The Surcharge and Requirement to Validate a Primary Residence for
The Homeowner Flood Insurance Affordability Act
The Homeowner Flood Insurance Affordability Act of 2014 (HFIAA) was signed into law by the President on March 21, 2014. This amendment to the National Flood Insurance Program (NFIP) enacted many changes, including an annual surcharge of $25 on all new and renewal flood insurance policies for primary residences and $250 for all others.
HFIAA slowed the elimination of subsidies authorized in the Biggert-Waters Flood Insurance Reform Act of 2012 and amended most of the provisions mandating that certain policies transition immediately to full-risk rates. To compensate for the decrease in revenue, the new law calls for the addition of a surcharge on all policies that will be collected until, with limited exceptions, all subsidies are eliminated.
The surcharge is a flat fee applied to all policies based on the property use of the insured building and is not associated with the flood zone in which the building is located or the construction date of the building (e.g., pre- or post-FIRM). The surcharge is in addition to a Federal Policy Fee that existed prior to the enactment of HFIAA and any applicable probation surcharge that may be applied to communities that fail to enforce the minimum floodplain management requirements of the NFIP.
Which surcharge applies to which policies?
If the home is an owner-occupied single-family dwelling insured under the Dwelling Policy and it is the owner’s primary residence, the $25 surcharge applies.
- If the building is not an owner-occupied single-family dwelling insured under the Dwelling Policy and it is NOT the primary residence of the owner, the $250 surcharge applies.
Here are a few examples to help you understand what is involved:
- NFIP Dwelling Building coverage purchased by a landlord would include the $250 surcharge. Keep in mind, the surcharge is intended to assist homeowners with their flood insurance costs. In a situation involving commercial use of a private home, such a landlord situation, if even one of the units is the primary residence of the landlord, the $250 surcharge still applies since the building is being used for profit by the landlord. The renter, who would have contents coverage only for their possessions, would pay only $25 under the contents policy.
- The $25 surcharge does not apply to 2-4 family dwellings unless the policy is written for contents only or the policy insures a specific condominium unit.
- A single-family detached building that is in the condominium form of ownership would have the $250 surcharge. Keep in mind this would be under the Residential Condominium Building Association Policy (RCBAP), even though the unit is the owner’s primary residence. Remember, this is not a Dwelling Policy. A high-rise insured under an RCBAP will be surcharged $250.
You can always check with your underwriting office to make sure your assessment is correct. For more examples, please see the April 1, 2015 changes bulletin. All NFIP bulletins can be found on the NFIP iService website.
Primary Residence vs. Non-Primary Residence
Keep in mind, for insurance rating purposes only, FEMA defines a primary residence as a building that will be lived in by an insured or an insured’s spouse for more than 50 percent of the 365 days following the policy effective date. However, for loss settlement purposes, if the dwelling does not meet the definition of a “principal residence,” then any claim for building damages will be paid using Actual Case Value (ACV). The Standard Flood Insurance Policy (SFIP) defines a principal residence that qualifies for Replacement Cost Value (RCV) coverage on the building as a building that, at the time of loss, is lived by an insured or an insured’s spouse for either 80 percent of the 365 days preceding the loss or 80 percent of the period of ownership, if less than 365 days, and the building is insured for at least 80 percent of its replacement cost value.
It is important that insurance agents communicate the difference between “Primary Residence” and “Principal Residence” for rating and loss settlement purposes, so their customers are aware of the SFIP limitations in case they do not meet the 80 percent threshold. Even though the policy declarations page will indicate “primary” residence for rating purposes, for the purpose of adjusting a claim, a different assessment is involved.
The insurer can assist you with validating the property use.
The policyholder needs to provide verification of primary residence status through documentation to include one of the following: driver’s license, automobile registration, proof of insurance for a vehicle, voter’s registration, documents showing where children attend school, or homestead tax credit for primary residence. If they cannot provide the documentation, they need to submit a signed and dated statement to the insurer to verify the property use. Failure to do so will require the insurer to assume the non-primary status and apply the $250 surcharge, and the building may be subject to a 25 percent premium rate increase. In either case, insurance agents should ensure that their customers understand the implications of not returning this very important documentation.
Where To Go for Assistance
As always, insurance agents should work with their insurer to answer important questions about rating and underwriting risk, in or out of the flood plain, just as they would their other lines of insurance.
Please also use the NFIP Flood Insurance Manual for information on the NFIP underwriting rules and requirements, including rating and the basics of flood insurance.
A list of participating private insurance companies known as Write Your Own Companies and their flood insurance contacts. For agents to have policies insured through the NFIP Direct Servicing Agent, please contact the underwriting department at 1-800-638-6620.
It is crucial that insurance agents remember to communicate with their customers as renewal time comes around. The documentation requirement for validating the residence status must be done prior to the effective date of the renewal. It is always a good idea to encourage policyholders to sign the letter or submit the supporting documentation at least 45 days prior to the policy expiration so they are not billed as a non-primary residence with a 25 percent premium rate increase and $250 surcharge.
For more information, please visit:
Flood Insurance Reform
Changes to the National Flood Insurance Program – What to Expect
FEMA.gov Insurance Agent Webpage
The Agents.FloodSmart.gov Website
NFIP Bulletin – Homeowner Flood Insurance Affordability Act (HFIAA) Surcharge Reporting Guidance for the National Flood Insurance Program New Business and Renewals.