Lesson 2 Objectives
After completing this lesson you will be able to:
    • Locate a recent property valuation report
    • Identify the full replacement cost of a building
    • Determine the maximum amount of coverage available for a condominium building
    • State the RCBAP’s coinsurance penalty formula
    • Determine the amount of flood insurance necessary to avoid the coinsurance penalty
    • Calculate the limit of recovery
Property Valuation Report
During an RCBAP flood loss investigation, an NFIP adjuster must provide a detailed industry acceptable replacement cost evaluation of the building. A recent property valuation report that states the value of the building, including its foundation, on a Replacement Cost Value (RCV) basis is acceptable. Since insurance agents are required to update this information and provide it to the insurer at least every three years, be sure to collaborate with the insurer/agent to obtain the most recent valuation.
Building Replacement Cost Eligibility

An RCBAP building may qualify for replacement cost in one of two ways:

    1. If the building is insured for 80% of its replacement amount
    2. If the building is carrying the statutory limit under the program ($250,000 X the number of units) 

If the building does not qualify for replacement cost, then the building will be settled under the coinsurance settlement section of the policy.

Full Replacement Cost
The full replacement cost of a building will include:
    • The Replacement Cost Value of any covered building property
    • The Replacement Cost Value of improvements installed by the condominium association or the unit owner
RCBAP – Loss Settlement Clause
RCBAP building claims can be settled at Replacement Cost Value (RCV) without deductions for physical depreciation (RCBAP Section VIII.V.2, Replacement Cost Loss Settlement). Again, a condominium is not a type of building, it is a form of ownership of a building.
RCBAP – Loss Settlement Clause

A condominium is not a type of building; it is a form of ownership of a building. The one exception to RCV settlement for an RCBAP is the use of the Special Loss Settlement Clause (Section VIII.V.3) when the building is a manufactured home, mobile home, or travel trailer as defined in the RCBAP (Section II.B.6.b and c).

To qualify, the same requirements found in the Dwelling Form apply: The building must be at least 16 feet wide with at least 600 square feet within its perimeter walls, and it must be the principal residence of the policyholder.

RCBAP – Loss Settlement Clause
The Special Loss Settlement Clause comes into play when the residential condominium building is a manufactured home, mobile home, or travel trailer and is totally destroyed or in the insurer’s judgment (the adjuster’s recommendation is considered) it cannot be economically repaired. This is the same Special Loss Settlement Clause found in the Dwelling Form. Payment will be the least of: the replacement cost of the manufactured home or travel trailer, or 1.5 times its actual cash value, or the building limit of liability shown on the declaration page of the policy.
RCBAP – Loss Settlement Clause
However, if it is the judgment of the insurer that the manufactured home, mobile home, or travel trailer is repairable, the Replacement Cost Loss Settlement will be used, but still limited to the building policy limit.
Determining the Building's Maximum Coverage Limit

A building’s replacement cost is one of three values used to determine the coinsurance. Another important value is the building's maximum coverage limit available under the NFIP. To determine the maximum limit available on a residential condominium building, use the single-family dwelling statutory coverage limit available under the Standard Flood Insurance Policy and multiply it by the number of units in the building.

Here are two examples:

If you have 10 units in a condo building, $250,000 times 10 equals $2.5 million; this reflects the maximum coverage amount available for the building.

  • $250,000 x 10 = $2,500,000

If you have 100 units, then $250,000 times 100 equals $25 million, reflecting the maximum coverage amount available for the building.

  • $250,000 x 100 = $25,000,000
RCBAP – Coinsurance Clause
Having identified the maximum amount of coverage and the replacement cost value, let's discuss coinsurance and how and when coinsurance applies. Coinsurance (RCBAP Section VII, A-D) is an important tool that encourages condo associations to purchase insurance for at least 80% of the full replacement cost of the residential condominium building. This coinsurance tool has been used by private-sector commercial policyholders to reduce premium by purchasing less than 80% of the full replacement cost of the building in exchange for a reduction in claim payments. That policyholder becomes a “coinsurer,” thus the name. The private sector uses the coinsurance clause to promote premium equity.
Coinsurance
Coinsurance applies only to building coverage under the Residential Condominium Building Association Policy (RCBAP). Building coverage purchased using the Dwelling Form cannot be added to RCBAP coverage to avoid coinsurance.
Coinsurance and Loss Assessment
Coinsurance applies only to building coverage under the RCBAP. Unit-owner building coverage purchased using the Dwelling Form will respond to loss assessments resulting from a coinsurance penalty applied, even if the RCBAP limits have not been exhausted.
Coinsurance and Loss Assessment
The Dwelling Form Section III. Property Covered, C.3.b.4 states that the policy will "not pay any loss assessment charged against you...that results from a loss sustained by the condominium association that was not reimbursed...because the building was not, at the time of loss, insured for an amount equal to the lesser of: a. 80% or more of its full replacement cost or b. the maximum amount of insurance permitted under the Act." Section VII.C.2 states "If there is other insurance...then this policy will be in excess over the other insurance.”
Coinsurance and Loss Assessment

In 2016, FEMA issued Bulletin w-16024, which states that until FEMA amends the Dwelling Form of the policy, FEMA is implementing Section 100214 of Biggert-Waters through a general waiver of Section III.C.3.b(4) and a limited waiver of Section VII.C.2.

The bulletin states in part, "42 U.S.C. Section 4019, as amended by Section 100214 of Biggert Waters, prohibits FEMA from denying payment to condominium unit owners who purchased unit-owner building coverage under the Dwelling Form policy for building claims that cannot be paid by the...RCBAP.... Section 100214...prohibits FEMA from enforcing Section III.C.3.b(4) and that provision is hereby waived....Under certain circumstances, application of Section VII.C.2 also prevents implementation of Section 100214 and that provision is hereby waived in part. This will allow the Dwelling Form policy to respond as if the RCBAP coverage were exhausted." In all other instances the unit-owner policy is excess to the RCBAP and payment of the unit-owner policy building coverage may not be paid until the building limits of the RCBAP have been exhausted (paid in full).

RCBAP – Coinsurance

Loss payment for a condominium building not insured to 80% of its replacement cost or the maximum amount of insurance available is determined using this formula:
The amount of insurance carried divided by the amount of insurance required multiplied by the full RCV loss minus the amount of the building deductible equals the Limit of Recovery.
RCBAP – Coinsurance Cautions
There are two cautions. First, take care in the division portion to not end up with a fraction that has a value greater than 1. This will lead to recommending a payment that is greater than the RCV loss.
RCBAP – Coinsurance Cautions

The second caution is that the step from division to multiplication should be a single expression on a calculator in which the quotient is not expressed but is held in the calculator and the multiplication function applied.

For example:

Correct Method: $6,000,000 divided by $9,000,000 multiplied by $4,000,000 = $2,666,666.67

Incorrect Method: $6,000,000 divided by $9,000,000 equals 0.67, and 0.67 then multiplied by $4,000,000 equals $2,680,000.00

As these examples make clear, the calculation method can change the results dramatically.

RCBAP – Example

Insurance Required = 80% of the full replacement cost value of a building when RCV is the appropriate loss settlement.

Insurance Required = $187,500 (full replacement value) x 80% = $150,000 or the insurance required.

RCBAP – Limit of Recovery Example

A small condominium building has a replacement cost value (RCV) of $187,500.

80% of the RCV equals $150,000 (the insurance required). The building carries only $130,000 in flood insurance, with a $500 deductible. It sustains a $120,000 flood loss.

What is the limit of recovery? 

Insurance carried ($130,000) divided by insurance required ($150,000) times the amount of the loss ($120,000) equals $104,000. After subtracting the $500 deductible, the limit of recovery is $103,500.

The General Property Form

The General Property Form has NO coinsurance and no replacement cost provision. The General Property Form is always adjusted on an Actual Cash Value (ACV) basis.

Case Study Using the Coinsurance Calculation

A condominium covered under the RCBAP is flooded and receives 7 million dollars in damage. The building’s replacement cost at the time of loss was $20 million. So the insurance required (80% of $20 million) is $16 million.

The amount of insurance carried divided by the amount of insurance required multiplied by the full RCV loss minus the amount of the building deductible equals the Limit of Recovery.

Case Study Using the Coinsurance Calculation
Instead of writing $16 million in coverage, the condominium association insures its building for just $8 million. When a building that should be insured for at least $16 million is only insured for $8 million, a considerable penalty is applied to the $7 million loss.
Lesson 2 Summary
Here are the key points discussed in this lesson:
  • Condominium building Replacement Cost of Value and the coinsurance penalty
  • Loss settlement limit of recovery
  • Amount of flood insurance needed to avoid a coinsurance penalty
The next lesson presents coverage differences that apply to the three SFIP forms and replacement cost. Let's begin by reviewing a case file.