"Obtain and Maintain" Insurance Requirements
LOUISIANA REALTORS • July 20, 2017
As we approach the anniversary of the Great Flood and as homes across the state are rebuilt and renovated, Louisiana REALTORS® wants to make REALTORS® aware of the "Obtain and Maintain" Insurance Requirements for homeowners that receive federal financial disaster assistance. The following information is for both REALTORS® and consumers. A printable PDF version of the information is available for download to incorporate in listing packets or as information for clients. LR will be working closely with the Louisiana Real Estate Commission (LREC) to further review the issue and whether the information will be added to any of the state mandated forms. In the meantime, there is a sample addendum for REALTORS® to reference.
THE "OBTAIN AND MAINTAIN"INSURANCE REQUIREMENTS UNDER THEFLOOD DISASTER PROTECTION ACT OF 1973
By: Patricia B. McMurray and Michelle Zaltsberg
Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
Property owners or renters who receive Federal financial flood disaster assistance after a Presidentially declared disaster may be required to obtain and maintain flood insurance on the property. The recipient of disaster relief funding who fails to "obtain and maintain" flood insurance may be ineligible for future disaster assistance as well as be required to repay disaster assistance previously received.
To determine if these "Obtain and Maintain" requirements apply, a property owner or renter should ask the following questions:
1. Have the owners of the property received Federal disaster assistance?
FEMA, SBA, and HUD offer programs which provide individuals, households, businesses, and private nonprofits financial assistance after a disaster. These programs may include residential and commercial property.
2. Is the property being sold or rented located in a Special Flood Hazard Area?
FEMA defines “Special Flood Hazard Area” as “The land area covered by the floodwaters of the base flood is the Special Flood Hazard Area (SFHA) on NFIP maps. The SFHA is the area where the National Flood Insurance Program's (NFIP's) floodplain management regulations must be enforced and the area where the mandatory purchase of flood insurance applies. The SFHA includes Zones A, AO, AH, A1-30, AE, A99, AR, AR/A1-30, AR/AE, AR/AO, AR/AH, AR/A, VO, V1-30, VE, and V.”
IF THE ANSWER IS “YES” TO BOTH OF THESE QUESTIONS,THE PROPERTY IS SUBJECT TO THE“OBTAIN AND MAINTAIN” REQUIREMENTS.
The “Obtain” Requirement. The National Flood Insurance Program (NFIP) allows Federal agencies to only provide financial assistance (including disaster assistance loans[1]) for acquisition or construction purposes in an SFHA where NFIP insurance is available, if the property for which assistance is being provided is covered by flood insurance. The amount of flood insurance must be the lesser of the following: (1) the maximum limit of coverage available under NFIP; or (2) the development or project cost (less estimated land cost).[2] If the disaster assistance is in the form of a loan, the amount of insurance need not exceed the outstanding principal balance of the loan.
The “Maintain” Requirement. The insurance must be continuously maintained regardless of a change in ownership. For owners, this requirement runs with the property address and applies to subsequent owners. For renters, this requirement only applies for as long as the applicant for disaster assistance or the insured contents remains at the flood-damaged rental property. For loans, the insurance must be maintained during the life of the loan.
Failure to “obtain and maintain” flood insurance results in ineligibility for future disaster assistance for flood-damaged items.[3]
THE NOTICE REQUIREMENT UNDER§ 582 OF THE NATIONAL FLOOD INSURANCEREFORM ACT OF 1994[4]
Notification to Subsequent Owners Required. There is a duty to notify the next owner of the “obtain and maintain” requirement in writing on or before the date the property is transferred. The notification requirement applies to personal, commercial, or residential property. The notification should appear in the document transferring ownership, such as the Act of Sale, as well as the Purchase Agreement. A sample of an addendum to the "Louisiana Agreement to Buy and Sell" is attached.
FAILURE TO NOTIFY COULD BE COSTLY.
If the following events occur: (1) the seller fails to provide this notice and the buyer does not obtain and maintain flood insurance as required; (2) the property is damaged by a flood disaster; and (3) Federal disaster assistance is provided to repair, replace, or restore the damage, then the seller may be required to reimburse the Federal government for the amount of the assistance previously received by the seller. The failure to provide the notice could be a very costly error to the former owner of the property.
[1] The requirement does not apply to “small loans,” defined as having (1) an original outstanding principal balance of $5,000 or less and a repayment term of one year or less, or (2) “detached structures” that are not part of the primary residential structure on residential property. 42 U.S.C.A. § 4012a(c)(2)-(3).
DOWNLOAD THE PRINTABLE VERSION (PDF)
[2] 42 U.S.C.A. § 4012a.
[3] Under the FEMA Public Assistance Program (applicable to state, local, tribal governments, and eligible private non-profits), the "obtain and maintain" requirement applies more broadly. Applicants are required to obtain and maintain insurance for any hazard that results in FEMA-funded assistance and the failure to do so renders the applicant ineligible for any future disaster assistance, regardless of the type hazard.
[4] 42 U.S.C.A. § 5154a.
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