that a homeowner
policyholder would only receive compensation up to the limits of
liability listed on the declarations page. This proposed section would
continue to clarify that the ``full amount due'' includes applicable
premiums, surcharges, and fees to help homeowner policyholders
understand that the full amount due can be reduced by these outstanding
amounts. Additionally, the section would require that the information
furnished by the homeowner policyholder be ``complete'' and accurate to
negate incomplete proof of loss issues that can delay claims
processing.
Proposed section I.D would move the policy term (currently in the
Dwelling Form at section VII.E.1) to the front of the agreement
section, separated from the policy renewal content, to make clear to
the homeowner policyholder at the top of the form, how long the
agreement lasts. Proposed section I.E would incorporate the
liberalization clause from the Dwelling Form (article IX), authorizing
FEMA to make changes that broaden coverage without an additional
premium and making those changes automatically apply to the policy as
of the date the change is implemented with certain caveats. Throughout
the policy, FEMA proposes to modify timeframes to ensure clarity on how
days are calculated under the policy. For example, proposed section
I.E. would specify a 60 ``calendar'' day window prior to or during the
policy term rather than a 60-day window as the Dwelling Form provides.
The NFIP
[[Page 8291]]
currently operates based on calendar days, and specifying this in the
policy promotes consistency and transparency, reducing the likelihood
that a homeowner policyholder might wrongly assume that ``days'' are
``business'' days. Finally, proposed section I.F would retain the right
of review language currently in section I.D of the Dwelling Form and
incorporate concepts from section VII.D of that form, including the
right to request additional information and revising the amounts due
from the homeowner policyholder based on any information reviewed.
These revisions would ensure the homeowner policyholder is aware of the
key terms of the agreement at the onset.
3. Section II: Definitions
First, FEMA proposes to retain in proposed section II.A the upfront
clarification that the pronouns ``you'' and ``your'' refer to the
insured(s), and that ``we,'' ``us,'' and ``our'' refer to the insurer.
This clarification concerning the use of pronouns has been in the
current SFIP forms since 1982,\41\ and retaining this clarification
comports with plain language guidelines.\42\ FEMA proposes to move the
language currently in section II.A of the Dwelling Form regarding the
policyholder's spouse and the language defining ``insured(s)'' to a new
definition for ``Insured(s).'' FEMA also proposes not to retain the
statement that some definitions are complex due to their presence in
statute, regulation, or case law, because this sentence is unnecessary.
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\41\ Prior to 1982, the forms referred to ``insurer'' and
``insured'' throughout. See e.g., 44 CFR 61 App. A(1) (1981).
\42\ See ``Federal Plain Language Guidelines,'' Mar. 2011, at
30, found at <a href="https://www.plainlanguage.gov/media/FederalPLGuidelines.pdf">https://www.plainlanguage.gov/media/FederalPLGuidelines.pdf</a> (last accessed Aug. 28, 2023).
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In section II.B, FEMA proposes to change the definition of
``flood.'' FEMA proposes ``Flood'' to mean a general and temporary
condition of partial or complete inundation of normally dry land from
(1) overflow of inland or tidal waters; (2) unusual and rapid
accumulation or runoff of surface waters from any source; (3) mudflow,
defined as a river of liquid and flowing mud on the surface of normally
dry land, as when earth is carried by a current of water; or (4) sudden
erosion or undermining of land along the shore of a lake or similar
body of water caused by waves or currents of water exceeding
anticipated cyclical levels that causes collapse or subsidence of land
resulting in a flood. FEMA proposes not to retain the language
currently in the Dwelling Form at section II.B.1 limiting flood to two
or more acres, or two or more properties, one of which is the
policyholder's, because it is unnecessarily restrictive: It deviates
from the definition at 44 CFR 59.1, which does not include this
limitation, and flood insurance adjusters can experience issues with
finding a second property to qualify as a flood, or accessing other
properties to investigate whether flooding occurred. FEMA proposes to
define ``mudflow'' where it appears (i.e., within the definition of
flood), rather than later in the definitions, to save homeowner
policyholders from having to reference a separate part of the policy
for it. This is a change to the location of the definition, and not the
meaning, as FEMA would continue to use the definition of ``mudflow''
from the Dwelling Form. FEMA's proposed sub-definition for ``erosion''
is substantively the same as the Dwelling Form's except that it
specifies that the erosion must be sudden, making it clear that gradual
erosion would not result in a flood under the policy. These proposed
changes to the definition of ``Flood'' would simplify coverage; FEMA
does not intend to broaden or narrow coverage here, and would continue
to limit coverage where a homeowner policyholder causes a flood or
where the cause is wind-driven rain (through a roof or window, etc.) or
some other water source (see proposed section IV.A.5).
FEMA proposes to relocate and revise the definition of ``Building''
and incorporate a revised definition of ``Basement'' and add a
definition for ``Enclosure'' within proximity of the definition of
``Building'' in section II.C. This relocation of terms will make it
easier to read the definiition of the structural elements applicable to
buildings in context of one another. ``Building'' would be defined as
``a structure, the construction of which has been completed, that has a
fully secured roof and solid, vertical, load-bearing walls and is
affixed to a permanent site.'' FEMA proposes to replace the phrase
``two or more outside rigid walls'' with ``solid, vertical, load-
bearing walls'' because this description is more accurate, and
specifying a number is unnecessary as ``walls'' is already plural. This
proposed definition would not include the sub-definitions for mobile
homes or travel trailers because, as mentioned above, owners of these
units would continue to be covered under the Dwelling Form.\43\ In
addition, FEMA proposes to remove references to gas or liquid storage
tanks, shipping containers, recreational vehicles, park trailers, or
other similar vehicles--because as these are not buildings,
specifically excluding them from the definition is unnecessary.
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\43\ The proposed Homeowner Flood Form may insure some
manufactured homes. Guidance regarding this coverage will be
detailed in future updates to the underwriting rules used by the
Program.
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Under the current Dwelling Form at section II.C.5, a ``Basement''
is defined as ``[a]ny area of a building, including any sunken room or
sunken portion of a room, having its floor below ground level on all
sides.'' Sometimes this definition does not align with homeowner
policyholder expectations that may consider what is defined in the
Dwelling Form as a basement to be the first floor of their home.\44\
Under the current Dwelling Form, coverage is limited in basements to
specific items and homeowner policyholders cannot choose to increase
coverage if they want it for areas of their home they may not otherwise
consider to be a ``Basement.'' The proposed definition for ``Basement''
would state that a basement is ``any area of a building having its
floor level below ground level on all sides, regardless of design or
use.'' The proposed definition would further clarify that ``An area of
a
[[Page 8292]]
building is below ground level when the land touching the exterior of
the building is above its floor level. An area of a building is
presumed to be below ground level when it is necessary to walk up steps
or a slope to reach the land surrounding the building. A professional
land survey or report may rebut this presumption.''
---------------------------------------------------------------------------
\44\ See Donovan Finn and John Travis Marshall, Superstorm Sandy
at Five: Lessons on Law as Catalyst and Obstacle to Long-Term
Recovery Following Catastrophic Disasters, 48 Envtl. L. Rep. 10494
(2018), found at <a href="https://commons.library.stonybrook.edu/cgi/viewcontent.cgi?article=1004&context=somas_articles">https://commons.library.stonybrook.edu/cgi/viewcontent.cgi?article=1004&context=somas_articles</a> (last accessed
Aug. 28, 2023). ``For instance, consider flood insurance regulations
and the seemingly simple question: what is a basement? In many parts
of the country that would cause little confusion; according to the
NFIP a basement is `[a]ny area of the building having its floor
subgrade (below ground level) on all sides.' However, this seemingly
straightforward definition became a source of significant concern
for many building owners after Sandy. In New York City, Hoboken,
Jersey City, and other municipalities in the region, the NFIP
definition of a basement also technically describes many thousands
of housing and retail units at the lowest level of attached row
houses that are known in the local vernacular as `ground floor' or
`garden units.' Such units may be located anywhere from a few inches
to three feet below grade and, if conforming to stipulations in
local laws, are legal for use as individual apartments, shops,
offices, or fully habitable levels of a single-family home. Many
buildings containing this kind of unit actually have an additional
cellar or basement level underneath this `ground' level. However,
while these units may sit above a second basement, and although they
are discrete legal residences or commercial units according to local
zoning and building codes, these units are classified by FEMA as
basements and are therefore ineligible for NFIP reimbursement. One
infamous case involved a Hoboken resident whose NFIP claim was
denied because his apartment was determined to be 0.13 inches below
grade.'' See also <a href="https://www.wxyz.com/news/what-does-fema-cover-if-youre-denied-help-after-floods-here-are-some-other-options">https://www.wxyz.com/news/what-does-fema-cover-if-youre-denied-help-after-floods-here-are-some-other-options</a> (last
accessed Aug. 28, 2023) and <a href="https://www.wxyz.com/news/why-many-people-are-being-denied-fema-flood-assistance">https://www.wxyz.com/news/why-many-people-are-being-denied-fema-flood-assistance</a> (last accessed Aug.
28, 2023).
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FEMA proposes this definition to better explain its application to
the area in the building, to the extent the definition is not aligned
with a homeowner policyholder's conception of a basement. This proposed
definition would better allow homeowner policyholders and their agents
to identify whether they have a basement at the point of sale. The
Homeowner Flood Form offers homeowner policyholders limited coverage
for a basement by default. FEMA seeks comment on this proposed
definition of basements to better address the needs and understanding
of homeowner policyholders.
``Enclosure'' would mean an area that exists below the dwelling and
used in accordance with local floodplain management ordinances or law
for the parking of vehicles, building access, or storage, and is shown
on the declarations page. FEMA proposes this new definition to more
clearly differentiate enclosures from basements.
FEMA is proposing to relocate the definitions currently found in
section II.B of the Dwelling Form to section II.D and is proposing to
include or modify several, but not all, definitions that are currently
in the Dwelling Form, and to add several others. First, FEMA proposes
to retain, with minimal to no changes, the definitions for ``Act,''
``Described Location,'' ``National Flood Insurance Program,'' and
``Policy.'' ``Act'' would continue to be defined as the National Flood
Insurance Act of 1968 (42 U.S.C. 4001 et seq.). ``Described Location''
would be defined as the location of the insured building, as shown on
the declarations page. The ``National Flood Insurance Program'' would
continue to be defined as FEMA's program of flood insurance coverage
and floodplain management administered under the ``Act.'' Lastly, the
definition for ``Policy'' would specify that it is the entire written
contract between the homeowner policyholder and FEMA to include: (1)
the Homeowner Flood Form; (2) the completed application for insurance;
(3) the declarations page; (4) any endorsements issued; and (5) any
addenda FEMA attaches to the Form upon application or renewal.
FEMA proposes minor, but somewhat more meaningful changes to the
definitions for ``Actual Cash Value,'' ``Declarations Page,'' ``Direct
Physical Loss By or From Flood,'' and ``Dwelling.'' The definition for
``Actual Cash Value'' would continue to be the cost to replace an
insured item of property at the time of loss, but FEMA proposes to
replace the phrase ``less the value of its physical depreciation'' with
``less depreciation based on its age and condition.'' FEMA proposes to
specify that depreciation is based on the insured item's age and
condition to explain what ``physical depreciation'' means. The
definition for ``Declarations Page'' would state that it is a document
provided to homeowner policyholders summarizing the coverage limit(s),
premium, insured(s), and other information about the policy, and that
it is a part of the policy. FEMA proposes this definition because it is
more modern than the Dwelling Form's current definition of a
``computer-generated summary. . . .'' FEMA proposes ``Direct Physical
Loss By or From Flood'' to mean actual physical loss or damage to the
insured property directly caused by a flood. FEMA chose not to retain
the sentence currently in the Dwelling Form that ``there must be
evidence of physical changes to the property.'' The addition of the
words ``actual physical'' to describe loss or damage to the insured
property obviates the need for that sentence and makes it clearer that
FEMA may only pay for physical loss or damage directly caused by a
flood. Lastly, FEMA proposes to define ``Dwelling'' as a building in
use as a one-to-four family residence, and specify that it is not a
mobile home, travel trailer, or condominium unit. FEMA proposes to
specify that mobile homes, travel trailers, or condominium units are
not ``dwellings'' under this Form because FEMA intends that this Form
only cover homeowners of one-to-four family site-built residential
buildings. At this time, the Dwelling Form would continue to serve as
the Standard Flood Insurance Policy Form covering mobile homes, travel
trailers, and condominium units, as well as landlords and tenants.
FEMA proposes to add definitions for ``Administrator,'' ``Claim,''
``Flood Damage Resistant Materials,'' ``Insured(s),'' ``Machinery and
Equipment,'' ``Proof of Loss,'' and ``Replacement Cost Value.'' FEMA
proposes to specify that ``Administrator'' refers to the FEMA
Administrator or designee for clarity. FEMA proposes to define
``Claim'' as the homeowner policyholder's assertion that (s)he is
entitled to payment for a covered loss under the terms and conditions
of the policy and specify that there is only one claim per flood event.
This definition would complement the proposed definition for ``Proof of
Loss.'' FEMA proposes to define ``Flood Damage Resistant Materials'' as
building materials identified by the Administrator as resistant to
flood damage to encourage homeowner policyholders to rebuild smarter.
Use of materials that are resistant to flood damage reduces the
likelihood of replacement in a future flood, and the ability to clean
and repair items instead of replacing them would likely result in net
savings to the NFIP and its policyholders. The definition of
``Insured(s)'' would include the homeowner policyholder and (1) any
additional persons identified on the declarations page; (2) any
mortgagee or loss payee named in the application for insurance, as well
as any other mortgagee or loss payee determined to exist at the time of
loss; and (3) the homeowner policyholder's spouse, if a resident of the
same household. This definition is substantively the same as the
definition of ``you'' from the Dwelling Form in II.A, but includes the
homeowner policyholder's spouse here, to simplify and consolidate in
one place the concept of who has an interest under the policy. FEMA
proposes to specify that ``Machinery and Equipment,'' when contained
within a building at the described location, would include functional
electrical, plumbing, heating, cooling, and safety elements necessary
for the operation of a building, and elevators. Outside of a building,
``Machinery and Equipment'' would include a heating and air
conditioning system's condenser unit and heat pump, solar panels, and
permanently installed whole house standby generators when these units
are connected to and are servicing a building at the described
location. FEMA proposes this definition to avoid long lists of items in
the coverage section. The coverage limitations in the Dwelling Form (at
III.A.8) appear in a list of 17 items. This new definition would
condense these 17 entries into a single definition. While the new
definition would still call out some items specifically, it is FEMA's
position that this more condensed, succinct approach would be less
cumbersome to homeowner policyholders and give the Agency increased
flexibility in its implementation of the NFIP.\45\ FEMA
[[Page 8293]]
also anticipates applying this definition during loss settlements to
encourage homeowners to move these relatively costly items from their
basements/lower enclosures to a less risky area of the property,
increasing savings to the NFIP and its policyholders. FEMA would define
``Proof of Loss'' as a signed and sworn statement by the homeowner
policyholder containing documentary evidence in support of one's loss
and the amount one is claiming. FEMA proposes to define this term to
mitigate confusion over what a proof of loss is,\46\ further
differentiate proof of loss from a claim, and to facilitate
implementation of proposed V.E, ``Disaster Conditions.'' Lastly,
``Replacement Cost Value'' would mean the necessary cost, without
deduction of depreciation, to repair or replace an item of property at
the time of loss with an item of like kind and quality. FEMA proposes
to add this definition because the new Homeowner Flood Form would offer
homeowner policyholders replacement cost value as the default, rather
than actual cash value as the Dwelling Form does, so defining the term
would assist FEMA in administering the Form.
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\45\ The NFIP Claims Manual currently explains each of the 17
items listed in section III.A.8.a of the Dwelling Form, and the
explanations of these items can also include several related items
themselves. See National Flood Insurance Program Claims Manual (May
1, 2020), found at <a href="https://www.fema.gov/sites/default/files/2020-07/fema_nfip_claims-manual_2020.pdf">https://www.fema.gov/sites/default/files/2020-07/fema_nfip_claims-manual_2020.pdf</a> (last accessed Aug. 28, 2023)
(``Claims Manual''). For instance, the Claims Manual explains that
``nonflammable insulation in a basement'' [III.A.8.a(10)] includes
the nonflammable insulation in walls and ceilings between joists in
the lowest elevated floor and unfinished protective weather barriers
affixed to floor joists and unattached protective barriers located
in a crawlspace. Id. at 41. In addition, ``well water tanks and
pumps'' [III.A.8.a(15)] include pressure switches, pressure valves,
and gauges. Id. at 43. The removal of these lists would provide FEMA
flexibility to the extent that the Agency can continue to clarify in
the Claims Manual terms defined in the policy.
\46\ During the aftermath of Superstorm Sandy, policyholders and
their representatives attempted to submit ``placeholder'' proofs of
loss where they filled out the coversheet for FEMA's Proof of Loss
Form (FEMA Form 086-0-9) with ``TBD'' on every line. This was not
appropriate or within the terms of the SFIP, creating problems for
these policyholders and for FEMA. (In this case, the insurance
carriers had to deny these claims because these policyholders failed
to meet the requirements of the SFIP. Many of these policyholders
pursued litigation, creating the need for FEMA's NFIP Transformation
Task Force established in 2015). See NFIP Bulletin w-14036, found at
<a href="https://nfipservices.floodsmart.gov/sites/default/files/w-14036.pdf">https://nfipservices.floodsmart.gov/sites/default/files/w-14036.pdf</a>
(last accessed Aug. 28, 2023) and NFIP Bulletin w-12092a, found at
<a href="https://nfipservices.floodsmart.gov/sites/default/files/w-12092a.pdf">https://nfipservices.floodsmart.gov/sites/default/files/w-12092a.pdf</a>
(last accessed Aug. 28, 2023).
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Finally, FEMA proposes not to carry over into the new Homeowner
Flood Form three definitions currently in the Dwelling Form: ``Base
Flood,'' ``Deductible,'' and ``Principal Residence.'' Because ``base
flood'' would not have any impact on the terms and conditions of
insurability in the new Form, defining it would be unnecessary. Because
``deductible'' is a commonly understood term in the insurance industry,
it is FEMA's position that including a definition for it would be
unnecessary. In addition, because the Homeowner Flood Form would not
vary coverage between principal and secondary, etc., residences,
defining the term ``principal residence'' would likewise be
unnecessary.
4. Section III: What We Cover
FEMA proposes to incorporate language currently in the Dwelling
Form with section III to improve the customer experience by presenting
the material in a more organized manner. The Dwelling Form addresses
property covered (article III), property not covered (article IV), and
exclusions (article V) in different sections. In proposed section III,
FEMA addresses in a single section what the policy covers, where
coverage is limited, any conditional coverage, and then property that
is not covered.\47\ The proposed changes to Coverages B and C also
generally align with coverage specifically for homeowners, the focus of
this proposed form. These changes also remove lists and ``hidden''
coverage and simplify policy language to enhance understanding and
functionality of the policy. Relying on the definitional concepts
instead of specific lists gives FEMA the opportunity to clarify
coverage and improve readability of the form while also providing
increased flexibility to implement the policy. FEMA proposes to
rephrase coverage that is currently phrased in the negative in the
Dwelling Form to ensure a better understanding of coverage. The
proposed revisions would also remove all references to flood zones in
special flood hazard areas, and instead provide universal default
coverage that applies to all buildings regardless of flood zone. These
revisions reduce the complexity of the policy, as homeowner
policyholders may not immediately recall what zone they are in. These
revisions also help alleviate concerns raised in understanding flood
risks through mapping alone and allowing the premium to inform the
homeowner policyholder about flood risk.
---------------------------------------------------------------------------
\47\ FEMA includes ``property not covered'' in proposed section
III, ``What We Cover,'' rather than proposed section IV,
``Exclusions,'' to conform with industry standards and address in
the same section those items for which the policyholder has the
burden of proof. The burden of proving that property is covered
falls on the insured, but the burden of proving that property is
excluded falls on the insurer.
---------------------------------------------------------------------------
FEMA proposes to remove specific dollar amounts from the policy,
giving the Agency the ability to increase these limits based on
statutory changes. Eliminating these specific dollar amounts also
allows FEMA to offer different coverage limit choices to different
homeowner policyholders by placing special limit amounts on the
declarations page of the policy.
FEMA proposes to allow more consumer choice by allowing homeowner
policyholders to choose whether they want basement coverage under
Coverage A through the Enhanced Basement Endorsement Option detailed
below. FEMA has long presumed that homeowner policyholders would not
want to pay for full coverage in a basement because it would be too
expensive,\48\ but in doing so inadvertently made it more likely that
homeowner policyholders would not realize the limitations on basement
coverage until they experienced a loss.\49\ FEMA has offered this
restrictive coverage in basements for four decades and the proposed new
Homeowner Flood Form would not change that coverage absent a homeowner
policyholder purchasing an endorsement. FEMA believes the limited
basement coverage creates challenges in the flood insurance sales
context for homeowner policyholders who want more coverage than the
current Dwelling Form and new Form would allow and in the recovery
context for homeowner policyholders who need it to more fully recover
from a flood event. Given these challenges, FEMA considered three
approaches to basement coverage: (1) the current Dwelling Form approach
of retaining the current restricted coverage, with a focus on training
agents selling flood insurance to further discuss what constitutes a
basement under the
[[Page 8294]]
Homeowner Flood Form and the restrictions on coverage at the point of
sale to better inform homeowner policyholders and those seeking to
purchase new homeowner flood insurance of the coverage restrictions;
(2) FEMA's preferred approach of offering an endorsement to the
proposed Homeowner Flood Form that would allow homeowner policyholders
to purchase, for an additional premium, an enhanced basement
endorsement to remove the restrictions in basement coverage (``Enhanced
Basement Coverage Endorsement''); and (3) a third approach of offering
a basement endorsement to remove coverage limitations, for an
additional premium, for (a) homeowners with split-level homes or sunken
room(s) (approach 3.1) and (b) homeowner policyholders who need to
occupy part of their basement (approach 3.2). Occupancy means the
basement is being used by the homeowner as bedrooms, bathrooms, and
kitchens/kitchettes. Each of the approaches is further detailed in
Appendix A(104): Basement Coverage Endorsement Option below.
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\48\ Until 1983, FEMA offered coverage in a basement. See e.g.,
44 CFR 61 App. A(1) Art. IV (1982). At that time, FEMA determined
that it was paying out $5 for every $1 collected on buildings with
damaged basements. See GAO Report on Flood Insurance: Federal
Emergency Management Agency's Basement Coverage Limitations, RCED-
86-10FS (Jan. 31, 1986) found at <a href="http://www.gao.gov/assets/rced-86-10fs.pdf">http://www.gao.gov/assets/rced-86-10fs.pdf</a> (last accessed Aug. 28, 2023). In the 1990s, FEMA explored
but abandoned an effort to offer some level of basement coverage and
throughout the entirety of the Dwelling Form (i.e., the last 20
years), there has been no option for basement coverage.
\49\ See Donovan Finn and John Travis Marshall, Superstorm Sandy
at Five: Lessons on Law as Catalyst and Obstacle to Long-Term
Recovery Following Catastrophic Disasters, 48 Envtl. L. Rep. 10494
(2018), found at <a href="https://commons.library.stonybrook.edu/cgi/viewcontent.cgi?article=1004&context=somas_articles">https://commons.library.stonybrook.edu/cgi/viewcontent.cgi?article=1004&context=somas_articles</a> (last accessed
Aug. 28, 2023). See also <a href="https://www.wxyz.com/news/what-does-fema-cover-if-youre-denied-help-after-floods-here-are-some-other-options">https://www.wxyz.com/news/what-does-fema-cover-if-youre-denied-help-after-floods-here-are-some-other-options</a>
(last accessed Aug. 28, 2023) and <a href="https://www.wxyz.com/news/why-many-people-are-being-denied-fema-flood-assistance">https://www.wxyz.com/news/why-many-people-are-being-denied-fema-flood-assistance</a> (last accessed
Aug. 28, 2023).
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FEMA does not expect the availability of optional basement coverage
(approaches 2, 3.1, or 3.2 above) to encourage riskier behavior by
homeowner policyholders. In general, policyholders do not wish to
experience flood losses. The act of choosing an option will require the
policyholder to envision their property being damaged by a flood.
Accordingly, rather than encouraging risky behavior, FEMA believes the
option would help homeowner policyholders to transfer their risk to
better recover after a flood while also encouraging homeowner
policyholders with basements to consider ways to mitigate their risks
in those areas. The current inventory of housing in the United States
contains homes built with basements. Recent studies on marginalized
communities show that formerly redlined areas face higher flood risks,
and several of the cities where this is most prevalent (New York,
Boston, Chicago, Camden, Detroit, Newark) have older housing stock that
are often built with basements.\50\ By offering options to increase
basement coverage, FEMA is proposing to increase the ability of these
homeowners to better protect their investment from flood risks. FEMA
understands that the additional coverage will result in additional
premiums for policyholders, but the pricing associated with these
additional premiums will reflect the reality of the structure above all
and will align with the risk. By offering choice, FEMA can better
educate homeowner policyholders on their coverage options, discuss the
flood risks associated with their property (i.e., through the price
signal provided by comparing the premium options), and how they can
better protect their property and mitigate those risks. FEMA seeks
specific comments on the expansion of basement coverage and the
approaches considered in this proposed rule as detailed in the basement
coverage endorsement options below.
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\50\ See <a href="https://www.redfin.com/news/redlining-flood-risk/">https://www.redfin.com/news/redlining-flood-risk/</a>(last
accessed Aug. 28, 2023) and <a href="https://www.njspotlightnews.org/2021/04/redlining-atlantic-city-nj-overlooked-underfunded-minority-neighborhoods-back-bay-racist-maps-superstorm-sandy/">https://www.njspotlightnews.org/2021/04/redlining-atlantic-city-nj-overlooked-underfunded-minority-neighborhoods-back-bay-racist-maps-superstorm-sandy/</a>(last accessed
Aug. 28, 2023). Note that in these areas, it is common to have a
basement because of the necessity of building below the frost line,
so that pipes do not burst.
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Proposed section III would not include ICC as Coverage D for all
homeowner policyholders as the Dwelling Form does (in section III.D),
but instead would make it an endorsement required to be purchased only
by those homeowner policyholders who may be eligible for it. Proposed
section III would also remove buildings under construction from default
coverage (as is the case under the Dwelling Form at section III.A.5),
as a Builder's Risk Endorsement naming the builder as an additional
insured party (with specific business rules associated with renewals)
would provide homeowner policyholders the option to address such
coverage. Finally, FEMA proposes to clarify that the policy would not
cover certain losses to items stored in a digital format or other
intangible format due to the complexity of demonstrating proof of
loss.\51\ Throughout the section, FEMA proposes minor edits to the Form
for clarity. FEMA anticipates the proposed changes to section III would
generally make the policy easier for agents to sell while also being
more understandable and desirable for homeowner policyholders as the
changes more closely align with other insurance policies with which
homeowners are familiar and the changes generally provide homeowners
with more flexibility by offering more coverage options.
---------------------------------------------------------------------------
\51\ Digital storage was not a substantial concern when the SFIP
was drafted in 1999. However, modern technology (allowing for
cryptocurrency, etc.), renders it sufficiently important to include
here.
---------------------------------------------------------------------------
a. Coverage A--Dwelling
FEMA proposes to label Coverage A as ``Dwelling'' (rather than
retain the Dwelling Form's title of ``Building Property'') to
differentiate coverage for the primary building--the dwelling--as
opposed to other buildings that may be covered. In proposed sections
III.A.1.a, III.A.2.b, III.A.2.c, III.A.3.c(1), and III.A.4.f, FEMA
proposes to update the language to clarify the coverage detailed in
this section of the policy relates specifically to the dwelling and to
distinguish between the dwelling and other buildings that may be
covered under Coverage B. Proposed section III.A.2, ``Limited Coverage
for Basements and Enclosures,'' would remove the differentiation of
coverage based on flood zone type or pre- or post-FIRM status found in
the Dwelling Form at section III.A.8. This proposed section would
clarify the limited coverage provided for basements regardless of where
the property is located. As explained above, FEMA is proposing to
remove differences in coverage based on flood zone type or pre- or
post-FIRM status and provide universal default coverage that applies to
all structures regardless of flood zone.\52\ Maps generally create
challenges for the application of policy coverage. In a flood event,
the flood does not simply stop at the map boundary and a homeowner
policyholder with property that is mapped in a higher risk zone could
be paying more for less coverage than their neighbors across the
street, when both are equally impacted by the flood event. By
eliminating these distinctions in the policy, FEMA proposes to simplify
the explanation of policy coverage for homeowner policyholders so that
they have a full understanding of the risks associated with their
property and can protect
[[Page 8295]]
themselves against flood peril by choosing their coverage accordingly.
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\52\ The Dwelling Form provides different types of coverage
based on FIRM status and zone: basements receive limited coverage
regardless of zone; certain post-FIRM elevated buildings receive
limited coverage below the lowest elevated floor; and the remainder
do not experience coverage limitations. The coverage limitations for
post-FIRM elevated buildings are a passive enforcement mechanism for
floodplain management rules concerning use of these spaces (i.e., 44
CFR 60.3(c)(5), allowing parking of vehicles, building access, and
storage). In practice, this often means policyholders do not learn
about the coverage restrictions until they experience a loss. In the
proposed Homeowner Flood Form, the policy would not provide
different types of coverage based on FIRM status and zone. Basements
continue to receive limited coverage regardless of zone. A building
with an enclosure--meaning it is used in accordance with the
floodplain management regulations--will continue to receive limited
coverage. However, if a policyholder does not indicate that they
have a basement or an enclosure at the time of application, they
will receive full coverage, but will also pay additional premium
based on the height of the first floor. The higher premium should
also act as a more timely signal to the policyholder, who may then
choose to not use the space for residential purposes. In other
words, the insurance policy will no longer passively enforce
floodplain management rules at the time of loss, but will complement
those rules through risk signaling, and floodplain management
officials may still take appropriate action on unacceptable uses of
enclosures.
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The proposed changes in section III.A.2.a eliminate the list of
covered items from current section III.A.8.a as these items are defined
in proposed section II. Elimination of the list is intended to make the
policy more readable. Additionally, FEMA proposes changes in section
III.A.2.d to simplify the understanding of coverage for unfinished
drywall in a basement or enclosure. The Dwelling Form details drywall
coverage for walls and ceilings in a basement and the cost to nail it,
unfinished and unfloated and not taped, to the framing (section
III.A.8.a(3)). FEMA proposes to simplify this by covering any
unfinished drywall in a basement and removing the restriction that the
drywall must be unfloated and not taped. FEMA also proposes to continue
coverage for nonflammable insulation in basements and enclosures. (See
Dwelling Form section III.A.8.a(10)).
FEMA proposes to add section III.A.3, ``Dwelling Limitations,'' to
summarize the limitations throughout the policy and list them in one
location. Proposed section III.A.3.a, ``Limitations on mold and
mildew,'' would revise Dwelling Form section V.D.4 to restate coverage
in positive rather than negative terms, simplifying the explanation
that the policy covers damage to the dwelling due to mold and mildew
caused by a flood only when it is outside of the homeowner
policyholder's control, i.e., when it is not in the homeowner
policyholder's control to inspect and maintain the property after a
flood recedes. FEMA is proposing this change to help resolve current
challenges faced with claims in this area, as the Agency has
experienced that implementation of this coverage is more challenging
than it should be. FEMA historically issued several bulletins to
clarify this coverage and its limitations \53\ and believes making
these proposed changes would reduce complexity and simplify the process
for homeowner policyholders, insurance adjusters, and companies. FEMA
proposes similar updates in proposed sections III.A.3.b, ``Limitations
on power, heating, or cooling failure,'' III.A.3.c, ``Limitations on
flood in the area,'' and III.A.3.d, ``Limitations on pollutants,'' for
simplicity and readability, and to positively affirm coverage of
specific items rather than stating coverage in the negative as the
Dwelling Form does in sections V.D.7, V.D.5-6, and V.F.II.B.22
respectively. The policy would continue to cover damage to any covered
building electrical system, such as the building's main service or home
security system, or to the HVAC system, when a flood physically damages
equipment installed at the described location (proposed section
III.A.3.b) as well as pollutant testing and monitoring after a flood
when required by law or ordinance (proposed section III.A.3.d). FEMA
also proposes to continue coverage for losses when there is a flood in
the area and the flood causes a back-up of water or waterborne material
through sewers or drains, discharge or overflow of a sump pump or
related equipment, or seepage/leakage on or through the dwelling
(proposed section III.A.3.c(1)) as well as losses by or from water
pressure or weight (hydrostatic pressure) (proposed section
III.A.3.c(2)). FEMA would also continue to cover losses to the dwelling
by or from the pressure or weight of water on or below the land's
surface in proposed section III.A.3.c(2).
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\53\ See W-13009, found at <a href="http://nfipservices.floodsmart.gov/sites/default/files/w-13009.pdf">http://nfipservices.floodsmart.gov/sites/default/files/w-13009.pdf</a>, (last accessed Aug. 28, 2023); W-
16061, found at <a href="http://nfipservices.floodsmart.gov/sites/default/files/w-16061.pdf">http://nfipservices.floodsmart.gov/sites/default/files/w-16061.pdf</a> (last accessed Aug. 28, 2023); W-20017, found at
<a href="http://nfipservices.floodsmart.gov/sites/default/files/w-20017.pdf">http://nfipservices.floodsmart.gov/sites/default/files/w-20017.pdf</a>
(last accessed Aug. 28, 2023); W-11062 found at <a href="http://nfipservices.floodsmart.gov/sites/default/files/w-11062.pdf">http://nfipservices.floodsmart.gov/sites/default/files/w-11062.pdf</a> (last
accessed Aug. 28, 2023); and W-04020, found at <a href="http://nfipservices.floodsmart.gov/sites/default/files/w-04020.pdf">http://nfipservices.floodsmart.gov/sites/default/files/w-04020.pdf</a> (last
accessed Aug. 28, 2023).
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Proposed section III.A.4 addresses the items not covered under the
policy, moving several provisions from article IV of the Dwelling Form
(Property Not Covered) to keep all ``coverage'' elements together. FEMA
proposes not to retain references to the Coastal Barrier Resources Act
and the Coastal Barrier Improvement Act \54\ in this section because
the language in proposed section I concerning conflicts with Federal
law renders it unnecessary. FEMA is incorporating into proposed section
III.A.4.a information from the Dwelling Form at sections V.A.2, V.A.3,
and V.A.5 to confirm that the policy does not cover loss of use at the
described location, including any living expenses incurred while the
dwelling is inaccessible or is unhabitable for any reason. FEMA
proposes incorporating this into one section for simplicity and
readability. In addition, FEMA proposes including it under this section
rather than Section IV, ``Exclusions,'' because the new Form generally
restricts ``exclusions'' to specific causes, and this language does not
speak to causation. In sections III.A.4.b and III.A.4.c, FEMA proposes
separating land and land values from lawns, trees, shrubs, plants,
growing crops, and landscaping to clarify that land and land values are
distinct from items that are on the land. Proposed section III.A.4.d
restates the current requirement in section IV.3 of the Dwelling Form
that no open structures including but not limited to those in, on, or
over water are covered, regardless of boat usage. In the proposed form,
FEMA retains in section III.A.4.e the substance of the language
currently in the Dwelling Form at section IV.2 except to remove the
reference to ``personal property'' because Coverage A of this Form
treats dwellings, not personal property. In section III.A.4.f, FEMA
proposes to clarify that in addition to underground structures and
equipment like wells and septic tanks/systems, which are currently
explicitly listed as not covered in section IV.8 of the Dwelling Form,
sewer, plumbing supply, waste lines, gas supply lines, electrical and
HVAC system components (not addressed in the proposed definition of
``machinery and equipment'') that are not located in the dwelling would
also continue to not be covered. In section III.A.4.g, FEMA proposes
not to retain the phrase ``or the building in which the insured unit is
located'' (found in the Dwelling Form at IV.9) for clarity of coverage
as the new Form would not be available to condominium unit owners. FEMA
is proposing additional minor changes in section III.A.4.h for clarity
regarding containers and related equipment. Proposed sections III.A.4.i
detailing fences, retaining walls, seawalls, bulkheads, wharves, piers,
bridges, and docks and III.A.4.j detailing hot tubs and spas as well as
swimming pools would be unchanged from Dwelling Form sections IV.12 and
IV.14, respectively.
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\54\ 16 U.S.C. 3501 et seq.
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b. Coverage B--Other Buildings
Coverage B would insure buildings other than the residence located
at the described location.\55\ This coverage would contain fewer
limitations than in the Dwelling Form, but with the same 10 percent
limit (see Dwelling Form section III.A.3). FEMA is proposing to require
the homeowner policyholder to specify the specific sublimits of this
coverage applicable to each of the
[[Page 8296]]
buildings on the declarations page to make sure that both the homeowner
policyholder and FEMA share an understanding of what is on the
property, to spur the conversation between the homeowner policyholder
and the insurance agent that higher coverage limits are available by
separately insuring these properties, and to capture data points for
repetitive loss purposes. The changes proposed to Coverage B would
restore non-dwelling buildings to a functional level but would not
fully restore these buildings. A homeowner policyholder seeking more
robust coverage should purchase a separate policy for these other
buildings. Coverage B is not an additional coverage, as it would reduce
the liability limit for the main building.
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\55\ These proposed changes would restore coverage for other
buildings to the NFIP's 1970's approach. See 24 CFR 1911.4(f)(5)
(1970): ``The insured may apply up to, but not in excess of, 10
percent of the face amount of the policy to appurtenant structures
and outbuildings (such as carports, garages, and guest houses) if
they do not constitute a separate residence. If they do constitute a
separate residence, or a residential structure still under
construction, they must be insured under a separate policy.'' This
approach insures what the homeowner policyholder has and that the
modern consumer expects, an experience customized and tailored to
themselves.
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Proposed section III.B.1 would clarify that FEMA would apply the
terms of Coverage A to other buildings at the described location except
as modified in proposed section III.B.2. As noted above, proposed
section III.B.1.a would require the homeowner policyholder to schedule
the buildings on the declarations page to confirm their location on the
property. In doing so, FEMA anticipates homeowner policyholders would
have discussions with agents regarding higher coverage limits if these
buildings are separately insured. By capturing the information here,
FEMA can also gather data on buildings that are repeatedly damaged
during flooding. Proposed section III.B.1.b would replace section
III.A.3 of the Dwelling Form and allow other buildings--not simply a
detached garage--to receive coverage with fewer limitations than in the
Dwelling Form, but with the same 10 percent limit.
FEMA proposes to add section III.B.2 to highlight the limitations
of coverage for other buildings. FEMA is proposing to use Coverage A as
a ``base'' layer of coverage specifically for the dwelling. Certain
items previously covered under Coverage A related to other buildings
are instead covered by this proposed section. Proposed section
III.B.2.a would remind homeowner policyholders that FEMA would not
cover anything already excluded under Coverage A. Proposed section
III.B.2.b would state that FEMA would not cover basements or enclosures
for any building that is not the dwelling. FEMA is proposing this
addition as a public policy measure to ensure that the riskiest parts
of a building that is not the property owner's residence are not
afforded coverage. For example, homeowner policyholders may have a
building near the beach on a coastal property containing a bathroom and
storage space, with an outdoor shower in an enclosure for convenience.
The proposed policy would allow for coverage of the building at the
homeowner policyholder's request, but would not cover the enclosure
given the enhanced risks associated with the enclosure. If a homeowner
policyholder wants to invest in these enclosures, a separate NFIP flood
insurance policy could be purchased to cover the other building with
the enclosure (i.e., under Coverage A), with restricted coverage
applied to the enclosure. Proposed section III.B.2.c would provide that
FEMA would not cover other buildings held or used for commercial
purposes. The purpose of Coverage B is to extend coverage to other
buildings that may have a residential use, such as a living space built
above a detached garage; buildings held or used for commercial purposes
are more appropriately suited for a commercial policy. Proposed section
III.B.2.d would provide that coverage can only extend to property the
homeowner policyholder owns. This addition is consistent with the
broader principle of ``insurable interest,'' which requires that the
insured have a right or relationship to the item insured such that the
insured can suffer a financial loss from damage, loss, or destruction
to it. By affirming this requirement, FEMA seeks to reduce the risk of
moral hazard, whereby a homeowner policyholder might have a financial
incentive to allow or even cause a loss.
c. Coverage C--Personal Property
FEMA proposes to move personal property coverage to proposed
section III.C and to further align it with common industry practices.
In contrast to section III.B.1 of the Dwelling Form that is conditioned
on whether or not the homeowner policyholder has purchased contents
coverage, FEMA proposes to change coverage in section III.C.1 to insure
all property inside a building at the described location with coverage
up to the limits listed on the declarations page. (Separate coverage
for personal property not at the described location is detailed in
proposed section III.C.2). Section III.C.1.a would remain unchanged
from section III.B.1.a of the Dwelling Form. Proposed section III.C.1.b
would provide that FEMA would insure property owned by non-paying
guests or laborers. By specifying that the guests be non-paying, FEMA
seeks to specifically exclude the possibility of short-term rentals,
such as vacation rentals, to clarify the rental agreement would govern
any such arrangement and ensure there is no contractual overlay, and
also to avoid the scenario where a renter seeks payment pursuant to
this policy. By changing ``servants'' to ``laborers,'' FEMA seeks to
modernize the language and include more individuals that may have
personal property in the described location.
In section III.C.2, FEMA is proposing to provide some coverage away
from the described location to ensure that the homeowner policyholder
gets an additional benefit of flood coverage to protect their personal
property. Homeowner policyholders may experience flooding while on
travel, may experience a flood loss if they have personal property at a
family member's house, or if they keep items in a storage unit. Under
the Dwelling Form at section III.C.2.b, a homeowner policyholder may
already claim this type of coverage at another location if they moved
the property because of a reasonable threat of flood. Expanding
coverage would eliminate the cumbersome adjudication analysis of
whether the homeowner policyholder moved the property to safety in
advance of a flood. With a storage unit, a homeowner policyholder could
rent a storage locker and, following a flood event, claim that he or
she relocated certain property from the dwelling to the storage unit
for safety. Under the Dwelling Form, if a flood occurs at the storage
unit, absent a dated photo showing the property located in the storage
unit, in the same position, the insurer would be unable to determine
when the property was placed in the storage unit. The proposed
expansion avoids this complex adjudication by providing the homeowner
policyholder with coverage in that situation. Moreover, expanding
coverage to contents that are not at the described location aligns with
industry standards for homeowners personal property coverage.
FEMA notes that although homeowners coverage can extend to personal
property anywhere in the world, the NFIA only authorizes flood
insurance in the United States.\56\ Thus, FEMA proposes limited
coverage for personal property anywhere in the United States. Under
proposed section III.C.2.a, FEMA would pay no more than 10 percent of
the Coverage C limits for personal property located anywhere in the
United States if the property is in a building at a location other than
the described location, or in a storage facility building. FEMA
proposes these changes to reaffirm the requirement that the personal
property be located inside a ``building'' (defined as a fully enclosed
structure) for coverage and to align with other common insurance
products.
[[Page 8297]]
Under proposed section III.C.2.b, the 10 percent coverage limitation
would not apply to personal property moved to a building reasonably
safe from flood, and not in a basement or enclosure, due to flooding
near the described location. This provision would not retain the
language in section III.C.2.b(3) of the Dwelling Form requiring moving
personal property outside of a special flood hazard area, but would
instead just require a reasonable assurance of safety to expand
coverage beyond the 10 percent limitation. It is difficult for
homeowner policyholders to ascertain where special flood hazard areas
are located, and an attic in a special flood hazard area may reasonably
be more secure than a ground floor \57\ just outside of that area. In
section III.C.2.b(1), FEMA proposes language to clarify that it would
cover personal property where a homeowner policyholder moves it from
his or her home to another location for protection, but the home
ultimately does not flood. Section III.C.2.b(2) would affirm coverage
when an evacuation order is issued. Finally, in section III.C.2.b(3),
FEMA proposes to extend coverage beyond the 10 percent limitation where
the personal property was moved due to repairs, renovations,
reconstruction, or other conditions rendering the described location
uninhabitable or unsuitable for property storage.
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\56\ 42 U.S.C. 4011(a).
\57\ Property must be placed above ground level. See Dwelling
Form section III.C.2.b(3).
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In proposed section III.C.3, ``Personal Property Limitations,''
subsection 3.a would provide that in a basement or enclosure, the
policy would only cover appliances installed in their functioning
locations and, if necessary for operation, connected to a power source.
FEMA proposes not to retain the references to flood zones and pre- or
post-FIRM status found in the current Dwelling Form (in section
III.B.5) to conform with other proposed changes to the policy. FEMA
anticipates that homeowner policyholders would better understand the
scope of the coverage available without the additional complicating
language around the property's flood zone location and the pre- or
post-FIRM status of the property. Additionally, rather than listing out
specific appliances, FEMA proposes to categorize the items listed in
section III.B.4 of the Dwelling Form as ``appliances'' for simplicity.
Proposed section III.C.3.b would further clarify the Dwelling Form's
requirement at section III.B.3 that personal property in any portion of
a building that is not fully enclosed must be secured to prevent
flotation out of the building.
Like section III.B.8 of the Dwelling Form, proposed section III.C.4
would provide special limits for specific kinds of personal property.
Rather than retaining the dollar limit in this section, FEMA proposes
instead to move it to the declarations page for readability and ease of
understanding. While proposed sections III.C.4.a, III.C.4.b, III.C.4.c,
III.C.4.d and III.C.4.f mirror existing provisions in the Dwelling Form
for special limits to personal property coverage, FEMA proposes to add
a new provision (section III.C.4.e) to specifically clarify coverage
limits for portable electronic devices. A homeowner policyholder should
be able to transport such personal property away from a flood and such
property may also have separate insurance available. For instance, cell
phones come with an offer of cell phone insurance; laptops and tablets
often come with offers of insurance as well. The distinction between
whether something is designed as portable or not should serve as the
bright line rule. For example, a laptop computer is portable while a
desktop computer is not, and a Sony PlayStation and a Microsoft Xbox
are not designed as portable whereas a Nintendo Switch is. Proposed
section III.C.4.f would also clarify that personal property primarily
used ``for any commercial purposes,'' rather than the current ``in any
business'' requirement in section III.B.6.e of the Dwelling Form, falls
within these special limits. FEMA proposes to specify that coverage is
limited for ``commercial purposes'' rather than ``any business'' to
continue providing coverage for hobbyists who may occasionally sell
what they create, but who do not operate as a business or have a
Federal Employment Identification Number for commercial tax purposes.
Finally, FEMA proposes to add section III.C.4.g to provide coverage for
up to 10 percent of the special limit on the declarations page for
valued paper, metals, or other similarly valued objects such as
accounts, bills, coins, currency, deeds, evidences of debt, medals,
money, scrip, stored value cards, postage stamps, securities, bullion,
or manuscripts. FEMA proposes this additional coverage because coverage
of these items is the industry standard. Proposed section III.C.5 would
retain the statement currently in the Dwelling Form at section III.B.9
that FEMA would only pay for the functional value of antiques.
In proposed section III.C.6, FEMA seeks to consolidate all
exclusions specific to personal property into one section to enhance
readability and ensure that homeowner policyholders and insurance
agents make appropriate decisions regarding how they insure the
property. Proposed section III.C.6.a would make it clear that FEMA
would not cover anything already excluded under Coverages A and B. FEMA
proposes to categorically narrow the coverage for personal property in
this respect to clarify that there can be no instance where something
excluded from either Coverage A or Coverage B could be eligible for
coverage under Coverage C. Proposed sections III.C.6.b and III.C.6.c
(excluding coverage for loss of use of personal property at the
described location, and personal property not inside a building) remain
unchanged from existing language in the Dwelling Form. Consistent with
coverage limitations in the current Dwelling Form, proposed section
III.C.6.d of the Homeowner Flood Form provides that FEMA would not
cover personal property in a basement or enclosure, except as stated in
III.C.3 which limits coverage to appliances installed in their
functioning locations consistent with the current Dwelling Form. FEMA
is proposing to make a change to this section to eliminate references
to flood zones or pre- or post-FIRM status of a building, consistent
with other changes throughout the policy. Similarly, proposed section
III.C.6.e, excluding coverage for personal property in a building
constructed or substantially improved after September 30, 1982, that is
located in, on, or over water or seaward of mean high tide, would
include non-substantive, grammatical revisions to conform to other
organizational changes within the policy. Proposed section III.C.6.f
would clarify that personal property in any open structure that is in,
on, or over water is not covered regardless of its use. FEMA proposes
to add section III.C.6.g to exclude losses to items stored in digital
or other intangible formats, consistent with broader industry standards
and other insurance products. This addition would have the effect of
excluding cryptocurrency and other such digital items, given the
challenges with proving such losses. For example, a flood could cause a
server or desktop computer with valuable information on it to stop
working. The policy would not cover these losses given the challenges
associated with proof of loss, such as demonstrating the existence of
the information at the time of loss, the inability to access or restore
the information through other means, the valuation of such information,
and other concerns. In proposed section III.C.6.h, FEMA seeks to add
items held in
[[Page 8298]]
violation of state or Federal law to the list of exclusions to clarify
that the Agency would not pay to indemnify against inherently illegal
activity. FEMA also proposes to add section III.C.6.i to exclude
coverage for living things, consistent with current Agency policy,
broader industry standards, and other insurance products. In section
III.C.6.j, FEMA proposes a minor change to the exclusion from coverage
of any self-propelled vehicle or machine to prohibit coverage for those
vehicles or machines capable of transporting people or cargo while
continuing to allow coverage for vehicles or machines not registered
for use on public roads that are used solely to service the described
location or to assist people with disabilities when such property is
inside a building at the described location. FEMA is proposing this
change to clarify that coverage would not extend to vehicles that do
not service the property or aid those with a disability, as other
insurance is more appropriate for those items.\58\
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\58\ For example, a separate automobile insurance policy would
be more appropriate for all-terrain vehicles (ATVs) and golf carts
because their use is not limited to servicing the location or
assisting those with disabilities. By contrast, this policy would
cover farm vehicles not licensed for use on a public road. See NFIP
Claims Manual (June 2023) at COVERAGE-19, available at <a href="https://www.fema.gov/sites/default/files/documents/fema_nfip-claims-manual_062023.pdf">https://www.fema.gov/sites/default/files/documents/fema_nfip-claims-manual_062023.pdf</a> (last accessed Aug. 28, 2023).
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d. Coverage D--Other Coverages
FEMA proposes organizing section III.D to align with the policy's
organizational structure. Section III.D.1, ``Debris Removal,''
clarifies what debris is covered and what is not. Specifically, FEMA
proposes in section III.D.1.a to cover labor and expense to remove
debris from anywhere that comes onto or into the dwelling or other
insured buildings, and debris of insured property anywhere. FEMA
proposes the clarification in section III.D.1.a(1) to emphasize that
labor is an element of the total covered expense. Additionally, FEMA
proposes a slight broadening of coverage from the current Dwelling Form
in proposed section III.D.1.a(1)(a) of the Homeowner Flood Form to
state that the removal of any debris inside the insured buildings is
covered. Proposed section III.D.1.a(2) would clarify that FEMA would
pay the value of any debris removal work performed by the homeowner
policyholder or a member of one's household using the Federal minimum
wage, and that this coverage does not increase the coverage limit on
the declarations page. Proposed section III.D.1.b, ``Debris Not
Covered,'' would provide that the policy does not cover debris from
other locations on the land surrounding the dwelling or other insured
buildings or any non-covered items of property from the dwelling or
buildings, even if the removal facilitates covered cleanup or repairs.
FEMA proposes this clarifying language to ensure that homeowner
policyholders appropriately insure their property and to avoid
duplication of benefits to both owners of debris and the homeowner
policyholder upon whose land the debris resides.
FEMA proposes to slightly broaden coverage in section III.D.2,
``Loss Prevention.'' Section III.D.2.a would provide that FEMA would
pay up to the coverage sublimit specified on the declarations page for
the expenses a homeowner policyholder incurs to protect one's insured
property from a flood or imminent danger of flood. These expenses would
be limited to: (1) reasonable expenses to buy materials to use
temporary measures to avoid or reduce the harm from an imminent flood,
including sandbags, fill for temporary levees, and pumps; and (2) the
value of work, at the Federal minimum wage, that a homeowner
policyholder or a member of her household performs to protect the
property. Section III.D.2.b would specify that this coverage for
materials and labor only applies if damage to the insured property by
or from flood is imminent and the threat of flood damage is apparent
enough to reasonably anticipate flood damage, and only if one of the
following occurs: (1) a general and temporary condition of flooding in
the area near the described location occurs, even if the flood does not
reach the insured building; or (2) a legally-authorized official issues
an evacuation order or other civil order for the community in which the
property is located to preserve life and property from flood. FEMA
proposes this language for increased clarity and consistency with other
sections in the Form. For instance, while the Dwelling Form at section
III.C.2.a(1) limits coverage to $1,000, this proposed section would
remove the dollar limit from the Form itself, allowing it to be altered
through the declarations page or other guidance. The proposed language
would also limit the use of lists (compare with sections
III.C.2.a(1)(a)(i)-(iv) of the Dwelling Form) and allow coverage where
there may be technological or local variances in what items are used to
prevent losses rather than restrict it to the specific items in the
policy as is currently the case.
Proposed section III.D.3, ``Property Removed to Safety,'' would
provide that FEMA would pay up to the coverage limit on the
declarations page, at the Federal minimum wage, for reasonable expenses
and labor a homeowner policyholder or member of her household, incurs
for moving insured property to a secure location to protect it from
flood or the imminent danger of flood. Consistent with other sections
in the Form, this language would simplify coverage by removing mention
of special flood hazard areas, as well as the coverage limit, allowing
the limit to be altered through the declarations page or other
guidance. Proposed section III.D.4 would specify that Coverage D does
not increase the limits of Coverages A, B, or C.
5. Section IV: Exclusions
Proposed section IV would replace article V of the Dwelling Form.
By continuing to address exclusions separately from coverage, FEMA
seeks to clearly delineate between the types of property covered and
not covered from the sources of damage excluded. This is to conform
with industry standards, as insurance companies generally combine what
is covered and not covered in the coverage section of their policies,
and address excluded causation in the exclusions section. As this is a
single peril policy, it is FEMA's position that a shorter, simplified
exclusions section would reduce confusion on the part of the homeowner
policyholder. Proposed section IV is structured to address three main
concepts: excluded losses; flood in progress; and pre-existing damage.
a. Excluded Losses
For excluded losses, FEMA proposes to exclude other perils,
economic losses (including loss of business or losses associated with
upgrading to code per law or ordinance), earth movement, gradual
erosion, several non-flood but water-related causes of loss, and damage
from defects, rot, or infestation. Many of the exclusions in the
proposed policy mirror in substance those in the existing Dwelling
Form. In proposed section IV.A.1, FEMA seeks to simplify the language
to exclude other perils as this is a single-peril policy. Consistent
with other changes in the policy, FEMA proposes to condense the list of
economic losses excluded from coverage currently in sections V.A.1-7 of
the Dwelling Form into section IV.A.2 for clarity.
The proposed earth movement section at IV.A.3 would clarify what is
and what is not considered earth movement. In proposed section
IV.A.3.a, FEMA would retain but revise the list of items in the
corresponding sections of V.C of the Dwelling Form for clarity; this
list describes what earth movement includes, even if caused by flood.
While
[[Page 8299]]
FEMA would retain earthquake, landslide, subsidence, and sinkholes on
the list in proposed sections of IV.A.3, other changes are being
proposed for modest clarifications. For instance, proposed section
IV.A.3.a(5) would not retain the phrase ``movement of land that results
from accumulation of water in subsurface land area'' from section V.C.5
of the Dwelling Form for clarity. In addition, FEMA proposes to add
section IV.A.3.a(6) (``Any other movement such as sinking, rising,
shifting, expanding or contracting of the earth'') as a further catch
all for any variety of geological phenomena not specifically listed in
subsections (1)-(5).
In IV.A.3.b, FEMA proposes to provide further specificity that the
earth movement coverage exclusion does not include hydrostatic
pressures or hydrodynamic forces, buoyancy, and frictional force from
floodwater moving along the surface of the ground. These terms are
subsumed in the statutory definition of a ``flood.'' \59\ These terms
appear in the engineering reports included in claims files. The ability
to line up an engineering report with the policy language should help
provide policyholders with additional clarity regarding what is and is
not excluded.
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\59\ See NFIA sec. 1370(b)-(c) (42 U.S.C. 4121(b)-(c)).
---------------------------------------------------------------------------
Proposed section IV.A.4 would exclude coverage for gradual erosion
caused by the normal water action that wears an area of land away over
time and contains minor clarifying edits for readability. FEMA proposes
similar clarifying edits in section IV.A.5, ``Other excluded causes of
damage.'' These clarifying edits include combining sections V.D.1 and
V.D.2 of the Dwelling Form into proposed section IV.A.5.a because the
listed items relate to ice; excluding in section IV.A.5.c damage from
exposure to water of any form other than flood (as detailed in sections
V.D.4.b(2), V.D.5, and V.D.6 of the Dwelling Form); and excluding in
section IV.A.5.e actions taken by homeowner policyholders or any
members of their household that deliberately cause direct physical loss
by or from flood (see section V.D.9 of the Dwelling Form). Proposed
section IV.A.5.b would remain unchanged from section V.D.3 of the
Dwelling Form. In section IV.A.5.d, FEMA proposes to add other related
conditions to clarify that design, structural, or mechanical defects;
deterioration, rot, or corrosion; or damage from insects and rodents
would be excluded as these are all pre-existing conditions at the time
of claims adjustment. Homeowner policyholders may not be aware of these
conditions prior to experiencing a loss, but these conditions are
generally not attributable to a single flood event and thus would not
be covered under the policy.
The Dwelling Form currently excludes coverage for losses that occur
because of an alteration to the insured property that significantly
increases the risk of flooding at section V.D.10. Proposed section
IV.A.6 would clarify that this exclusion covers any homeowner
policyholder actions, whether an alteration to the insured property or
a more general change, that causes the hazard to increase by any means
within the homeowner policyholder's control or with the homeowner
policyholder's knowledge. FEMA is proposing this revision to streamline
the policy by stating in one location rather than the two sections
found in the current Dwelling Form (sections V.D.10 and VII.F) that
FEMA would not pay for a loss where the homeowner policyholder took
action or allowed an action to happen that increased their risk of
flooding.
b. Flood in Progress
In section IV.B, ``Flood in Progress,'' FEMA proposes to define
what constitutes a flood in progress, and to address concerns where
there is a strong moral hazard. This clarity would help ensure that
policies are not written for a property while a flood is in progress at
the described location. Further, this proposed revision ensures that if
a policy is written while a flood is in progress, the exclusion is
well-defined to help avoid disputes when the homeowner policyholder
attempts to submit a claim. With this proposed revision, FEMA seeks to
avoid situations where a homeowner policyholder purchases flood
insurance as a means of ``buying a claim'' while also allowing
homeowner policyholders to perceive their risk and take an appropriate
action. FEMA proposes to explain in section IV.B.1 that a flood is in
progress when (1) there is a near certainty of a flood loss at the
described location from a flood control effort such as opening a
spillway, breaching a levee, or releasing water from a dam, or (2)
there is a flood at the described location. FEMA proposes to explain in
section IV.B.2 that if the policy becomes effective in connection with
a loan closing, FEMA would not pay for loss caused by a flood in
progress at the time of the loan closing. Proposed section IV.B.3 would
provide that in all other circumstances, FEMA would not pay for a loss
caused by a flood in progress that existed on or before the day the
homeowner policyholder submitted the application. While proposed
sections IV.B.2 and IV.B.3 mirror in substance the language in section
V.B of the Dwelling Form, the added clarity in proposed section IV.B.1
would help ensure that policies are written and administered
consistently.
c. Pre-Existing Damage
FEMA proposes in section IV.C to explicitly exclude coverage for
pre-existing damage. This section would specify that pre-existing
damage includes flood loss or damage that occurred prior to the date of
loss, whether direct physical loss or not, and whether paid or unpaid,
and damage attributable to any non-flood peril that occurred prior to
the date of loss. Under section VII.H.2.e of the Dwelling Form, when an
insurance company suspects that damage existed prior to the flood
event, it can request evidence that prior flood damage has been
repaired. In some instances, the property may have been sold without
disclosure of a prior flood loss.\60\ In other instances, the insurer
may know that a homeowner policyholder had a loss from another peril
and was paid for the same items. More explicitly excluding coverage for
pre-existing damage would make the exclusion clearer to homeowner
policyholders and help prevent disputes over unrepaired flood damage or
from unrepaired items from other perils that often arise when property
changes owners. It would also better align the policy with traditional
insurance concepts and FEMA's longstanding practice of not paying for
pre-existing damage. Lastly, it would reinforce proposed VI.A.3.g(5)
(requiring proof of repairs for prior losses to ensure coverage of
damages occurring from the current loss). Note that FEMA is proposing
not to retain in this section language regarding ICC coverage, as that
would be detailed in the ICC Endorsement.
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\60\ State laws govern disclosures of prior losses in property
transfers and the SFIP cannot change state disclosure laws that
apply to prior losses.
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6. Section V: Policy Conditions
Proposed section V would combine provisions from articles VII,
``General Conditions,'' and VIII, ``Policy Nullification, Cancellation,
and Non-Renewal,'' of the Dwelling Form that specifically apply to how
FEMA administers the policy. These provisions represent homeowner
policyholder-facing underwriting aspects of the policy.
[[Page 8300]]
a. Actions and Conditions That Can Void Your Policy
Proposed section V.A would describe the actions and conditions that
can void a policy. Section V.A.1, ``NFIP Ineligibility,'' would provide
scenarios where the policy is void from inception and has no legal
force due to underlying ineligibilities. Retaining language from
section VIII.B.1.a of the Dwelling Form, proposed section V.A.1.a would
provide that the policy is void if the described location is in a
community that was not participating in the NFIP at the policy's
inception and did not join or reenter the NFIP during the policy term
and before loss occurred. Similarly, proposed section V.A.1.b would
retain the substance of section VIII.B.1.b of the Dwelling Form and
provide that the policy is void where the described location or other
property is otherwise not eligible for coverage under the NFIA or its
implementing regulations, for reasons of noncompliance with local
floodplain ordinances or otherwise. Subsection A.1.c would provide that
the policy is void where any other Federal law prevents coverage of
property at the described location. FEMA proposes not to retain the
language in sections VIII.B.1.c-e and VIII.B.2 of the Dwelling Form;
because these provisions do not relate to coverage, they are better
suited to guidance.
Section V.A.2, ``Concealment or Fraud,'' contains much of the same
language in the Dwelling Form, with three primary clarifications.
Proposed section V.A.2.a provides that the policy is void and cannot be
renewed if the insured or agent, at any time before or after a loss,
intentionally concealed or misrepresented any material fact or
circumstance, engaged in fraudulent conduct relating to the policy, or
knowingly made false statements relating to the policy or any other
NFIP insurance at any time. FEMA proposes to add the word
``intentionally'' to clarify that a homeowner policyholder must intend
to conceal or misrepresent in order for the policy to be void; a
scrivener's error would not result in voidance. FEMA proposes to
specify that the fraudulent activity must relate to the policy, because
any fraudulent activity beyond the scope of the policy is not a cause
for voidance. FEMA also proposes to specify that any false statements
must have been made ``knowingly'' to ensure that the policy is only
voided in situations involving malfeasance on the part of the insured
or agent. Like section VIII.A.3 of the Dwelling Form, proposed section
V.A.2.b would specify that the policy would be void as of the date the
acts described in subsection A.2.a were committed. Proposed section
V.A.2 would not retain the language in section VIII.A.4 of the Dwelling
Form regarding applicable Federal laws, consistent with other changes.
b. Policy Renewal
Proposed section V.B, ``Policy Renewal,'' would require that FEMA
receive the renewal premium within 30 calendar days of the expiration
date of the prior policy; it would also state the FEMA would not renew
the policy if Federal law prevents coverage of property at the
described location. This section is considerably shorter than the
corresponding section in the Dwelling Form (at section VII.E) and
conforms to modifications elsewhere in the policy. For instance, this
section would no longer contain the policy term or right for review, as
those would be addressed in proposed sections I.D and I.F,
respectively. Additionally, the Dwelling Form explains the consequences
when the insurer fails to mail the renewal notice or makes a mistake,
such as by mailing the notice to the incorrect address. There is no
analogous provision in other property insurance contracts, and FEMA is
proposing to eliminate this language given the rarity of these
situations. Lastly, section V.B.2 would reference ``Federal law'' for
brevity, as this would include section 1316 and other relevant
provisions of the NFIA, relevant provisions of the Coastal Barrier
Resources Act,\61\ and any future statutory changes.
---------------------------------------------------------------------------
\61\ 16 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
c. Cancellation of the Policy by You
Proposed section V.C, ``Cancellation of the Policy by You,'' would
provide that the homeowner policyholder may cancel the policy when the
homeowner policyholder (1) no longer has an insurable interest in the
property, (2) is no longer required to maintain flood insurance
pursuant to Federal law or lender requirements, or (3) has a duplicate
NFIP policy. It would also provide that if a homeowner policyholder
cancels the policy, he or she may be entitled to a full or partial
refund of premium for the current policy term. While the NFIP uses over
a dozen cancellation reason codes, not all of these are for homeowner
policyholder cancellation. FEMA isolated the reasons specific to
homeowner policyholder cancellation, found that they fell into the
three broad categories outlined just above, and now proposes to
highlight those categories in the policy itself. It is FEMA's position
that these changes offer increased clarity for the homeowner
policyholder compared to the language in the Dwelling Form at section
VIII.C.
d. Reduction and Reformation of Coverage
Proposed section V.D, ``Reduction and Reformation of Coverage,''
would explain to homeowner policyholders what occurs when the premium
FEMA receives is insufficient for the coverage sought, but in a shorter
and easier to read format compared to the Dwelling Form (see section
VII.D of the Dwelling Form). Proposed section V.D.1 would provide that
where the premium is not enough to purchase the requested amount of
coverage, FEMA would issue the policy, but only for the amount of
coverage that the premium would purchase for a one-year term. This
section would substantively mirror section VII.D.2 of the Dwelling Form
but would be more readable. Proposed section V.D.2 would provide that
FEMA would increase the reduced amount of coverage to the amount
originally requested without regard to whether a loss occurred when
FEMA bills for the additional premium, or if necessary to calculate the
additional premium, requests information (V.D.2.a), and the homeowner
policyholder responds to the request for additional premium within 30
calendar days, or responds to the request for additional information
within 60 calendar days (V.D.2.b). Proposed section V.D.2.c would
provide that a homeowner policyholder's failure to timely respond may
result in a waiting period for additional coverage if a loss has not
occurred within the policy term, or the settlement of a claim under the
reduced limit if a loss has occurred within the term. Functionally,
there is no difference between determining that there is an
insufficient premium before loss or after loss, so treating these
concepts together should simplify the policy. Altogether, section V.D.2
would condense sections VII.D.3.a and b of the Dwelling Form into one
more concise and readable section and would conform to other changes in
the policy (e.g., specifying ``calendar'' days).
e. Disaster Conditions
FEMA proposes to add section V.E, ``Disaster Conditions,'' which
would be a new section. This section would incorporate existing
practices when a flood reaches such a magnitude that FEMA anticipates
logistical challenges with adjusting losses and reasonably expects
increased competition for limited contractor services in the disaster-
effected area, or where homeowner policyholders may not be in a
position to receive and respond to
[[Page 8301]]
mail regarding the renewal of their flood insurance policy. In these
scenarios, FEMA has, as a courtesy to homeowner policyholders, extended
both the proof of loss deadline beyond the 60 days stated in the policy
and the grace period to renew coverage without experiencing a lapse.
(For example, FEMA extended the proof of loss and grace period
deadlines for Hurricanes Harvey, Irma, and Maria in 2017 and Hurricane
Michael in 2018). FEMA has issued these extensions via bulletin to the
WYO companies, and via public communications to policyholders who would
otherwise lack awareness of these extensions and the flexibility they
bring. In the absence of policy language governing extensions, however,
stakeholders have often requested longer proof of loss timeframes for
smaller flooding events, or have asked FEMA to continue to extend
deadlines indefinitely for even longer periods following major
flooding. To provide clarity and uniformity, therefore, proposed
section V.E.1 would provide that in the event of a flood associated
with a major disaster or emergency declared by the President under the
Stafford Act,\62\ the FEMA Administrator may, after written notice,
extend the timeframes for proof of loss up to 365 calendar days from
the date of loss, and the timeframes for policy renewal up to 60
calendar days from the policy's expiration date. Placing an explicit,
objective trigger in the policy would allow it to indicate when these
``special'' provisions might apply to any homeowner policyholder. In
addition, establishing clear upper limits for proof of loss and policy
renewal extensions would enhance clarity and reduce requests for
indefinite extensions. Furthermore, by making the provision
discretionary and not mandatory, FEMA seeks to continue to offer
flexibility. These flexibilities would allow FEMA to extend one or both
deadlines when necessary and choose shorter timeframes when
appropriate.
---------------------------------------------------------------------------
\62\ Public Law 93-288, as amended; 42 U.S.C. 5121 et seq.
---------------------------------------------------------------------------
Proposed section V.E.2 would provide new flexibilities that in the
event of a flood associated with a declared major disaster or
emergency, the Administrator may, after written notice, conditionally
waive the requirement in proposed sections VI.A.3 and VI.B.2 that an
insured must sign or swear to a proof of loss or an adjuster's report.
This would authorize the insurer to accept and make payment on the
adjuster's report. This payment based on the adjuster's report is
``undisputed'' which allows the insurer to accept that a covered loss
took place without any further action needed from the policyholder. The
flexibility provided here would not stop the homeowner policyholder
from seeking additional payment through a proof of loss but would help
ensure payment as quickly and safely as possible to the homeowner
policyholder.
Proposed section V.E.3 would provide new flexibilities that in the
event of a flood associated with a declared major disaster or
emergency, the Administrator may, after written notice, establish
special procedures for advance payments to insured(s) in accordance
with proposed section VI.C.3. (As discussed below at section III.A.7.c
of this preamble, this section would allow the insurer to make an
advance payment for up to 5 percent of the Coverage A limit to a
homeowner policyholder without putting the mortgage company on the
check). Under the current Dwelling Form, a homeowner policyholder with
Coverage A receives a check issued to the homeowner policyholder and
any secured interest (i.e., a mortgage or second mortgage, etc.) and
the homeowner policyholder may have to negotiate with the secured
interest holder before the check can be cashed to provide payment to a
contractor for repairs. Some secured interest holders may be reluctant
to endorse the check until they know the repairs have been made to
protect their financial position. Doing so, however, can negatively
impact the homeowner policyholder who is then required to secure the
contractor with out-of-pocket funds. By allowing for advance payment,
homeowner policyholders without contents coverage should be able to
secure a contractor without necessarily utilizing out-of-pocket funds
while not affecting the mortgage company's ability to file its own
claim. FEMA understands the proposed 5 percent advance payment would
benefit the homeowner policyholder so they can rebuild more quickly.
FEMA believes the proposed 5 percent advance payment is an insurance
industry standard and seeks comment from the public specifically on
whether or not the 5 percent advance payment is standard.
Finally, proposed section V.E.4 would provide new flexibilities
that in the event of a flood associated with a declared major disaster
or emergency, the Administrator may, after written notice, settle
losses in accordance with any formula established under Federal law
that allocates covered damages amongst multiple perils, including
flood. This would add flexibility if a declared disaster allows the use
of the COASTAL Formula for settling losses that allocate damages
amongst multiple perils.\63\
---------------------------------------------------------------------------
\63\ Section 1337(b)(1) of the National Flood Insurance Act of
1968 (NFIA) (42 U.S.C. 4057(b)(1)), as added by section 100253 of
the Consumer Option for an Alternative System to Allocate Losses Act
of 2012 (also referred to as the COASTAL Act of 2012) (Pub. L. 112-
141, div. F, title II), requires FEMA to ``establish by rule a
standard formula to determine and allocate wind losses and flood
losses for claims involving indeterminate losses.'' This formula is
referred to as the ``COASTAL Formula'' pursuant to NFIA sec.
1337(a)(2) (42 U.S.C. 4057(a)(2)). Once FEMA adopts a COASTAL
Formula in regulation, FEMA may use the formula to oversee the
handling of claims involving indeterminate losses and, for floods
resulting in a Federal disaster declaration, make claim payments
based on the formula. See NFIA sec. 1337(c) (42 U.S.C. 4057(c)).
---------------------------------------------------------------------------
7. Section VI: Procedures and Duties When a Loss Occurs
The Dwelling Form includes various provisions under article VII,
``General Conditions.'' FEMA proposes to combine all provisions
relating to how losses are proven and paid (traditionally claims
issues) in proposed section VI, ``Procedures and Duties When A Loss
Occurs.'' The organization of this section would mirror the sequence
that a homeowner policyholder would use the policy following a loss,
first addressing what the homeowner policyholder must do, then what
insurer options exist, how the claims adjustment process works, what
deductible applies, how loss is settled, and how the appraisal process
works when required. It is FEMA's position that organizing this section
according to the logical progression of the process would aid homeowner
policyholders who experience a loss, helping ensure that they
understand the policy's terms and conditions as well as the process.
a. Your Duties After a Loss
In organizing section VI.A, ``Your Duties After a Loss,'' FEMA
focused extensively on proof of loss. The proof of loss is an industry
standard concept and is the foundation of payment of any claim. In the
NFIP, the proof of loss is a crucial customer service tool, ensuring
that the flood adjuster takes the time to explain coverage and helps
the homeowner policyholder understand how to address situations where
the insurance estimate and contractor estimate (or quote) deviate.
Absent the proof of loss, an adjuster can submit a report to an
examiner and the insurer can make payment without the homeowner
policyholder ever understanding what they did or did not get paid for
as part of the claim. In proposed section VI.A, FEMA seeks to simplify
the language around proof of loss where possible and address what is
[[Page 8302]]
expected of the homeowner policyholder separately from what options the
insurer has (proposed section VI.B). These changes align with other
property insurance forms in the marketplace \64\ and make clear that
certain duties exist for both parties to the insurance transaction.
---------------------------------------------------------------------------
\64\ The changes align with the Insurance Services Office's
``HO-3'' form, the template behind most standard homeowners
insurance policies. See supra note 24.
---------------------------------------------------------------------------
Proposed section VI.A would provide that if the described location
experiences a direct physical loss by or from flood, the homeowner
policyholder must comply with all of the duties listed in VI.A.1-7.
This would ensure that the homeowner policyholder knows they must
comply with these duties, and that substantial compliance would not
suffice. Proposed section VI.A.1 outlines the first duty, which is to
give prompt notice to the insurer. This would be a change from the
Dwelling Form (see section VII.G) and allow for a reasonable form of
prompt notice to the insurer when a loss occurs rather than
specifically requiring a written notice. The critical element of the
notice requirement is timing, not the form the notice takes. This
proposed revision provides flexibility to the homeowner policyholder
regarding the ways prompt notification can be given and reflects
current practice, as some homeowner policyholders provide prompt notice
by calling or emailing their insurance agents when a loss occurs.
Proposed section VI.A.2 would require that the homeowner policyholder
separate the damaged and undamaged property as soon as possible so that
it can be examined and take all reasonable measures to protect covered
property from any further loss. This section would not retain the
phrase ``best possible order'' found in section VII.G.2 of the Dwelling
Form because this language is unnecessary, as FEMA does not deny claims
because there was a better possible order available. In addition, the
requirement that homeowner policyholders take reasonable measures to
protect undamaged property would help avoid scenarios where avoidable
damage or intervening causes of loss occur, which could result in
denial of coverage. This additional language reinforces the duty to
mitigate loss and reduce the potential for intervening causes of loss
which generally result in denial of insurance claims.
Proposed section VI.A.3 makes a significant change from the
Dwelling Form (see section VII.G.4) regarding timing of submission of
the proof of loss. It would require that within 90 calendar days after
the loss, the homeowner policyholder must send FEMA a signed and sworn
proof of loss containing the date and time of loss, how the loss
occurred, details of any other insurance, changes in title or occupancy
of the property during the policy term, names of mortgagees or anyone
else with a lien, charge, or claim against the property, a description
of all damages and detailed repair estimates (if available), and an
inventory of the lost, damaged, or destroyed property. The inventory
must show the quantity, description, replacement cost value or actual
cash value (whichever is applicable), amount of loss, evidence that
prior flood damage has been repaired, any written plans for repair of
the property that the homeowner policyholder can reasonably make
available, and all funds the homeowner policyholder spends recovering
from the loss. The homeowner policyholder must also attach copies of
all bills, receipts, invoices, written estimates, and related
documents.
This proposed section would increase the timeframe to submit a
proof of loss from 60 to 90 days, and, consistent with other provisions
in the Homeowner Flood Form, specify that these are calendar days. FEMA
has historically provided a 60-day window for providing proof of loss.
FEMA recognizes that 60 days, the industry standard,\65\ is normally a
sufficient timeframe for homeowner policyholders to provide the proof
of loss information in a non-disaster scenario. FEMA proposes, however,
to surpass the industry standard regarding this timeframe given the
nature of the peril involved--flooding--the governmental nature of the
NFIP,\66\ and the fact that as mentioned previously, FEMA has often
provided homeowner policyholders with extensions of the 60-day window
in catastrophic conditions.\67\ Flooding, often resulting from severe
storms, can require extended evacuation periods. After a flood,
securing contractors to determine the full scope of damage to a
property can be challenging given the increased demand in impacted
areas for these services. Increasing the timeframe to provide proof of
loss should assist homeowner policyholders by providing additional time
to return to the property after an evacuation and secure a contractor.
FEMA anticipates that this increased timeframe would also result in
fewer homeowner policyholder requests for additional payment that FEMA
currently sees with the 60-day window. In a catastrophic event,
homeowner policyholders need to coordinate with contractors to obtain
price quotes which can take time given the volume of demand after an
event. While the insurance policy would provide payment based on an
adjuster's estimate, it is just that--an estimate. An occasion may
arise where an estimate is insufficient to cover the cost of repairs
that are within the policy's coverage that a contractor's quote would
capture. Additionally, there may be an occasion where a contractor's
quote may include repairs that are not covered under the policy. For
example, a garage door is damaged by flood. The adjuster finds coverage
and identifies the scope of the
[[Page 8303]]
covered damage and estimates the value of the covered damage at $500.
The contractor's quote may indicate a $1,000 price to replace the
garage door. The additional $500 in the contractor's quote may be due
to an increase in the price of the unit following the disaster and such
cost may be covered. The additional $500 in the contractor's quote
could be for rewiring to conform to local building codes and such a
code upgrade would generally not be covered. The proposed additional
time would allow homeowner policyholders to obtain contractor services
and resolve these questions in advance, improving the efficiency of the
process overall.
---------------------------------------------------------------------------
\65\ See Nevada Department of Insurance Allstate Homeowner's
Form, page 12, Section 1 Conditions 3.g (stating that signed, sworn
proof of loss statements must be submitted within 60 days after the
loss), found at <a href="http://docs.nv.gov/doi/documents/home_policies/AllStateForms/AP783.pdf">http://docs.nv.gov/doi/documents/home_policies/AllStateForms/AP783.pdf</a> (last accessed Aug. 28, 2023).
\66\ As a government program, the NFIP does not have the variety
of flexibilities available to the private sector regarding post-loss
options. If a policyholder experiences a loss, a private industry
insurer can send over their preferred contractors to handle
everything for the policyholder after the payment of the deductible.
In the NFIP, utilizing treasury funds and other governmental
requirements generally require a greater degree of precision and
puts an added burden on SFIP policyholders as compared to their
general homeowners coverage through private insurance. By providing
more time in this proposed revision, FEMA is offering SFIP customers
extra time beyond the industry standard to help alleviate this added
burden.
\67\ For example, FEMA extended these deadlines for Hurricane
Maria (see e.g., Bulletin W-17057, ``Activation of NFIP Catastrophic
Event Enhanced Claim Payment Process and Proof of Loss Extension for
Hurricane Maria,'' (Sept. 28, 2017), found at <a href="https://nfipservices.floodsmart.gov/sites/default/files/w-17057.pdf">https://nfipservices.floodsmart.gov/sites/default/files/w-17057.pdf</a> (last
accessed Aug. 28, 2023)), Hurricane Irma (see e.g., Bulletin W-
17040, ``Activation of NFIP Catastrophic Event Enhanced Claim
Payment Process and Proof of Loss Extension of Hurricane Irma,''
(Sept. 17, 2017), found at <a href="https://nfipservices.floodsmart.gov/sites/default/files/w-17040.pdf">https://nfipservices.floodsmart.gov/sites/default/files/w-17040.pdf</a> (last accessed Aug. 28, 2023)), and
the August 2016 floods in Louisiana (see e.g., Bulletin W-16028,
``Notice of the Limited Waiver of the Standard Flood Insurance
Policy (``SFIP'') to Extend the Time for Sending Proofs of Loss in
the States of Louisiana and Mississippi for Claims Related to Severe
Winter Storms Commencing on March 7, 2016 through March 19, 2016,''
(Apr. 21, 2016), found at <a href="https://nfipservices.floodsmart.gov/sites/default/files/w-16028.pdf">https://nfipservices.floodsmart.gov/sites/default/files/w-16028.pdf</a> (last accessed Aug. 28, 2023)); Bulletin
W-16038, ``Notice of the Limited Waiver of the Standard Flood
Insurance Policy (``SFIP'') to Extend the Time for Sending Proofs of
Loss in the State of Louisiana for Claims Related to Severe Spring
Storms Commencing on April 17, 2016 through April 20, 2016,'' (Jun.
15, 2016), found at <a href="https://nfipservices.floodsmart.gov/sites/default/files/w-16038.pdf">https://nfipservices.floodsmart.gov/sites/default/files/w-16038.pdf</a> (last accessed Aug. 28, 2023)); Bulletin
W-16067, ``Notice of the Limited Waiver of the Standard Flood
Insurance Policy (``SFIP'') to Extend the Time for Sending Proofs of
Loss in the State of Louisiana for Claims Related to the Mid-Summer
Severe Storms Commencing on August 9, 2016 through August 31,
2016,'' (Sept. 9, 2016), found at <a href="https://nfipservices.floodsmart.gov/sites/default/files/w-16067.pdf">https://nfipservices.floodsmart.gov/sites/default/files/w-16067.pdf</a> (last
accessed Aug. 28, 2023)), among others.
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FEMA proposes to retain in proposed section VI.A.3 the Dwelling
Form's existing requirements in section VII.G.4 for documenting the
proof of loss with a few minor adjustments. These include proposed
VI.A.3.c's requirement that the homeowner policyholder provide details
of any other insurance that may cover some or all of the loss, as this
would make the insurer aware of the other insurance regardless of the
extent of coverage it may provide for the loss. In addition, VI.A.3.f's
requirement that the homeowner policyholder provide a description of
all damages to the dwelling and other covered buildings with detailed
repair estimates would help remind homeowner policyholders of the
requirements to prepare their claim for Coverages A and B. While much
of the required inventory list remains the same, FEMA highlights a few
changes here. First, proposed section VI.A.3.g would require homeowner
policyholders to list not only damaged property, but also property that
may have been lost or destroyed, as that property may still be eligible
for coverage. Second, proposed section VI.A.3.g(3) would add in
replacement cost value, as Coverage C would be eligible for replacement
cost value loss settlement instead of only actual cash value. Third,
proposed section VI.A.3.g(7)'s requirement of information on all funds
actually spent recovering from the loss, including copies of all bills,
receipts, invoices, written estimates, and related documents, would
enhance the insurer's ability to accurately and completely settle the
loss.
FEMA proposes minor clarifying edits in proposed sections VI.A.4,
VI.A.5, VI.A.6, and VI.A.7. Like section VII.G.5 of the Dwelling Form,
proposed section VI.A.4 would continue requiring homeowner
policyholders to use their own judgment concerning the amount of loss
and justify that amount before signing it. Like section VII.G.6 of the
Dwelling Form, proposed section VI.A.5 would clarify that there may be
additional parties beyond an adjuster involved in the investigation of
a claim. In proposed section VI.A.6, FEMA would add an industry
standard provision requiring the homeowner policyholder make the
damaged property accessible for inspection, to ensure that the insurer
can inspect the damaged property as appropriate for the claims review
process. FEMA also proposes conforming changes in section VI.A.7
(section VII.G.7 of the Dwelling Form) to the deadline for submission
of proof of loss to 90 calendar days as reflected in proposed section
VI.A.3.
b. Our Options After a Loss
In proposed section VI.B, ``Our Options After a Loss,'' FEMA seeks
to simplify and further clarify the insurer's options. Section VI.B.1.
would provide that after a loss and at the insurer's sole discretion,
it may require that the homeowner policyholder provide it access to the
damaged property, submit to examination under oath upon request and
sign the transcript from such examination, and permit the insurer to
examine and make copies of all or any portion of any policies of
property insurance against loss and the deed establishing ownership of
the insured property, and all bills, invoices, receipts, and other
records pertaining to the damaged property (or certified copies if
originals are lost). Section VI.B.2 would allow the insurer to accept
its adjuster's report of the loss in lieu of a proof of loss and
require the homeowner policyholder to sign the report, and it would
also allow the insurer to require the homeowner policyholder to swear
to the report. This section does not mirror its counterpart in the
Dwelling Form (at section VII.H) because the section in the Dwelling
Form includes several concepts that the Homeowner Flood Form would
cover in other sections (e.g., inventory requirements, which the Form
would cover in VI.A.g, discussed above). FEMA proposes to add the
requirement in VI.B.1.a that the homeowner policyholder provide the
insurer access to the damaged property as this would formally enable
the inspection of damaged property to better facilitate the claims
review process. FEMA's proposed reorganization and restatement of the
requirement to provide transactional and other records related to the
damaged property in section VI.B.1.c(2) would increase clarity for
homeowner policyholders and ensure they understand that insurers can
examine and make copies of these records. The language in proposed
VI.B.2 is currently in the Dwelling Form (at section VII.G.9), but FEMA
proposes not to retain the language describing what the adjuster's
report includes (information about the loss and damages sustained)
because this language is unnecessary. This section would also not
retain the option currently in section VII.H.3.a of the Dwelling Form
for insurers to make repairs directly, as it is unnecessary. This
repair option has been a part of the Dwelling Form for several years,
yet FEMA data show that insurers have not invoked this option.
c. Loss Payment
Proposed section VI.C, ``Loss Payment,'' would retain much of the
current Dwelling Form's language at VII.J with minor changes. In
section VI.C.1, ``Adjustment of Claims,'' paragraph a. would state that
the insurer has not authorized the adjuster to approve or disapprove
any claim. This language would eliminate the redundancy currently in
the Dwelling Form and clarify that the adjuster is not authorized to
approve or disapprove any claim. Paragraph VI.C.1.b would retain the
language in section VII.J.1 of the Dwelling Form except for the
clarification that the 60 and 90-day timeframes are calendar days,
consistent with other proposed changes. Proposed section VI.C.2 would
similarly retain the language in the Dwelling Form at section VII.J.2,
except it would increase the timeframe a homeowner policyholder has to
file an amended proof of loss from 60 to 90 calendar days from the date
of loss, and would add references to the appeal, appraisal, and
litigation sections of the policy to make clear to homeowner
policyholders the additional rights available to them.
FEMA proposes to add a section on ``Advance Payments'' at proposed
VI.C.3. Section VI.C.3.a would provide that the insurer may provide the
homeowner policyholder with an advance payment prior to the completion
of the claim, and the homeowner policyholder may request an advance
payment after providing the notice of loss. It would further provide
that these payments may include amounts totaling no more than 5 percent
of the Coverage A limit to an insured without regard to proposed
section VII.F (``Mortgage Clause,'' discussed below). Section VI.C.3.b
would provide that the insurer may approve or reject the request for
advance payment, and that such approval or rejection does not affect
the final adjustment of the claim and does not change the homeowner
policyholder's duties or insurer's options. Section VI.C.3.c would
state that if the insurer provides an advance
[[Page 8304]]
payment that exceeds the covered loss, the insurer would send written
notice of the overpayment, and the homeowner policyholder must repay
the excess amount or dispute the validity of the overpayment within 30
calendar days. It would further provide that failure to repay any
overpayment may result in a debt collection by the Federal Government.
Current guidance requires the insurer to contact the homeowner
policyholder with a description of the remedies available to the NFIP
upon failure to repay the amount due by the deadline.\68\ Providing
this information in the policy would ensure the homeowner policyholder
is aware of this option in advance. FEMA proposes this section to
increase flexibility for insurers and transparency for the homeowner
policyholder, as giving insurers the option to issue advance payments
comports with industry practice. The language in VI.C.3.a permitting up
to 5 percent of the Coverage A limit of liability as an advance payment
would allow the insurer to issue a de minimis amount of payment to an
insured without having to include a mortgagee on the check. Lastly,
proposed section VI.C.3.c explains that an advance payment cannot
provide for a beneficial loss as this is an indemnity policy. Indemnity
insurance is a contractual agreement in which the insurer guarantees
compensation for actual losses or damages sustained and thus, the
homeowner policyholder must repay any excess amount issued.
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\68\ See Claims Manual at 217.
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d. Deductible
The Dwelling Form addresses deductibles in a standalone article
(``VI. Deductibles''). For the Homeowner Flood Form, however, FEMA
proposes to place the deductible section within section VI,
``Procedures and Duties When a Loss Occurs,'' as treating it within the
loss context is more logical. FEMA also proposes to present the
deductible as a single deductible instead of several deductibles for
simplicity. Proposed section VI.D.1 would retain language in the
Dwelling Form at VI.A, providing that when a loss is covered under the
policy, the insured would pay only that part of the loss that exceeds
the homeowner policyholder's deductible amount (subject to the
applicable coverage limit), and that the deductible amount is shown on
the declarations page. This section would not retain the additional
language in the Dwelling Form at VI.A regarding buildings under
construction, as the Homeowner Flood Form would treat buildings under
construction in a separate endorsement. Proposed section VI.D.2 would
provide that in each loss from flood, a single deductible applies to
losses to the dwelling and all other insured property. Proposed section
VI.D.3 would clarify that the deductible does not apply to any loss
avoidance measures specified in proposed sections III.D.2 or III.D.3.
Although offering separate deductibles for building and personal
property coverage are long-time conditions of the flood insurance
policy,\69\ it is FEMA's position that offering a single deductible for
property and contents aligns with industry standards and customer
expectations. A single deductible is also permissible under the NFIP's
statutory authority, as the NFIA sets the minimum deductible for
buildings,\70\ but no minimum deductible for personal property. Most
claims for personal property loss also contain a building loss claim
because personal property must be inside a building for coverage and it
is unlikely that personal property would be damaged without
corresponding building losses. The Biggert-Waters Flood Insurance
Reform Act of 2012 (BW-12) \71\ requires policyholders be paid only for
damage to property covered under their policy and a single deductible
applying to losses from the dwelling and all other property insured by
the policy comports with this. In proposed section VI.D.3, FEMA retains
the reference to loss avoidance measures, but does not retain
references to condominium loss assessments or Increased Cost of
Compliance. As mentioned previously, the Homeowner Flood Form would not
cover condominium units, and would include ICC coverage through an
endorsement.
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\69\ The National Flood Insurance Act authorizes FEMA to deliver
the NFIP in one of two ways. The first (Part A), envisions an
industry program supported by the Federal Government whereby FEMA
serves as a backstop for a pool of private insurers which sell a
flood insurance policy containing terms provided by FEMA. The second
(Part B, under which the NFIP currently operates), envisions a
Government program with industry support whereby FEMA leads a
program where private insurers agree to sell and service a Federal
flood insurance policy. When the NFIP operated under Part A, the
Department of Housing and Urban Development (HUD) set certain flood
insurance terms and conditions by regulation that FEMA continued to
utilize even after the switch to operating under Part B. See
generally 24 CFR 1911(f)(3) (1970): ``The policy contains a
deductible clause. Each loss sustained by the insured is subject to
a deductible provision under which the insured bears a portion of
the loss before payment is made under the policy. The amount of this
deductible is either $100 for each type of loss (that is, $100 on
the structure and $100 on the contents) or 2 percent of the amount
of insurance applicable to the type of loss, whichever is greater;''
and 44 CFR 61.5(d)(1980): ``Each loss sustained by the insured is
subject to a deductible provision under which the insured bears a
portion of the loss before payment is made under the policy. The
amount of the deductible for each loss occurrence is (1) For
structural losses, $200, and (2) for contents losses, $200.''
\70\ 42 U.S.C. 4019(b).
\71\ Public Law 112-141, 126 Stat. 916 (2012).
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e. Loss Settlement
FEMA proposes in section VI.E, ``Loss Settlement,'' to simplify the
provisions regarding loss settlement compared to the Dwelling Form's
section on the same (see section VII.R). This section would make it
clear that replacement cost value--the method of valuation using the
amount that it would cost to replace an asset--rather than actual cash
value, would be the default loss settlement. (As noted previously, a
homeowner policyholder seeking coverage at actual cash value may do so
by endorsement.) Section VI.E.1 would explicitly state that the policy
provides both replacement cost value and actual cash value as possible
methods of settling losses based on whether property is insured to
value. (1) Section VI.E.1.a would apply replacement cost value to the
dwelling, if at the time of loss, the coverage limit that applies to
the dwelling is 80 percent or more of full replacement cost immediately
before the loss or is the maximum coverage limit available under the
NFIP. It would also apply replacement cost value to claims arising
under Coverage B or C of the policy. Extending replacement cost value
loss settlement beyond Coverage A to Coverage B and C aligns the Form
with customer expectations and comports with other proposed changes for
consistency across coverages. (2) Section VI.E.1.b would apply actual
cash value if the dwelling is not eligible for replacement cost value
because it does not meet the conditions of VI.E.1.a, (insured to value)
or if actual cash value is specified in an endorsement (allowing
homeowner policyholders to elect actual cash value loss settlement at
the time of policy inception, with an appropriately adjusted premium
requirement reflecting the lowered expected loss).\72\ Proposed section
VI.E.1 would not retain special loss settlement, as it is only
applicable to
[[Page 8305]]
certain mobile homes (which would not be covered under the Form).
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\72\ Using replacement cost value allows FEMA to pay a
policyholder to replace what he or she had at the time of loss with
new like and kind quality. Actual cash value allows FEMA to pay a
policyholder to replace what he or she had at the time of loss while
considering the quality of the item and applying depreciation. For
example, if a floor is damaged by a flood, under replacement cost
value, the policyholder would receive payment for the type of
flooring at the same quality at current prices. Under actual cash
value, the policyholder would receive payment for the type of
flooring at the same quality less depreciation (wear and tear,
etc.), resulting in a reduced payment.
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Proposed section VI.E.2, ``Replacement Cost Value Settlement,''
would provide that if the loss is subject to replacement cost value
under VI.E.1.a, the insurer would pay to repair or replace the damaged
dwelling or other buildings at the described location or covered
personal property, but not more than the lesser of (1) the coverage
limit applicable to the loss as shown on the declarations page; (2) the
replacement cost of the damaged part of the dwelling using materials of
like kind and quality and for like use; or (3) the amount necessary to
repair or replace the damaged part of the dwelling for like use.
Proposed section VI.E.2 would also provide that where the loss is
subject to replacement cost value and the dwelling is rebuilt at a new
location, the insurer would pay only the cost that would have been
incurred if the dwelling had been rebuilt at its former location.
Proposed section VI.E.3, ``Actual Cash Value,'' would provide that if
actual cash value loss settlement applies, the insurer would pay the
lesser of the actual cash value of the covered property, or the policy
limits stated on the declarations page. Compared to the Dwelling Form,
these sections contain conforming edits (such as not retaining the
distinction between primary and nonprimary residences), and
nonsubstantive edits for readability. These sections would also not
retain the special situations listed in the Dwelling Form where only
actual cash value applies, consistent with other proposed changes.
FEMA proposes a new section VI.E.4, ``Flood Mitigation Expenses,''
to give customers and those who have suffered loss additional options
to receive payment for modest mitigation efforts.\73\ Section VI.E.4.a
would provide that the insurer would reimburse for post-loss expenses
that mitigate against future flood events as long as post-loss expenses
do not exceed the policy limits. Section VI.E.4.b would allow the
homeowner policyholder to choose to replace any damage under Coverage A
or B with Flood Damage Resistant Materials; after completing
installation of these materials, the homeowner policyholder may request
reimbursement. Section VI.E.4.c would allow the homeowner policyholder
to choose to elevate his or her machinery and equipment above a
basement or enclosure. Such elevated machinery or equipment must be
elevated to a height reasonably expected to avoid future direct
physical loss by or from flood. After elevating machinery and
equipment, the homeowner policyholder may request reimbursement. The
NFIP is not strictly an insurance program, but rather a program that
combines studying flood risk, mapping it, creating national minimum
floodplain management standards, and transferring flood risk.\74\ Under
these revisions, FEMA would not only pay to repair damaged property to
the status quo ante, it would pay for the additional higher costs of
flood damage resistant materials or additional labor to move machinery
and equipment. In the same way that many insurers currently take
efforts to reduce the likelihood or size of future claim payments pre-
loss,\75\ these revisions would allow FEMA to pay for similar actions,
just after the loss. Ultimately, the coverage is there to help the
homeowner policyholder recover; FEMA anticipates that the premiums tied
to the coverage choices would signal the underlying risk and promote
mitigation efforts.
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\73\ Any payment for mitigation efforts must be within statutory
limits and within the context of repairs of damaged items where
applicable.
\74\ See 42 U.S.C. 4001 et seq generally. Note that 42 U.S.C.
4001 addresses the intent of Congress to create a program that is
not strictly a flood insurance program; 42 U.S.C. 4014(a) authorizes
the agency to conduct studies and investigation for premium rate
estimation; 42 U.S.C. 4101b authorizes the agency to map flood risk;
42 U.S.C. 4102 authorizes the agency to conduct studies and
investigations for land management, floodplain management, and
zoning; 42 U.S.C. 4122 authorizes the agency to study perils other
than flood; and 42 U.S.C. 4127(c) authorizes the agency to utilize
appropriations for studies.
\75\ E.g., many insurers offer defensive driving discounts for
automobile policies, premium credits if a policyholder installs a
security system in his or her home, a reduction in premium for a
commercial liability policy if the business has sprinkler systems
installed throughout, etc. In essence, these efforts ``pay'' for
actions pre-loss through reductions in premium collected.
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Lastly, proposed section VI.E.5 would provide that the Form is not
a valued policy and would explain that a valued policy is a policy in
which the payable amount in the event of a total loss is agreed upon by
the insured and insurer. This reference puts the homeowner policyholder
on notice that, in the event of a total loss, the homeowner
policyholder would not automatically receive the policy limits.
Although the Dwelling Form also states that it is not a valued policy,
it contains this statement in the Definitions section. FEMA proposes to
place this in the Form's Loss Settlement section (1) because this is
the only location where it uses the term, and (2) to acknowledge the
frequency with which insurers cite to the term in denial letters, so
that homeowner policyholders would better understand the policy's loss
parameters.
f. Appraisal
In section VI.F, ``Appraisal,'' FEMA proposes to revise provisions
regarding appraisal to more closely mirror the NFIP's guidance issued
by bulletin,\76\ as appraisal carries a different meaning for the NFIP
than it does for property insurance under some state laws.\77\ Under
section VI.F, if the homeowner policyholder and the insurer fail to
agree on the replacement cost value, or if applicable, actual cash
value, and are thus unable to settle the amount of loss, either party
may demand an appraisal of the loss. Section VI.F.1 outlines the
conditions before a homeowner policyholder can request an appraisal.
Before requesting an appraisal, the homeowner policyholder must agree
with the insurer on a list of damaged items to be appraised (VI.F.1.a)
and must have complied with proof of loss requirements (VI.F.1.b). (If
the homeowner policyholder is uncertain about their loss and has not
finalized a proof of loss claim, the appraisal process is not
appropriate). Section VI.F.1.c would provide that appraisal is only
available when the dispute involves the price to be paid for the
covered property. Other disputes, such as disputes regarding coverage
or causation, or the extent of the loss, would not be able to be
resolved through the appraisal process. Section VI.F.2, ``Appraisal
Process,'' retains the language from section VII.M of the Dwelling Form
with minor conforming changes regarding actual cash value and
replacement cost value, and clarifying that the timeframes are in
calendar days, consistent with other proposed changes in the form. In
proposed section VI.F.3, FEMA seeks to more closely mirror the guidance
set out by previous bulletins to confirm that appraisals can only be
used when it would result in complete resolution of the entire claim
and
[[Page 8306]]
cannot be used to resolve only part of the claim or to determine the
value of some items and not others.
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\76\ See Bulletin W-13029, ``Proper Invocation and Usage of the
Appraisal Clause Provisions in the Standard Flood Insurance Policy''
(May 15, 2013), found at <a href="https://nfipservices.floodsmart.gov/sites/default/files/w-13029.pdf">https://nfipservices.floodsmart.gov/sites/default/files/w-13029.pdf</a> (last accessed Aug. 28, 2023).
\77\ In traditional claims handling, one first addresses
eligibility (i.e., is there a valid policy, insurable interest,
etc.?), then coverage (i.e., is there a loss caused by flood?), then
the scope of the loss (i.e., how much damage did floodwater cause?),
then finally pricing (i.e., the value of the loss items). For the
NFIP, appraisal only comes into play when there is a dispute
regarding pricing (i.e., the insurer and policyholder agree on
eligibility, coverage, and scope, just not on price). Many states,
by contrast, use appraisal in a variety of other ways, such as
determining causation (especially when there are multiple perils) or
other aspects of the claim. Because each state has specific
insurance laws that govern in the absence of a Federal law on point,
appraisal often serves as a ``catch-all'' for a range of dispute
resolution programs that exist for insurance which vary from state-
to-state.
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8. Section VII: General Conditions
Proposed section VII, ``General Conditions,'' would contain items
of general applicability to the policy. While article VII of the
Dwelling Form contains most of these provisions, the Homeowner Flood
Form would reorganize them alphabetically to make it easier for the
policyholder to find relevant information. It would also add three new
provisions (``Death,'' ``Headings and Captions,'' and ``Your Options
After Our Denial'') discussed in further detail below.
In proposed section VII.A, ``Abandonment,'' FEMA proposes to add
the word ``unilaterally'' so that the provision would read that the
policyholder may not unilaterally abandon to the insurer, damaged or
undamaged property insured under the policy. This is to ensure an
agreement for salvage, as the policyholder cannot invoke salvage for
the insurer. Proposed section VII.B, ``Amendments, Waivers, and
Assignment,'' would break out the first two sentences of section VII.C
of the Dwelling Form into separate clauses for readability, and would
change the reference to ``Federal Insurance Administrator'' to
``Administrator'' to conform with the policy's proposed terminology.
Although the current Dwelling Form provides conditions under which the
policyholder may assign the policy, proposed section VII.B.3 would
prohibit the assignment of the policy or claim to any other party in
order to avoid claims-related issues in states that allow assignment of
benefits.\78\ Because the increased choice and flexibility of the
Homeowner Flood Form allows homeowner policyholders to tailor it to
their needs, it is FEMA's position that it would not be necessary or
desirable for a homeowner policyholder to assign the policy to another
party.\79\ This is because the policy, as tailored by the original
homeowner policyholder, would not necessarily provide adequate
insurance coverage for the assignee. Eliminating the option to assign
should result in more fulsome discussions between agents and homeowner
policyholders regarding available options and would allow each
homeowner policyholder to choose the options that are right for them,
rather than having to accept a policy tailored to another individual's
choices.
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\78\ FEMA notes that while the Agency does permit assignment of
ICC benefits to a community in the context of grants, the extent to
which the FEMA will continue to permit assignment of ICC benefits
would be addressed in the ICC Endorsement.
\79\ For instance, a homeowner policyholder may want actual cash
value while an assignee might want replacement cost value coverage,
a homeowner policyholder may want additional living expenses while
an assignee might not, or a policyholder may not want to cover other
buildings under Coverage B, while an assignee might want to cover
one or more. In addition, to the extent that FEMA permits different
values for sublimits (e.g., loss avoidance, etc.), this is another
choice that may differ between homeowner policyholders and
assignees.
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Proposed section VII.C, ``Death,'' would be a new provision and
would provide that in the event of the homeowner policyholder's death
during the policy term, the coverage under the policy would continue
automatically for any other insured(s). If no other insured exists, the
policy would insure the administrator, executor, or other legal
representative of the homeowner policyholder's estate as previously
determined by the homeowner policyholder or the intestacy laws of the
state where the described location is located, but only for the
dwelling, building(s), and personal property of the deceased at the
time of death. Issues involving the death of a homeowner policyholder
arise with frequency. These can include situations where insurers deny
claims by invoking the assignment clause, questions arise over whether
the spouse was a resident of the same household, or more simply,
remaining family who are still grieving the loss become frustrated with
the insurance process. Addressing this scenario in the policy would
align it with industry practice, as homeowners' policies include a
death clause, and would reduce complexity for the remaining insured(s)
and/or family of the deceased.
Proposed section VII.D, ``Duplicate Policies Not Allowed,'' would
provide that FEMA would not insure personal property at the described
location under more than one NFIP policy. It would further provide that
if there is more than one NFIP policy for buildings at the described
location, FEMA would apply the NFIP rules concern
[…truncated; see source link]Indexed from Federal Register on February 6, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.