FEMA Rule: National Flood Insurance Program

WASHINGTON, July 20 -- The Federal Emergency Management Agency has issued a rule (44 CFR Parts 59, 61 and 62 ), published in the Federal Register, entitled: "National Flood Insurance Program: Conforming Changes To Reflect the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12) and the Homeowners Flood Insurance Affordability Act of 2014 (HFIAA), and Additional Clarifications for Plain Language".

The rule was issued by Peter T. Gaynor, Administrator, Federal Emergency Management Agency.

DATES: This rule is effective on October 1, 2021.

FOR FURTHER INFORMATION CONTACT: Kelly Bronowicz, Director, Policyholder Services Division, Federal Insurance and Mitigation Administration, Federal Emergency Management Agency, 400 C Street SW, Washington, DC 20472, (202) 557-9488.

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SUPPLEMENTARY INFORMATION:

I. Background and Discussion of the Rule

On July 16, 2018, FEMA published a Notice of Proposed Rulemaking (NPRM) (83 FR 32956) proposing to make several non-substantive changes to the NFIP regulations to improve their readability, uniformity, and clarity. In addition, FEMA proposed to codify certain requirements of the Biggert-Waters Flood Insurance Reform Act of 2012 (Pub. L. 112-141, 126 Stat. 916) (BW-12) and the Homeowner Flood Insurance Affordability Act of 2014 (Pub. L. 113-89, 128 Stat. 1020) (HFIAA).

The NPRM proposed to codify the provisions of BW-12 that require FEMA to (1) increase the maximum coverage amount for multi-family properties to the same amount as that allowed for commercial properties; (2) establish a minimum deductible amount for NFIP polices; (3) stop denying payment to policyholders for damage or loss to a condominium unit under the Dwelling Form based solely on the fact that the condominium association has inadequate flood insurance coverage on the entire condominium; and (4) review, among other things, the processes and procedures for making flood in progress determinations. The NPRM also proposed to codify HFIAA's requirement that FEMA offer a high deductible option of $10,000.

The NPRM solicited public comment on these proposed changes. FEMA received three comments related to the rulemaking and five unrelated comments that were outside the scope of the rulemaking. FEMA does not consider the five comments unrelated to this rulemaking in this preamble. In this final rule, FEMA adopts the changes it proposed in the NPRM, with some minor revisions in consideration of the related comments and corrections of typographical errors. FEMA describes these changes below.

II. Summary and Discussion of Public Comments

Of the three comments germane to this rulemaking, one anonymous commenter [FEMA-2018-0026-0005] commented on the need for more dams, the second, from the Association of State Floodplain Managers (ASFPM) [FEMA-2018-0026-0004], commented on the inclusion of spouses on the General Property Form of the Standard Flood Insurance Form (SFIP) and identified a typographical error, and the third, a member of the public [FEMA-2018-0026-0003], suggested that FEMA should modify the Residential Condominium Building Association Policy (RCBAP) to better take into account certain State laws concerning the maintenance and repair of condominium buildings and the units therein.

A. Dams

The anonymous commenter [FEMA-2018-0026-0005] suggested that FEMA "build more dams to hold back the waters from flooding." FEMA is committed to building a culture of preparedness by, in part, incentivizing investments that reduce risk--including pre-disaster mitigation--and reduce disaster costs at all levels.[1] This includes encouraging the investment in infrastructure that reduces future disaster costs, such as dams and levees. However, this comment suggests actions beyond the scope of this rulemaking, which focuses on making conforming and clarifying changes to the National Flood Insurance Program's regulations and policy forms. For this reason, FEMA declines to make changes to this rulemaking in response to this comment.

B. Spouse as Named Insured in General Property Form

The Association of State Floodplain Managers (ASFPM) [FEMA-2018-0026-0004] noted that it supports FEMA's effort to revise the NFIP's regulations to clarify rules relating to the NFIP's operation and align them with BW-12 and HFIAA. ASFPM disagreed, however, with FEMA's proposal to add the insured's spouse as a named insured for both the Dwelling Form and the General Property Form of the SFIP. While ASFPM understands that a homeowners policy may typically include the insured's spouse as a named insured, it is not included in a commercial policy. ASFPM spoke with insurance specialists who confirmed that there may be a good chance that the spouse is not part of the commercial venture and has no interest in the business and therefore, should not be automatically included in the General Property Form. ASFPM therefore recommended removing the spouse as a named insured in the General Property Form.

FEMA did not intend to modify this provision in the NPRM and agrees with ASFPM's comments that the spouse of a named insured should not automatically be included as an insured in the General Property Form of the SFIP. The current General Property Form of the SFIP does not automatically include the spouse of a named insured as an insured under the policy. See 44 CFR part 61, App. A(2), II.A. Accordingly, this final rule will not modify the provision from the status quo. FEMA thanks ASFPM for identifying this inadvertent proposed change.

C. Replacement of "Covered" With "Insured"

ASFPM [FEMA-2018-0026-0004] also noted that while it has no issues with FEMA's proposal to replace the word "covered" with the word "insured" in the SFIP, the NPRM did not propose doing so throughout the SFIP, including the title of Section IV, "Property Not Covered." ASFPM recommended that FEMA review the different SFIP forms and ensure they are consistent with the use of "insured."

FEMA proposed to replace the word "covered" with the word "insured" in the SFIP because "covered" is a generic and undefined term that does not conform to common industry or Agency usage. FEMA agrees with ASFPM's comment and has replaced the word "covered" with "insured" in all instances where appropriate throughout the three SFIP forms.

D. Residential Condominium Building Association Policy (RCBAP)

A member of the public [FEMA-2018-0026-0003] suggested several modifications to the Residential Condominium Building Association Policy (RCBAP). The RCBAP 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. Under existing NFIP regulations, the RCBAP acts as primary coverage for an entire condominium building, including portions of a condominium building which an individual unit owner is responsible for maintaining, such as interior walls and cabinetry.[2] Individual unit owners may choose to purchase a Dwelling Form policy that provides excess building coverage beyond that offered by an RCBAP, subject to statutory coverage limits. The requirement that the RCBAP act as primary coverage for all losses to condominium buildings and the units therein simplifies the claims process by allowing the NFIP to pay claims without having to divide payments between unit owners and condominium associations based on a wide array of condominium building bylaws and relevant state laws.

The commenter suggested that FEMA modify the RCBAP to better take into account certain state laws concerning the maintenance and repair of condominium buildings and the units therein. The commenter explained that many state laws divide responsibility for maintaining and repairing condominium buildings between a condominium association and individual unit owners. According to the commenter, the RCBAP's present design causes FEMA to deem the excess building coverage of an individual unit owner's Dwelling Form policy duplicative, excessive, and unable to provide coverage that an individual policyholder could use upon suffering a loss. The commenter stated that treating the Dwelling Form's building coverage as excess to the RCBAP causes delays in insurance payments reaching individual unit owners, which in turn delays repairs, ultimately leading to litigation between condominium owners and their associations. The commenter is concerned that as a result, informed individual owners will cease purchasing building coverage under a Dwelling Form policy if they are aware that they will only receive payment of loss if the loss exceeds coverage under the RCBAP.

In addition, the commenter also stated that FEMA's treatment of a unit owner's Dwelling Form policy as excess to a condominium association's RCBAP violates section 1312(c) of the National Flood Insurance Act of 1968 (42 U.S.C. 4019(c)) (added by section 100214 of BW-12), which generally prohibits FEMA from denying or limiting coverage under an individual condominium unit owner's policy based solely or in part on the flood insurance coverage of the condominium association on the overall property.

The commenter also suggested defining the term "common elements" or making clear to policyholders that the applicable state definition will be used in interpreting the policy, likely for the purposes of interpreting Dwelling Form SFIP, Art. III.C.3.a. Moreover, the commenter recommended expanding the condominium loss assessment coverage provisions in III.C.3 of the Dwelling Form to clearly state what flood damaged items, if any, are excluded from coverage under the condominium loss assessment provision.

In sum, the commenter proposed that FEMA redesign the RCBAP so that it conforms with the laws in most states regarding condominiums (e.g., individuals insure the inside of their units, and the associations insure what they are responsible for under state law to repair). The commenter believes that this would (1) encourage individual unit owners to purchase building coverage, and (2) protect financial institutions, as a unit owner's financial institution is usually only named on the individual's Dwelling Form policy but not the RCBAP.

FEMA appreciates the commenter's suggestions on substantive changes FEMA could make to the SFIP to increase its marketability. As part of its 2018-2022 Strategic Plan, FEMA is committed to building a culture of preparedness by, in part, taking steps to double the number of properties covered by flood insurance through the private sector or the government. FEMA believes that designing flood insurance products that meet consumer needs will help achieve this goal. However, FEMA does not intend to make such substantive changes to the SFIP in this rulemaking. FEMA's intent in this rule is to clarify the SFIP to improve overall readability as well as conform it to BW-12 and HFIAA. FEMA thanks the commenter for this comment and will take it under advisement if FEMA considers substantive changes to the SFIP in the future.

FEMA disagrees with the commenter's view that making coverage under a unit owner's Dwelling Form policy excess to the condominium association's RCBAP violates 42 U.S.C. 4019(c). Condominium associations commonly charge individual unit owners loss assessments when the association's insurance coverage is insufficient to cover damage after a flood. When a Dwelling Form policy insures a condominium unit, the policy provides coverage for loss assessments charged to the policyholder by their condominium association for covered flood damage. See Dwelling Form SFIP, Art. III.C.3.a. Prior to the enactment of BW-12, the policy excluded coverage for loss assessments if the reason for the assessment is due to application of the RCBAP's coinsurance penalty provision. See Dwelling Form SFIP, Art. III.C.3.b.4. As a result, FEMA would deny coverage for a portion of flood damage under both the RCBAP and the Dwelling Form of the SFIP.

Section 100214 of BW-12 now prohibits FEMA from denying or limiting coverage under an individual condominium unit owner's policy based solely or in part on the flood insurance coverage of the condominium association on the overall property, including situations where the condominium association did not maintain a minimum amount of coverage through an RCBAP. See 42 U.S.C. 4019(c). As a result, FEMA no longer denies coverage for a loss assessment under the Dwelling Form SFIP that results from the application of the RCBAP's coinsurance penalty, and this rulemaking removes the contrary provision. See Dwelling Form SFIP, Art. III.C.3.b.4.

Contrary to the commentor's assertion, the current structure of the RCBAP acting as primary coverage for a condominium building and the Dwelling Form acting as excess coverage does not violate 42 U.S.C. 4019(c). The Dwelling Form's excess coverage provision (VII.C.2) does not result in the denial of otherwise covered damage. Rather, it merely apportions the coverage between the Dwelling Form and the RCBAP. Ultimately, the flood damage is still covered, though the payment may go to the condominium association rather than directly to the unit owner.

Additionally, interpreting 42 U.S.C. 4019(c) to prohibit treating the Dwelling Form as excess coverage to the RCBAP coverage would be contrary to FEMA's statutory authority, fundamental tenets of insurance law, and Congressional intent. If FEMA were not able to treat Dwelling Form coverage as excess to RCBAP coverage, Dwelling Form policyholders could be entitled to receive payments for damage that FEMA would also be required to pay for under an RCBAP. Congress has not given FEMA authority to "double pay" for the same damage.[3] Further, such double payments would also be contrary to fundamental principles of insurance law.[4] Finally, Congress' intent in enacting 42 U.S.C. 4019(c) was to ensure Dwelling Form policyholders can still receive payments where RCBAP coverage is inadequate; it was not intended to require FEMA pay for the same damage under two separate policies.[5] Treating the Dwelling Form coverage as excess to the RCBAP coverage comports with this purpose.

FEMA appreciates the commenter's suggestions to clarify parts of the Dwelling Form's coverage for condominium loss assessments. However, FEMA does not agree with the commenter's suggestion of defining "common elements" based on applicable state laws. The NFIP is a national program that is best implemented through uniform guidance irrespective of various state laws. Defining "common elements" based on state law, rather than a uniform standard, would increase policyholder confusion and complicate claims adjusting processes.

FEMA also does not agree that it is necessary to list in the SFIP items excluded from coverage of condominium loss assessments. FEMA has already provided guidance in this respect in the NFIP Claims Manual.[6] On page 54, the Manual explains "[The Dwelling Form's coverage of condominium loss assessments] does not include an assessment from the Condominium Association for property not covered by the SFIP, such as the cleanup of debris, sand, landscape lighting, repairs to parking lots, decks, sidewalks, pools, etc." It is FEMA's position that this guidance states with sufficient clarity what flood damaged items are excluded from coverage under the condominium loss assessment provision.

FEMA also wishes to point out that Coverage B (Personal Property) in the Dwelling Form of the SFIP will continue to include coverage for "interior walls, floor, and ceiling" not otherwise covered by an RCBAP policy. This coverage is limited to no more than 10 percent of the contents coverage limit chosen by the insured. This allows an individual unit owner to purchase his or her own policy that provides coverage beyond that offered by the RCBAP.

III. Summary of Other Changes

The final rule also includes corrections of typographical errors and other non-substantive stylistic changes from the NPRM. For instance, FEMA corrects the capitalization of some section headings to ensure consistency. FEMA also removed an inadvertent inclusion of "initial installment payment" in the revised 44 CFR 61.11(c) and added an inadvertently-removed unnumbered paragraph in the revised RCBAP section III.C.2.a (stating "[t]his coverage does not increase the Coverage A or Coverage B limit of liability."). FEMA also hyphenated the usage of "single-family" and "two-to-four" through the rule to conform to current NFIP styles. FEMA also updated cross-references to the Dwelling Form in 44 CFR 61.17(g).

Last, in the Maximum Amounts of Coverage Table at 44 CFR 61.6(a), FEMA replaced the term "Condominium Building" with "Residential Condominium Building" to make clear that the particular coverage limit is limited to condominium buildings used for residential purposes, rather than non-residential condominium buildings. This change reflects current practice and is for clarification purposes only.

Peter T. Gaynor,

Administrator, Federal Emergency Management Agency.

[FR Doc. 2020-09260 Filed 7-17-20; 8:45 am]

BILLING CODE 9111-52-P

The document is published in the Federal Register: https://www.federalregister.gov/documents/2020/07/20/2020-09260/national-flood-insurance-program-conforming-changes-to-reflect-the-biggert-waters-flood-insurance

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