[Federal Register Volume 62, Number 37 (Tuesday, February 25, 1997)]
[Rules and Regulations]
[Pages 8391-8400]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-4640]


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FEDERAL EMERGENCY MANAGEMENT AGENCY

44 CFR Part 61

RIN 3067-AC54


National Flood Insurance Program; Standard Flood Insurance Policy

AGENCY: Federal Insurance Administration (FEMA).

ACTION: Final rule.

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SUMMARY: This rule amends the National Flood Insurance Program (NFIP) 
regulations to add coverage under the Standard Flood Insurance Policy 
to pay for the increased cost to rebuild or otherwise alter flood-
damaged structures to conform with State or local floodplain management 
ordinances or laws consistent with the requirements and guidance of the 
NFIP.

EFFECTIVE DATE: June 1, 1997.

FOR FURTHER INFORMATION CONTACT: Charles M. Plaxico, Jr., Federal 
Insurance Administration, 500 C Street SW., Washington, DC 20472, (202) 
646-3422.

SUPPLEMENTARY INFORMATION: On September 23, 1996, FEMA published in the 
Federal Register, 61 FR 49717, a proposed rule to amend the National 
Flood Insurance Program (NFIP) regulations by adding coverage under the 
Standard Flood Insurance Policy (SFIP) for the increased cost, up to a 
maximum liability of $15,000, to bring structures into compliance with 
State or community floodplain management laws or ordinances after flood 
losses. This coverage, which is referred to in the proposed rule as 
``increased cost of construction'' coverage but hereinafter referred to 
in this final rule as ``increased cost of compliance'' coverage (ICC), 
is mandated by Sec. 555 of Public Law 103-325 which requires the NFIP 
to ``enable the purchase of insurance to cover the cost of compliance 
with land use and control measures established under section 1361 * * 
*.''
    The following are the principal features of the September 23, 1996 
proposed rule:
    (1) The limit for ICC coverage would be $15,000.
    (2) Only flood-damaged structures would be eligible for the 
coverage.
    (3) Only those structures substantially or repetitively damaged by 
flood would be eligible for ICC coverage.
    (4) Only structures in areas of special flood hazard would be 
eligible for ICC payments.
    (5) ICC payments would be limited to the amount necessary to meet 
but not exceed the NFIP elevation requirements after flood damage. 
(This feature of the proposed rule has been changed. See below.)
    (6) Repetitive loss structures would be eligible for ICC payments 
when two conditions are met:
    (a) The community has adopted and is enforcing a cumulative 
substantial damage provision or repetitive loss provision in its 
floodplain management ordinance that requires action by the property 
owner; and
    (b) The structure has a history of flood claims under the NFIP that 
satisfies the statutory definition of repetitive loss structure.
    During the comment period, sixteen (16) sets of comments were 
received by FEMA. In many cases, commenters shared similar views and 
recommendations on individual issues. The commenters' recommendations, 
concerns, and questions have been considered and, where appropriate, 
incorporated into this final rule.

$15,000 Maximum Benefit

    Five commenters objected to the maximum benefit of $15,000 proposed 
in the rule for ICC coverage. The underlying concern is that $15,000 
will be insufficient to pay for the increased costs to elevate or 
floodproof a structure substantially or repetitively damaged by flood. 
For example, one commenter concluded, ``the ICC's maximum coverage of 
$15,000 is far below the $35,000 average cost to elevate a

[[Page 8392]]

structure.'' Another commenter recommended ``full Ordinance or Law 
coverage up to the statutory limit'' which, for a single family 
dwelling, would be $250,000. One commenter, however, supported this 
maximum benefit for ICC coverage saying, ``In order to maintain fiscal 
control over the program the $15,000 cap on ICC payment should be 
retained.''
    FEMA arrived at the $15,000 cap from basic pricing considerations 
and the current status of the National Flood Insurance Fund. After 
years of surplus in the Fund, FEMA currently has in excess of $600 
million on loan from the Treasury under the program's borrowing 
authority as a result of unusually heavy flood losses since 1993. With 
this as a backdrop, FEMA had to consider several issues in establishing 
the coverage and in pricing ICC. First, the pricing for this coverage 
should be actuarially sound with premiums varying, to the extent 
practical, by risk. Second, Sec. 555 of the National Flood Insurance 
Reform Act of 1994 sets a cap on the amount the NFIP may charge on each 
policy for ICC coverage. The statute says, ``The Director shall impose 
a surcharge on each insured of not more than $75 per policy to provide 
cost of compliance coverage.'' (Emphasis added.) Third, FEMA estimates 
that on average 3400-3700 ICC claims will be made each year to bring 
flood-damaged structures into compliance with State or local floodplain 
management laws or ordinances. Fourth, FEMA has drawn on its NFIP 
underwriting experience to make projections for ICC coverage, but there 
are uncertainties associated with the introduction of any new product, 
particularly one for which there is no direct experience. Fifth, aside 
from the NFIP's borrowing authority, there is currently no surplus of 
funds to provide a cushion against uncertainties.
    For these reasons, FEMA has determined that a $15,000 limit on ICC 
coverage is a prudent amount for the introduction of this new product. 
FEMA recognizes that $15,000 generally will not be sufficient to pay 
all of the costs to bring the structure into compliance with state and 
community floodplain management laws and ordinances, but it will make a 
significant contribution toward those costs. Although the individual 
property owner will have to bear a portion of the cost of the selected 
mitigation measure (elevation, floodproofing, relocation or demolition 
or combinations thereof), there should be a commensurate increase in 
the value of the property that will offset at least part of those 
costs. FEMA will review its experience with ICC from time to time to 
determine whether adjustments should be made in the pricing, the amount 
of the benefit, or other aspects of the coverage.
    Furthermore, other mitigation resources and programs from FEMA, as 
well as other Federal, State and local resources, can be used to 
supplement the ICC payment to help property owners comply with State 
and community laws and ordinances. For example, currently, the Hazard 
Mitigation Grant Program available pursuant to Sec. 404 of the Robert 
T. Stafford Disaster Relief and Emergency Assistance Act, Pub. L. 93-
288, as amended, could be used to supplement the ICC benefit in 
communities which initiate mitigation projects.

Limitation of ICC to Flood Damaged Structures

    One commenter recommended that ICC coverage not be limited to flood 
damages. This recommendation, however, cannot be incorporated in the 
final rule since Sec. 555 of the National Flood Insurance Reform Act of 
1994 authorizes ICC coverage only for flood-damaged structures. The 
statute authorizes ICC coverage for ``(1) properties that are 
repetitive loss structures; (2) properties that have flood damage in 
which the cost of repairs equals or exceeds 50 percent of the value of 
the structure at the time of the flood event; and (3) properties that 
have sustained flood damage on multiple occasions * * *.'' ``Repetitive 
loss structure'' is defined at Sec. 512 of Pub. L. 103-325 as ``a 
structure covered by a contract for flood insurance under this title 
that has incurred flood-related damage on 2 occasions during a 10-year 
period ending on the date of the event for which a second claim is 
made, in which the cost of repair, on the average, equaled or exceeded 
25 percent of the value of the structure at the time of each such flood 
event.'' (Emphasis added.) The final rule limits the benefit of ICC 
coverage under Coverage D of the Standard Flood Insurance Policy to 
bring flood-damaged structures into compliance with State or local 
floodplain management laws or ordinances.

ICC Benefits Within the Maximum Limits of Insurance Coverage

    One commenter objected that the $15,000 ICC benefit was included 
within, and not in addition to, the maximum statutory limits of flood 
insurance coverage available to property owners for direct, physical 
damage from flood, which for a single family dwelling is $250,000. The 
commenter felt that the maximum liability of $250,000 for a single 
family dwelling for Coverage A (direct, physical loss from flood), 
combined with the new Coverage D (increased cost of compliance), 
effectively denied $15,000 of flood insurance benefits to the 
policyholder who has purchased the statutory limits of coverage.
    FEMA considered this objection but concluded it does not have the 
authority to exceed the maximum statutory limits set by Congress for 
the NFIP in the Act, as amended (42 U.S.C. 4013). Consequently, as 
stated in the proposed rule, the ICC benefit would be added to the 
policy limit for direct loss from flood, but the total payment for the 
ICC benefit and the direct loss payment for flood would not be greater 
than the maximum limits of coverage for that class of structure 
authorized under the Act, as amended. In that connection, Sec. 573 of 
Pub. L. 103-325 increased the maximum limit of flood insurance coverage 
for a single family dwelling from $185,000 to $250,000 and for non-
residential structures from $250,000 to $500,000. For structures 
insured to the statutory limit, FEMA's pricing of ICC coverage, 
however, reflects the possibility that, under some conditions, a full 
$15,000 could not be collected.

Types of Mitigation Allowed

    One commenter stated that the proposed rule centers on elevation 
and floodproofing and does not address relocation or demolition. The 
Proposed Rule for ICC coverage indicated in the Standard Flood 
Insurance Policy and in the ``Supplementary Information'' section that 
the allowable mitigation measures under ICC include elevation, 
floodproofing, relocation, and demolition, or any combination thereof. 
These allowable mitigation activities have been retained in the final 
rule. It is the property owner's decision which mitigation measure will 
be undertaken provided that he or she complies with applicable State or 
community floodplain management laws or ordinances. However, FEMA 
expects that States or communities will work closely with the property 
owner to determine the most technically feasible and cost effective 
mitigation measure for the damaged structure. It is also expected that 
States or communities that have adopted a mitigation plan will ensure 
that the selection of the mitigation measure will be consistent with 
the approved plan and coordinated with other mitigation programs and 
activities.
    Another commenter asked whether ICC is available for floodproofing 
residential buildings in those communities that are permitted by FEMA 
to adopt standards for residential

[[Page 8393]]

floodproofed basements. Under 44 CFR 60.6 (b) or (c) of the NFIP's 
Floodplain Management Regulations, communities that have been approved 
for residential basement exceptions by FEMA may adopt standards for 
floodproofed residential buildings. The ICC benefit can be used to 
floodproof a residential basement only if the building is located in 
one of these communities approved for residential basements exceptions. 
The final rule says this and also indicates that ICC payments will be 
made in connection with non-residential floodproofing to meet State or 
local floodplain management requirements.

Payments for Elevating or Floodproofing to Elevations Which Exceed 
NFIP Minimum Requirements

    Seven comments objected to the limitation in the proposed rule that 
ICC pay for the cost of elevation or floodproofing flood-damaged 
structures only to the base flood elevation, the NFIP minimum standard, 
and not to a higher elevation required in some State and community laws 
and ordinances. The comments pointed out that some States and 
communities, in the interest of sound floodplain management and in 
recognition of future floodplain development, exceed the NFIP's minimum 
standards by requiring new or substantially improved structures to be 
elevated or floodproofed to one or more feet above the base flood 
elevation. This more restrictive elevation requirement is generally 
referred to as ``freeboard.'' Furthermore, the comments noted that FEMA 
has, as a matter of policy, encouraged communities to exceed the NFIP's 
minimum standards, and that FEMA's Community Rating System (CRS) in 
fact provides premium rate discounts to communities that exceed the 
minimum requirements.
    FEMA agrees with these comments that the cost to elevate or 
floodproof structures to higher State or community floodplain 
management standards should be eligible for ICC benefits. The final 
rule has, therefore, been revised to permit ICC payments, up to the 
$15,000 limit of coverage, to elevate or floodproof structures to the 
``freeboard'' established and enforced in the State or community's 
floodplain management law or ordinance.

ICC Benefits for Map Revisions and Areas Designated as Zone A

    Two aspects of ICC that should be clarified are: (1) How ICC 
coverage will respond to situations where FEMA issues an advisory map 
or has issued a preliminary or draft Flood Insurance Study, and (2) how 
ICC will respond to elevation requirements in areas designated as Zone 
A. If FEMA issues an advisory map and increases the base flood 
elevation, and the community adopts the map and the higher base flood 
elevations, ICC benefits will be paid to elevate or floodproof flood-
damaged structures to these preliminary or advisory base flood 
elevations. ICC benefits will be paid even if the zone was previously 
designated Zone B, C, X, or D. Also, in communities that have areas 
designated as unnumbered A Zones on their Flood Insurance Rate Map, ICC 
benefits will be paid on a flood damaged structure for elevation, 
floodproofing, demolition, relocation, or any combination thereof. The 
community must obtain, review and reasonably utilize any base flood 
elevation data available from a Federal, State, or other sources in 
accordance with 44 CFR 60.3(b)(4) and require that the structure be 
elevated or floodproofed to that elevation. The base flood elevation 
data should be used as long as the data: (1) Reasonably reflect 
flooding conditions expected during the base (100-year) flood, (2) are 
not known to be scientifically or technically incorrect, and (3) 
represent the best data available.

Demolition

    An issue needing clarification is where a structure is demolished, 
and a replacement structure is built at the same or another site. In 
this situation, ICC coverage will pay for the cost of demolition as 
well as for the incremental costs to elevate or floodproof the 
structure during the course of rebuilding to meet elevation 
requirements at the same site or another location provided the 
elevation or floodproofing is to comply with State or community 
floodplain management laws or ordinances. The ICC payment, within the 
$15,000 limit, will also be made when the structure, after demolition, 
is rebuilt at a new site even if the base flood elevations are higher 
there than at the original location. FEMA's decision to permit ICC 
benefits to pay for the incremental costs of elevation or floodproofing 
after a structure has been demolished is based on the statutory 
language of Sec. 555 of Public Law 103-325, i.e., that the new coverage 
is to pay for ``increased cost of compliance'' with land use and 
control measures being enforced by the State or community that meet the 
standards of 44 CFR 60.3 established under Sec. 1361 of the National 
Flood Insurance Act of 1968, as amended.
    In sum, ICC benefits will be paid to perform mitigation activities 
to help bring a structure into compliance with State and community 
floodplain management laws or ordinances. Not included in any ICC 
payment for demolition will be the residual value of the undamaged 
portion of the structure.
    FEMA considered whether to pay for loss of residual value when the 
demolition option is selected. Offering ICC benefits for loss of 
residual value is a potentially costly initiative--one that could 
undermine FEMA's ability to raise the initial cap of $15,000 at some 
later date if program experience warrants such an increase. Hence, FEMA 
has decided to gain experience with ICC and to analyze that program 
experience in order to determine the feasibility of providing ICC 
benefits for loss of residual value. FEMA will initiate this analysis 
after nine months from the effective date on this final rule.

Market Value versus Replacement Cost and Substantial Improvements

    One commenter stated that ``market value'' was not defined and 
recommended the use of ``replacement cost'' instead. Another commenter 
asked how States or communities that use ``replacement cost'' instead 
of ``market value'' implement the substantial damage requirement.
    While the statute does not specify what value should be used in 
determining substantially damaged or repetitive loss structures, 
``market value'' is currently used in the definitions of ``substantial 
damage'' and ``substantial improvement'' in the NFIP's Regulations (44 
CFR 59.1). For this reason, ``market value'' will be used for 
consistency for ICC substantial damage and repetitive loss 
determinations. Under the NFIP, substantially damaged structures must 
be elevated or floodproofed (non-residential structures only) to or 
above the Base Flood Elevation. States and communities participating in 
the NFIP are required to use market value in determining whether a 
structure has been substantially damaged. Use of ``replacement cost'' 
is not permitted under the NFIP's floodplain management regulations.
    A related issue that should be clarified is how ICC coverage will 
respond to situations involving improvements that are made to a damaged 
structure at the same time that it is being repaired. The final rule 
provides that payment be made to help policyholders comply with State 
and community floodplain management laws and ordinances after a flood 
loss. Unless the flood loss alone constitutes ``substantial damage'' or 
the loss meets the criteria for a ``repetitive loss'', ICC will not 
provide coverage even if the

[[Page 8394]]

combination of the cost of the repair and the cost of the improvement 
exceeds the 50 percent of market value threshold for a ``substantial 
improvement'' under the community's ordinance. The improvement 
represents a voluntary decision by the individual to improve or add on 
to an existing structure in a special flood hazard area and is not a 
flood loss as required by the statute. In addition, ICC will not cover 
the costs to bring into compliance with State or community elevation or 
floodproofing requirements any improvements or additions to damaged 
structures at the time repairs are made, such as a new addition. 
Although ICC benefits are not paid for substantial improvements, 
substantially improved structures and improvements made along with 
repairs to a substantially damaged structure must still meet all the 
minimum requirements of the NFIP.

Repetitive Loss Structures

    A number of comments were received on implementation of the 
repetitive loss coverage under ICC. These comments relate to ordinance 
adoption, timing of the flood losses relative to the effective date of 
the final rule, and how losses are counted toward a repetitive loss 
determination.
    There were several questions and comments on whether States and 
communities will be required to amend their floodplain management 
ordinances to include a repetitive loss provision. One commenter 
suggested that communities be given a reasonable time frame within 
which to adopt this provision before the coverage goes into effect. One 
commenter recommended that the requirement to adopt a repetitive loss 
provision be eliminated as a condition for receiving the benefit. Two 
other commenters noted that very few communities currently have a 
repetitive loss provision in their floodplain management ordinance and 
that the requirement to adopt such a provision would be at great 
expense and difficulty. A commenter also asked what the effect would be 
on a policyholder if a community did not adopt a repetitive loss 
provision.
    Based on a review of the statute and the NFIP's other authorities, 
FEMA has concluded that the statute does not mandate that it change the 
NFIP's floodplain management regulations at 44 CFR 59.1 and 60.3 to 
require States and communities to adopt a repetitive loss requirement. 
Therefore, adoption of a cumulative substantial damage provision or a 
repetitive loss provision is voluntary and will be at the discretion of 
the State or community. Making adoption of such a provision voluntary 
recognizes that very few of the approximately 18,500 participating NFIP 
communities have adopted a cumulative substantial damage provision or 
repetitive loss provision in their floodplain management laws or 
ordinances. Furthermore, FEMA recognizes that there is an added 
administrative burden to communities in adopting and administering 
these types of provisions. Finally, not all NFIP communities have a 
history of repetitive flood losses to existing structures. Making this 
feature of ICC implementation voluntary will allow States and 
communities to evaluate historic flood losses carefully to determine 
whether such a provision would significantly mitigate the flood risk to 
existing structures. While the ICC benefit will not be paid for a 
repetitive loss structure if the State or local government has not 
adopted a cumulative substantial damage or repetitive loss provision in 
its floodplain management law or ordinance, the ICC benefit will still 
be paid for substantially damaged structures whether or not the 
community adopts a repetitive loss provision. A State or community can 
adopt a law or ordinance addressing repetitive loss structures at any 
time before or after this final rule becomes effective.
    FEMA has concluded that since the statute ties the availability of 
ICC to the land use and control measures under Sec. 1361 of the Act (42 
U.S.C. 4102), as amended, ICC coverage is intended to respond only to 
State or local ordinances or laws requiring repetitive loss structures 
to be rebuilt to at least NFIP floodplain management requirements for 
substantially damaged structures. Therefore, one of the conditions for 
the ICC benefit to be paid under the SFIP for repetitive loss 
structures is for the State or community to be enforcing a repetitive 
loss provision or a cumulative substantial damage provision requiring 
action by the property owner. The second condition that must be met is 
that the structure have a history of claims payments that satisfy the 
statutory definition of repetitive loss structure.
    Several commenters recommended that ordinance language be flexible 
to meet local concerns. One commenter noted that communities may 
already have a cumulative substantial damage requirement that is 
inconsistent with the repetitive loss definition in the proposed rule. 
The State or community's requirement for a property owner to bring a 
building into compliance can be triggered by a cumulative substantial 
damage or repetitive loss ordinance that deviates from the National 
Flood Insurance Reform Act's definition; however, a policyholder will 
only be eligible for ICC payments when the Act's repetitive loss 
definition is satisfied. With either type of provision, the State or 
community must apply it consistently to all structures regardless of 
whether or not the structure is covered by a contract for flood 
insurance. At a minimum, structures that met the definition of a 
``repetitive loss structure'' would be required to meet the minimum 
floodplain management requirements that apply to substantially damaged 
structures.
    FEMA will develop model ordinance language for addressing 
repetitive loss structures consistent with the statute's definition. 
FEMA also will be developing guidance on adoption of the repetitive 
loss provision; however, States or communities with questions 
concerning whether an existing repetitive loss or cumulative 
substantial damage provision in a community's law or ordinance is 
consistent with the definition in the final rule can contact their 
respective FEMA Regional Offices for assistance.
    Questions were raised concerning the timing of the first and second 
loss relative to when the ICC coverage takes effect and when the 
community adopts a repetitive loss provision for determining if a 
structure has been repetitively damaged. Specifically, the comments 
questioned why the first qualifying loss has to occur after the State 
or community amends its law or ordinance to include a repetitive loss 
provision or why both claims have to occur after ICC coverage takes 
effect. In a related comment, it was asked how FEMA intends to treat a 
loss after the effective date of the final rule on ICC coverage, but 
before community adoption of a repetitive loss provision.
    The proposed rule stated that the benefit of ICC under the SFIP for 
repetitive loss structures requires that two conditions be met. First, 
the State or community must be enforcing a cumulative substantial 
damage or repetitive loss provision requiring action by the property 
owner. Second, the NFIP must have a history of claims payments for the 
structure that satisfies the statutory definition of repetitive loss 
structure.
    FEMA is implementing the repetitive loss provision of the statute 
by providing ICC coverage when a property owner is required to rebuild 
in compliance with a community's substantial damage or repetitive loss 
provision and the accumulated damage based on two losses within a 10-
year

[[Page 8395]]

period that, combined, total more than 50% of the value of the 
structure. The date on which the first loss occurred is immaterial as 
to eligibility, even if the loss occurred before the effective date of 
this final rule since ICC coverage will respond to enforceable State or 
community floodplain management laws or ordinances for compliance.
    Several comments and questions were received on how repetitive 
losses are counted toward a repetitive loss determination. One 
commenter asked whether each of the two losses have to equal at least 
25% of the value of the structure for a total of 50% in order to 
qualify as a repetitive loss structure. Another commenter suggested 
that the determination should be flexible to reach a 50% loss, whether 
the first loss is only 10% and the second is 40%.
    The definition of ``repetitive loss structure'' in the statute, 
states that ``the cost of repair, on the average, equaled or exceeded 
25 percent of the value of the structure at the time of each such flood 
event''. In the proposed rule, FEMA stated that the two losses, when 
combined, must equal or exceed 50 percent of the market value of the 
structure within a 10-year period ending on the date of the event for 
which the second claim is made. Therefore, if the first loss is only 
10% and the second loss is 40% and the State or community enforces the 
repetitive loss ordinance for these losses, the structure qualifies for 
the ICC payment. However, two or more losses that when combined are 
less than 50 percent of the market value of the structure do not 
qualify under the statutory definition of a ``repetitive loss 
structure.''

ICC Coverage for Multiple Flood Damages

    Two commenters mentioned that specific guidance should be developed 
as soon as possible for the third category of flood-damaged structures 
eligible under the statute for ICC coverage. The third category 
consists of structures damaged by flood ``on multiple occasions, if the 
Director determines that it is cost-effective and in the best interests 
of the National Flood Insurance Fund to require compliance with the 
land use and control measures'' (42 U.S.C. 4011). As mentioned in the 
``Supplementary Information'' section of the September 23, 1996 
proposed rule, since the statute does not specify a specific loss 
threshold for the third category of multiple losses, the NFIP needs 
specific experience with this new coverage to determine what multiple 
loss situations would be reasonable, cost-effective candidates for 
compliance with State or local land use and control measures after a 
flood loss. FEMA will review the loss history for ICC coverage and the 
status of the National Flood Insurance Fund after the first several 
years of implementation of this coverage. At that point, FEMA will 
decide whether ICC coverage should be implemented for the third 
category of structures ``damaged by flood on multiple occasions where 
the FEMA Director had determined it is in the best interests of the 
National Flood Insurance Fund to require compliance with land use and 
control measures (42 U.S.C. 4011).'' The decision will be based on the 
best interests of the NFIP's financial status at that time, and whether 
the pricing constraints imposed by the statute can accommodate an 
expansion of coverage.

Adjustment of ICC Claims

    Three commenters raised specific questions about the adjustment 
process for ICC claims under the SFIP. FEMA is drafting detailed 
procedures to be used by adjusters for ICC claims. The final loss 
adjustment procedures implementing ICC coverage will be distributed to 
the companies participating in the Write Your Own program as well as 
the adjusters servicing the NFIP business written directly by the 
Government approximately 30-60 days before the effective date of this 
final rule. Also, FEMA in conjunction with the NFIP Bureau and 
Statistical Agent will conduct approximately 30 workshops for insurance 
adjusters to address ICC.

ICC: Optional vs. Mandatory Coverage

    Two commenters recommended that ICC coverage should be made 
optional. Section 555 of Public Law 103-325 requires the NFIP to 
``enable the purchase of this coverage * * *'' What makes any coverage 
under an insurance contract possible, however, is the spread of the 
risk over a sufficiently large population exposed to a common peril. 
For this reason, and the high potential that only the worst risks would 
purchase ICC coverage if it were optional, it is necessary to provide 
this coverage by incorporating it as a standard coverage for every 
flood insurance policy. Reasonable pricing would be impossible 
otherwise.
    One commenter raised a related question whether policyholders 
outside areas of special flood hazard could ever be eligible to make an 
ICC claim. ICC coverage for policies in zones B, C, X, and D insures 
against the possibility that, after the rating of policies in those 
zones, the Flood Insurance Rate Map (FIRM) is changed and the community 
requires such structures to be in compliance after substantial or 
cumulative substantial flood damage. Because of the lower potential for 
ICC claims from policies rated outside of the current special flood 
hazard area, the premium charges are considerably less, at $6 per year, 
than for the higher risk, i.e., pre-FIRM properties in the special 
flood hazard area at $75 per year.

Range of Premiums Charged for ICC Coverage

    On a related issue, four commenters asked how the premiums charged 
for ICC would be calculated and whether the maximum surcharge of $75 
would be applied to all structures. As explained above, the surcharge 
for ICC coverage ranges from $6 to $75 and is based on the likelihood 
of loss payments for each risk zone. The underlying concern was that 
surcharges would be assessed of policyholders who would not be eligible 
for the ICC coverage. As indicated above, all structures regardless of 
risk zone are eligible for ICC coverage, and premium surcharges, 
reflective of the risk, have been set for ICC coverage.

Exclusions

    The September 23, 1996 proposed rule was silent on the availability 
of ICC coverage in Emergency Program communities and for those 
recipients of Individual and Family Grant (IFG) awards insured under a 
Group Flood Insurance Policy (GFIP). FEMA's pricing considerations for 
ICC coverage have never included policyholders in Emergency Program 
communities or IFG recipients insured under the GFIP since any premium 
surcharge would be onerous in light of the limited amount of structure 
coverage available to these categories of policyholders. (The maximum 
amount of structure coverage authorized by the Act for a single family 
dwelling under the Emergency Program is $35,000 which would also be the 
limit on the combined building and ICC loss payment.)
    With regard to the GFIP, FEMA is considering whether to issue a 
proposed rule soliciting comments on adding ICC coverage to the 
certificate holders covered under the GFIP. At this juncture, however, 
those insured under the GFIP are excluded from ICC coverage.
    This final rule addresses the omissions by excluding from ICC 
coverage ``the cost associated with enforcement of any floodplain 
management ordinance or law in communities participating in the 
Emergency Program'' and ``for any structure insured under a Group Flood

[[Page 8396]]

Insurance Policy issued pursuant to 44 CFR 61.17.''

Appurtenant Structures

    One commenter asked whether ICC coverage would apply to appurtenant 
structures. Only the SFIP's Dwelling Form provides coverage against 
direct, physical loss from flood for appurtenant structures. As 
indicated in the ``Exclusions'' section of the Dwelling Form of the 
SFIP (see new Article 4 of Appendix A (1) being added by this final 
rule), ICC coverage does not apply to appurtenant structures. No 
similar exclusionary language is needed for ICC coverage in the General 
Property Form (Appendix A (2)) and the Residential Condominium Building 
Association Policy Form (Appendix A (3)) since there is no coverage for 
direct physical loss from flood for appurtenant structures in these 
forms. ICC coverage is available for appurtenant structures only when a 
separate flood insurance policy is written on an appurtenant structure, 
since ICC coverage will be included as Coverage D in every SFIP written 
or renewed on and after June 1, 1997.

Cancellations and Refunds

    Two commenters asked specific questions on cancellations and 
refunds. One commenter asked, since it will be possible for the owners 
of 3-year policies to cancel on the anniversary date and purchase a new 
policy with ICC coverage on and after the effective date of the final 
rule on ICC coverage, will the owners of 1-year policies have the 
option of canceling mid-term. Cancellations in connection with ICC will 
be subject to the NFIP's current rules. A policyholder of a 1-year 
policy will have to wait until the policy is renewed at which time the 
premium surcharge will automatically be charged for ICC coverage. A 
policyholder of a 3-year policy written before this coverage becomes 
effective may cancel and rewrite on the anniversary date of the policy 
on and after June 1, 1997 in order to add ICC coverage. To ensure 
continuous coverage, policyholders must submit policy applications and 
premium payments 30 days before the anniversary date of the policy 
since ``cancel-rewrite'' situations for 3-year policies are subject to 
the statutory 30-day waiting period.
    One commenter also asked about whether a refund of premium for ICC 
coverage is available when a policy is canceled. Refunds for ICC 
coverage will also be subject to the NFIP's current rules for premium 
refunds.

Interim Final Rule vs. Final Rule

    Three commenters recommended that, in implementing ICC coverage, 
FEMA publish this rule as an ``interim final'' rule rather than a 
``final rule'' which would conceivably permit more time by States to 
recommend adjustments to the implementation of ICC coverage.
    The Office of the Federal Register, National Archives and Records 
Administration, has issued guidance to Federal agencies on the 
appropriate type of action, i.e., proposed, interim, or final rule, to 
be selected for any rule making activity. The following selection from 
the Federal Register's Document Drafting Handbook says, ``An interim 
rule is usually issued without prior notice of proposed rule making. An 
immediate effective date is generally specified and comments on the 
interim rule may be requested. The interim rule is designed to respond 
to an emergency situation and is usually followed by a final rule which 
confirms that the interim rule is final and may include further 
amendments.'' (p. 39). The particulars of this final rule do not 
warrant publication as an interim final rule since proposed rule making 
has been conducted, comments have been solicited on the proposed rule, 
substantive changes have been made to this final rule based on comments 
received during the comment period, and no emergency situation exists.
    Consistent with agency policy, FEMA considers State and local 
governments to be essential partners in the implementation of a 
national emergency management program, and mitigation is the 
cornerstone of that program. As a result, during the first years of 
implementing ICC coverage, FEMA expects to benefit from the experience 
of States, local governments, policyholders, insurance agents, 
insurance adjusters, and the Write Your Own companies selling and 
servicing a majority of the SFIPs and make any necessary changes to the 
rule implementing ICC coverage as necessary.

Increased Cost of Compliance Coverage

    One commenter from the insurance industry recommended that the 
title for Coverage D read ``increased cost of compliance'' coverage 
rather than ``increased cost of construction'' as reflected in the 
September 23, 1996 proposed rule. FEMA agrees with this recommendation 
since the new coverage mandated by Sec. 555 of Pub. L. 103-325 is 
described as ``compliance coverage'' in the statute. ``Increased cost 
of compliance'' more accurately describes the kind of coverage being 
added to the SFIP and is consistent with the terminology in the 
industry's Law and Ordinance coverage.

Guidance and Technical Assistance

    Questions were also raised on how FEMA intends to inform 
policyholders as well as States and communities and others impacted on 
the availability of this new coverage. Several commenters stated that 
implementation procedures will need to be developed for State and local 
officials who may potentially have increased responsibility as a result 
of this new coverage. In addition, it was recommended that a model 
ordinance on the repetitive loss aspect of ICC be developed and 
assistance be provided to communities regarding this provision. It was 
also recommended that FEMA provide an explanatory letter or brochure to 
accompany each policy which fully explains the new coverage.
    It is FEMA's intention to inform policyholders in the renewal 
notice on the new ICC coverage. All future insurance adjuster and 
agents workshops will include a segment explaining the new coverage. It 
is also FEMA's intention to develop before the effective date of the 
final rule a publication for use by State and local officials 
explaining the details of the new coverage, their responsibilities 
under their floodplain management laws and ordinances as it pertains to 
the ICC coverage, their relationship to the flood insurance adjustment 
process, as well as information on cost effective mitigation measures. 
FEMA will also include in this guidance model ordinance language on a 
repetitive loss provision. FEMA Regional Office will provide technical 
assistance to States and communities on technically feasible and cost-
effective mitigation measures. Existing opportunities, such as 
Community Assistance Visits, workshops, conferences, and FEMA sponsored 
flood mitigation courses will be utilized to explain this new coverage. 
There are also a number of FEMA publications available to assist 
States, communities, architects, engineers, builders, and contractors, 
as well as individual property owners on various mitigation measures 
and techniques for elevation, floodproofing, and relocation (e.g., 
Engineering Principles and Practices for Retrofitting Flood Prone 
Residential Structures'', ``Elevated Residential Structures'', 
``Floodproofing Non-Residential Structures'', and ``Technical 
Bulletins'' on NFIP building standards).

[[Page 8397]]

Technical Corrections to the Policy Language

    The final rule clarifies coverage issues and corrects several 
technical inconsistencies in the policy language as it appeared in the 
September 23, 1996 proposed rule. For example, to make it clear for the 
policyholder, community officials, and insurance adjusters precisely 
what floodproofing activities are eligible for ICC coverage, eligible 
floodproofing have been related to the applicable NFIP floodplain 
management standards at 44 CFR 60.3(b) or (c). As mentioned above, the 
proposed rule was silent on several exclusions, and the final rule has 
been revised to correct that omission. Also, Coverage A was incorrectly 
referred to in the proposed rule as ``Dwelling'' in the proposed 
addition to Appendix A (1) and ``Building'' in the proposed addition to 
Appendices A (2) and (3). The final rule has been revised to correctly 
identify Coverage A in each of the SFIP's Forms as ``Building 
Property.'' Also, the reference to ``other insurance'' which was 
contained in the proposed rule has been removed from Coverage D since 
the SFIP already treats the issue of ``other insurance'' in Article 9 
of the Dwelling Form, Article 8 of the General Property Form, and 
Article 10 of the Residential Condominium Building Association Policy 
Form.

National Environmental Policy Act

    This final rule is categorically excluded from the requirements of 
44 CFR Part 10, Environmental Consideration. No environmental 
assessment has been prepared.

Executive Order 12898, Environmental Justice

    The socioeconomic conditions to this final rule were reviewed and a 
finding was made that no disproportionately high and adverse effect on 
minority or low income populations would result from this final rule.

Executive Order 12866, Regulatory Planning and Review

    This final rule is not a significant regulatory action within the 
meaning of sec. 2(f) of E.O. 12866 of September 30, 1993, 58 FR 51735, 
and has not been reviewed by the Office of Management and Budget. 
Nevertheless, this final rule adheres to the regulatory principles set 
forth in E.O. 12866.

Paperwork Reduction Act

    This final rule does not contain a collection of information and is 
therefore not subject to the provisions of the Paperwork Reduction Act.

Executive Order 12612, Federalism

    This final rule involves no policies that have federalism 
implications under Executive Order 12612, Federalism, dated October 26, 
1987.

Executive Order 12778, Civil Justice Reform

    This final rule meets the applicable standards of section 2(b)(2) 
of Executive Order 12778.

List of Subjects in 44 CFR Part 61

    Flood insurance.

    Accordingly, 44 CFR Part 61 is amended as follows:

PART 61--INSURANCE COVERAGE AND RATES

    1. The authority citation for Part 61 continues to read as follows:

    Authority: 42 U.S.C. 4001 et seq.; Reorganization Plan No. 3 of 
1978; 43 FR 41943, 3 CFR, 1978 Comp., p. 329; E.O. 12127 of Mar. 31, 
1979, 44 FR 19367, 3 CFR, 1979 Comp., p. 376.

Appendix A(1)--[Amended]

    2. Paragraph A.6. of Article 3 of Appendix A (1) is amended to add 
the following phrase at the end:
* * * * *
    * * * except as provided in Coverage D--Increased Cost of 
Compliance.
* * * * *
    3. A new section is added to Article 4 of Appendix A (1) to read as 
follows:
* * * * *

Coverage D--Increased Cost of Compliance Coverage

    Increased Cost of Compliance coverage (Coverage D) is for the 
consequential loss brought on by a floodplain management ordinance 
or law affecting repair and reconstruction involving elevation, 
floodproofing, relocation, or demolition (or any combination 
thereof) of a structure, after a direct loss caused by a ``flood'' 
as defined by this policy. (Floodproofing activities eligible for 
Coverage D and referred to hereafter in this policy are limited to 
residential structures with basements that satisfy the criteria of 
44 CFR 60.6 (b) or (c) and to non-residential structures.)
    The limit of liability under this Coverage D (Increased Cost of 
Compliance) will not exceed $15,000. This coverage is only 
applicable to policies with building coverage (Coverage A) and is in 
addition to the Building limit you selected on your application, and 
appears on the Declarations Page. No separate deductible applies. 
The maximum amount collectible under this policy for both Coverage A 
(Building Property) and Coverage D (Increased Cost of Compliance), 
however, cannot exceed the maximum permitted under the Act.

Eligibility

    A structure covered under Coverage A--Building Property--
sustaining a loss caused by a ``flood'' as defined by this policy 
must:
    1. Be a structure that is a repetitive loss structure. A 
``repetitive loss structure'' means a structure, covered by a 
contract for flood insurance issued pursuant to the Act, that has 
incurred flood-related damage on 2 occasions during a 10-year period 
ending on the date of the event for which a second claim is made, in 
which the cost of repairing the flood damage, on the average, 
equaled or exceeded 25% of the market value of the structure at the 
time of each such flood event. In addition to the current claim, the 
National Flood Insurance Program must have paid the previous 
qualifying claim, and the State or community must have a cumulative, 
substantial damage provision or repetitive loss provision in its 
flood plain management law or ordinance being enforced against the 
structure; or
    2. Be a structure that has had flood damage in which the cost to 
repair equals or exceeds 50% of the market value of the structure at 
the time of the flood event. The State or community must have a 
substantial damage provision in its floodplain management law or 
ordinance being enforced against the structure.
    This Coverage D will not pay for Increased Cost of Compliance to 
meet State or community floodplain management laws or ordinances 
which exceed the minimum criteria at 44 CFR 60.3, except as provided 
in 1. above or a. or b. as follows:
    a. elevation or floodproofing in any risk zone to preliminary or 
advisory base flood elevations provided by FEMA which the State or 
local government has adopted and is enforcing for flood-damaged 
structures in such areas. (This includes compliance activities in B, 
C, X, or D zones which are being changed to zones with base flood 
elevations. This also includes compliance activities in zones where 
base flood elevations are being increased, and a flood-damaged 
structure must comply with the higher advisory base flood 
elevation.) Increased Cost of Compliance coverage does not respond 
to situations in B, C, X, or D zones where the community has derived 
its own elevations and is enforcing elevation or floodproofing 
requirements for flood-damaged structures to elevations derived 
solely by the community.
    b. elevation or floodproofing above the base flood elevation to 
meet State or local ``freeboard'' requirements, i.e., that a 
structure must be elevated above the base flood elevation.
    Under the minimum NFIP criteria at 44 CFR 60.3(b) (4), States 
and communities must require the elevation or floodproofing of 
structures in unnumbered A zones to the base flood elevation where 
elevation data are obtained from a Federal, State, or other source. 
Such compliance activities are also eligible for this Coverage D.
    This coverage will also pay for the incremental cost, after 
demolition, or relocation, of elevating or floodproofing a structure 
during its rebuilding at the same or another site to meet State or 
local floodplain management laws or ordinances, subject to Exclusion 
(7).

[[Page 8398]]

    This coverage will also pay to bring a flood-damaged structure 
into compliance with State or local floodplain management laws or 
ordinances even if the structure had received a variance before the 
present loss from the applicable floodplain management requirements.

Conditions

    (1) When a structure covered under Coverage A--Building 
Property--sustains a loss caused by a ``flood'' as defined by this 
policy, our payment for the loss under this Coverage D will be for 
the increased cost to elevate, floodproof, relocate, demolish, or 
any combination thereof, caused by enforcement of current State or 
local floodplain management ordinances or laws. Our payment for 
eligible demolition activities will be for the cost to demolish and 
clear the site of the building or a portion thereof caused by 
enforcement of current State or local floodplain management 
ordinances or laws. Eligible activities for the cost of clearing the 
site will include those necessary to discontinue utility service to 
the site and ensure proper abandonment of on-site utilities.
    (2) When the building is repaired or rebuilt, it must be intended 
for the same occupancy as the present building unless otherwise 
required by current floodplain management ordinances or laws.

Exclusions

    Under this Coverage D (Increased Cost of Compliance), we will 
not pay for:
    (1) The cost associated with enforcement of any floodplain 
management ordinance or law in communities participating in the 
Emergency Program.
    (2) The cost associated with enforcement of any ordinance or law 
that requires any insured or others to test for, monitor, clean up, 
remove, contain, treat, detoxify or neutralize, or in any way 
respond to, or assess the effects of pollutants. Pollutants include 
but are not limited to any solid, liquid, gaseous or thermal 
irritant or contaminant, including smoke, vapor, soot, fumes, acid, 
alkalis, chemicals and waste. Waste includes but is not limited to 
materials to be recycled, reconditioned or reclaimed.
    (3) The loss in value to any covered building or other structure 
due to the requirements of any ordinance or law.
    (4) The loss in residual value of the undamaged portion of a 
building demolished as a consequence of enforcement of any State or 
local floodplain management law or ordinance.
    (5) Any increased cost of compliance under this Coverage D:
    (a) Until the covered building is actually elevated, 
floodproofed, demolished or relocated on the same or to another 
premises; and
    (b) Unless the covered building is elevated, floodproofed, 
demolished, or relocated as soon as reasonably possible after the 
loss, not to exceed two years.
    (6) For any code upgrade requirements, e.g., plumbing or 
electrical wiring, not specifically related to the State or local 
floodplain management law or ordinance.
    (7) For any compliance activities needed to bring additions or 
improvements made after the loss occurred into compliance with State 
or local floodplain management laws or ordinances.
    (8) Loss due to any ordinance or law that you were required to 
comply with before the current loss.
    (9) For any rebuilding activity to standards that do not meet 
the NFIP's minimum requirements. This includes any situation where 
the insured has received from the State or community a variance in 
connection with the current flood loss to rebuild the property to an 
elevation below the base flood elevation.
    (10) Increased cost of compliance for appurtenant structure(s).
    (11) For any structure insured under a Group Flood Insurance 
Policy issued pursuant to 44 CFR 61.17.
    (12) Assessments made by a condominium association on individual 
condominium unit owners to pay increased costs of repairing commonly 
owned buildings after a flood in compliance with State or local 
floodplain management ordinances or laws.

Other Provisions

    (1) Increased Cost of Compliance coverage will not be included 
in the calculation to determine whether coverage meets the 80% 
insurance-to-value requirement for replacement cost coverage under 
Article 8 or for payment under Article 3.B.3 for loss from land 
subsidence, sewer backup, or seepage of water.
    (2) All other conditions and provisions of the policy apply.
* * * * *

Appendix A(2)--[Amended]

    4. Paragraph A.6. of Article 3 of Appendix A (2) is amended to add 
the following phrase at the end:
* * * * *
    * * * except as provided in Coverage D-- Increased Cost of 
Compliance.
* * * * *
    5. A new section is added to Article 4 of Appendix A (2), to read 
as follows:
* * * * *

Coverage D--Increased Cost of Compliance Coverage

    Increased Cost of Compliance coverage (Coverage D) is for the 
consequential loss brought on by a floodplain management ordinance 
or law affecting repair and reconstruction involving elevation, 
floodproofing, relocation, or demolition (or any combination 
thereof) of a structure, after a direct loss caused by a ``flood'' 
as defined by this policy. (Floodproofing activities eligible for 
Coverage D and referred to hereafter in this policy are limited to 
residential structures with basements that satisfy the criteria of 
44 CFR 60.6 (b) or (c) and to non-residential structures.)
    The limit of liability under this Coverage D (Increased Cost of 
Compliance) will not exceed $15,000. This coverage is only 
applicable to policies with building coverage (Coverage A) and is in 
addition to the Building limit you selected on your application, and 
appears on the Declarations Page. No separate deductible applies. 
The maximum amount collectible under this policy for both Coverage A 
(Building Property) and Coverage D (Increased Cost of Compliance), 
however, cannot exceed the maximum permitted under the Act.

Eligibility

    A structure covered under Coverage A--Building Property--
sustaining a loss caused by a ``flood'' as defined by this policy 
must:
    1. Be a structure that is a repetitive loss structure. A 
``repetitive loss structure'' means a structure, covered by a 
contract for flood insurance issued pursuant to the Act, that has 
incurred flood-related damage on 2 occasions during a 10-year period 
ending on the date of the event for which a second claim is made, in 
which the cost of repairing the flood damage, on the average, 
equaled or exceeded 25% of the market value of the structure at the 
time of each such flood event. In addition to the current claim, the 
National Flood Insurance Program must have paid the previous 
qualifying claim, and the State or community must have a cumulative, 
substantial damage provision or repetitive loss provision in its 
flood plain management law or ordinance being enforced against the 
structure; or
    2. Be a structure that has had flood damage in which the cost to 
repair equals or exceeds 50% of the market value of the structure at 
the time of the flood event. The State or community must have a 
substantial damage provision in its floodplain management law or 
ordinance being enforced against the structure.
    This Coverage D will not pay for Increased Cost of Compliance to 
meet State or community floodplain management laws or ordinances 
which exceed the minimum criteria at 44 CFR 60.3, except as provided 
in 1. above or a. or b. as follows:
    a. Elevation or floodproofing in any risk zone to preliminary or 
advisory base flood elevations provided by FEMA which the State or 
local government has adopted and is enforcing for flood-damaged 
structures in such areas. (This includes compliance activities in B, 
C, X, or D zones which are being changed to zones with base flood 
elevations. This also includes compliance activities in zones where 
base flood elevations are being increased, and a flood-damaged 
structure must comply with the higher advisory base flood 
elevation.) Increased Cost of Compliance coverage does not respond 
to situations in B, C, X, or D zones where the community has derived 
its own elevations and is enforcing elevation or floodproofing 
requirements for flood-damaged structures to elevations derived 
solely by the community.
    b. Elevation or floodproofing above the base flood elevation to 
meet State or local ``freeboard'' requirements, i.e., that a 
structure must be elevated above the base flood elevation.
    Under the minimum NFIP criteria at 44 CFR 60.3(b)(4), States and 
communities must require the elevation or floodproofing of 
structures to the base flood elevation where elevation data are 
obtained from a Federal,

[[Page 8399]]

State, or other source. Such compliance activities are also eligible 
for this Coverage D.
    This coverage will also pay for the incremental cost, after 
demolition, or relocation, of elevating or floodproofing a structure 
during its rebuilding at the same or another site to meet State or 
local floodplain management laws or ordinances, subject to Exclusion 
(7).
    This coverage will also pay to bring a flood-damaged structure 
into compliance with State or local floodplain management laws or 
ordinances even if the structure had received a variance before the 
present loss from the applicable floodplain management requirements.

Conditions

    (1) When a structure covered under Coverage A--Building 
Property--sustains a loss caused by a ``flood'' as defined by this 
policy, our payment for the loss under this Coverage D will be for 
the increased cost to elevate, floodproof, relocate, demolish, or 
any combination thereof, caused by enforcement of current State or 
local floodplain management ordinances or laws. Our payment for 
eligible demolition activities will be for the cost to demolish and 
clear the site of the building or a portion thereof caused by 
enforcement of current State or local floodplain management 
ordinances or laws. Eligible activities for the cost of clearing the 
site will include those necessary to discontinue utility service to 
the site and ensure proper abandonment of on-site utilities.
    (2) When the building is repaired or rebuilt, it must be 
intended for the same occupancy as the present building unless 
otherwise required by current floodplain management ordinances or 
laws.

Exclusions

    Under this Coverage D (Increased Cost of Compliance), we will 
not pay for:
    (1) The cost associated with enforcement of any floodplain 
management ordinance or law in communities participating in the 
Emergency Program.
    (2) The cost associated with enforcement of any ordinance or law 
that requires any insured or others to test for, monitor, clean up, 
remove, contain, treat, detoxify or neutralize, or in any way 
respond to, or assess the effects of pollutants. Pollutants include 
but are not limited to any solid, liquid, gaseous or thermal 
irritant or contaminant, including smoke, vapor, soot, fumes, acid, 
alkalis, chemicals and waste. Waste includes but is not limited to 
materials to be recycled, reconditioned or reclaimed.
    (3) The loss in value to any covered building or other structure 
due to the requirements of any ordinance or law.
    (4) The loss in residual value of the undamaged portion of a 
building demolished as a consequence of enforcement of any State or 
local floodplain management law or ordinance.
    (5) Any increased cost of compliance under this Coverage D:
    (a) Until the covered building is actually elevated, 
floodproofed, demolished or relocated on the same or to another 
premises; and
    (b) Unless the covered building is elevated, floodproofed, 
demolished, or relocated as soon as reasonably possible after the 
loss, not to exceed two years.
    (6) For any code upgrade requirements, e.g., plumbing or 
electrical wiring, not specifically related to the State or local 
floodplain management law or ordinance.
    (7) For any compliance activities needed to bring additions or 
improvements made after the loss occurred into compliance with State 
or local floodplain management laws or ordinances.
    (8) Loss due to any ordinance or law that you were required to 
comply with before the current loss.
    (9) For any rebuilding activity to standards that do not meet 
the NFIP's minimum requirements. This includes any situation where 
the insured has received from the State or community a variance in 
connection with the current flood loss to rebuild the property to an 
elevation below the base flood elevation.
    (10) For any structure insured under a Group Flood Insurance 
Policy issued pursuant to 44 CFR 61.17.

Other Provisions

    (1) Increased Cost of Compliance coverage will not be included 
in the calculation to determine whether coverage meets the 80% 
insurance-to-value requirement for payment under Article 3.B.3 for 
loss from land subsidence, sewer backup, or seepage of water.
    (2) All other conditions and provisions of the policy apply.
* * * * *

Appendix A (3)--[Amended]

    6. Paragraph A.6. of Article 3 of Appendix A (3) is amended to add 
to the end the following phrase:
* * * * *
    * * * except as provided in Coverage D--Increased Cost of 
Compliance.
* * * * *
    7. A new section is added to Article 4 of Appendix A (3), to read 
as follows:
* * * * *

Coverage D--Increased Cost of Compliance Coverage

    Increased Cost of Compliance coverage (Coverage D) is for the 
consequential loss brought on by a floodplain management ordinance 
or law affecting repair and reconstruction involving elevation, 
floodproofing, relocation, or demolition (or any combination 
thereof) of a structure, after a direct loss caused by a ``flood'' 
as defined by this policy. (Floodproofing activities eligible for 
Coverage D and referred to hereafter in this policy are limited to 
residential structures with basements that satisfy the criteria of 
44 CFR 60.6 (b) or (c) and to non-residential structures.)
    The limit of liability under this Coverage D (Increased Cost of 
Compliance) will not exceed $15,000. This coverage is only 
applicable to policies with building coverage (Coverage A) and is in 
addition to the Building limit you selected on your application, and 
appears on the Declarations Page. No separate deductible applies. 
The maximum amount collectible under this policy for both Coverage A 
(Building Property) and Coverage D (Increased Cost of Compliance), 
however, cannot exceed the maximum permitted under the Act.

Eligibility

    A structure covered under Coverage A--Building Property--
sustaining a loss caused by a ``flood'' as defined by this policy 
must:
    1. Be a structure that is a repetitive loss structure. A 
``repetitive loss structure'' means a structure, covered by a 
contract for flood insurance issued pursuant to the Act, that has 
incurred flood-related damage on 2 occasions during a 10-year period 
ending on the date of the event for which a second claim is made, in 
which the cost of repairing the flood damage, on the average, 
equaled or exceeded 25% of the market value of the structure at the 
time of each such flood event. In addition to the current claim, the 
National Flood Insurance Program must have paid the previous 
qualifying claim, and the State or community must have a cumulative, 
substantial damage provision or repetitive loss provision in its 
flood plain management law or ordinance being enforced against the 
structure; or
    2. Be a structure that has had flood damage in which the cost to 
repair equals or exceeds 50% of the market value of the structure at 
the time of the flood event. The State or community must have a 
substantial damage provision in its floodplain management law or 
ordinance being enforced against the structure.
    This Coverage D will not pay for Increased Cost of Compliance to 
meet State or community floodplain management laws or ordinances 
which exceed the minimum criteria at 44 CFR 60.3, except as provided 
in 1. above or a. or b. as follows:
    a. Elevation or floodproofing in any risk zone to preliminary or 
advisory base flood elevations provided by FEMA which the State or 
local government has adopted and is enforcing for flood-damaged 
structures in such areas. (This includes compliance activities in B, 
C, X, or D zones which are being changed to zones with base flood 
elevations. This also includes compliance activities in zones where 
base flood elevations are being increased, and a flood-damaged 
structure must comply with the higher advisory base flood 
elevation.) Increased Cost of Compliance coverage does not respond 
to situations in B, C, X, or D zones where the community has derived 
its own elevations and is enforcing elevation or floodproofing 
requirements for flood-damaged structures to elevations derived 
solely by the community.
    b. Elevation or floodproofing above the base flood elevation to 
meet State or local ``freeboard'' requirements, i.e., that a 
structure must be elevated above the base flood elevation.
    Under the minimum NFIP criteria at 44 CFR 60.3(b)(4), States and 
communities must require the elevation or floodproofing of 
structures to the base flood elevation where elevation data are 
obtained from a Federal, State, or other source. Such compliance 
activities are also eligible for this Coverage D.

[[Page 8400]]

    This coverage will also pay for the incremental cost, after 
demolition, or relocation, of elevating or floodproofing a structure 
during its rebuilding at the same or another site to meet State or 
local floodplain management laws or ordinances, subject to Exclusion 
(7).
    This coverage will also pay to bring a flood-damaged structure 
into compliance with State or local floodplain management laws or 
ordinances even if the structure had received a variance before the 
present loss from the applicable floodplain management requirements.

Conditions

    (1) When a structure covered under Coverage A--Building 
Property--sustains a loss caused by a ``flood'' as defined by this 
policy, our payment for the loss under this Coverage D will be for 
the increased cost to elevate, floodproof, relocate, demolish, or 
any combination thereof, caused by enforcement of current State or 
local floodplain management ordinances or laws. Our payment for 
eligible demolition activities will be for the cost to demolish and 
clear the site of the building or a portion thereof caused by 
enforcement of current State or local floodplain management 
ordinances or laws. Eligible activities for the cost of clearing the 
site will include those necessary to discontinue utility service to 
the site and ensure proper abandonment of on-site utilities.
    (2) When the building is repaired or rebuilt, it must be 
intended for the same occupancy as the present building unless 
otherwise required by current floodplain management ordinances or 
laws.

Exclusions

    Under this Coverage D (Increased Cost of Compliance), we will 
not pay for:
    (1) The cost associated with enforcement of any floodplain 
management ordinance or law in communities participating in the 
Emergency Program.
    (2) The cost associated with enforcement of any ordinance or law 
that requires any insured or others to test for, monitor, clean up, 
remove, contain, treat, detoxify or neutralize, or in any way 
respond to, or assess the effects of pollutants. Pollutants include 
but are not limited to any solid, liquid, gaseous or thermal 
irritant or contaminant, including smoke, vapor, soot, fumes, acid, 
alkalis, chemicals and waste. Waste includes but is not limited to 
materials to be recycled, reconditioned or reclaimed.
    (3) The loss in value to any covered building or other structure 
due to the requirements of any ordinance or law.
    (4) The loss in residual value of the undamaged portion of a 
building demolished as a consequence of enforcement of any State or 
local floodplain management law or ordinance.
    (5) Any increased cost of compliance under this Coverage D:
    (a) Until the covered building is actually elevated, 
floodproofed, demolished or relocated on the same or to another 
premises; and
    (b) Unless the covered building is elevated, floodproofed, 
demolished, or relocated as soon as reasonably possible after the 
loss, not to exceed two years.
    (6) For any code upgrade requirements, e.g., plumbing or 
electrical wiring, not specifically related to the State or local 
floodplain management law or ordinance.
    (7) For any compliance activities needed to bring additions or 
improvements made after the loss occurred into compliance with State 
or local floodplain management laws or ordinances.
    (8) Loss due to any ordinance or law that you were required to 
comply with before the current loss.
    (9) For any rebuilding activity to standards that do not meet 
the NFIP's minimum requirements. This includes any situation where 
the insured has received from the State or community a variance in 
connection with the current flood loss to rebuild the property to an 
elevation below the base flood elevation.
    (10) For any structure insured under a Group Flood Insurance 
Policy issued pursuant to 44 CFR 61.17.

Other Provisions

    (1) Increased Cost of Compliance coverage will not be included 
in the calculation to determine whether coverage meets the 80% 
replacement cost requirement under Article 9 or for payment under 
Article 3.B.3 for loss from land subsidence, sewer backup, or 
seepage of water.
    (2) All other conditions and provisions of the policy apply.
* * * * *
(Catalog of Federal Domestic Assistance No. 83.100, ``Flood 
Insurance'')

    Dated: February 18, 1997.
Spence W. Perry,
Executive Administrator, Federal Insurance Administration.
[FR Doc. 97-4640 Filed 2-24-97; 8:45 am]
BILLING CODE 6718-03-P