In other words, if an improvement can float away, it is not insurable. If a lender takes a security interest in an improved real property and the contents of that property, both elements must be covered by the flood insurance. On the other hand, if a lender takes a security interest only in contents but not the improved real property, no flood insurance is required. The improved real property must be in a participating community to be insurable. FEMA has developed the Special Flood Hazard Determination Form for this purpose.
Flood insurance is available only for potential losses to buildings and mobile homes.
To calculate the insurable value of improved real property located in an SFHA, a lender must determine the overall value of the property less the value of the land. FEMA recommends that lenders follow the same practice for determining coverage for flood insurance as they follow for establishing hazard insurance coverage. It is very important to calculate the insurable value of the property, otherwise the lender might inadvertently require the borrower to pay for too much or too little flood insurance coverage. For example, if the lender fails to deduct the value of the land when determining the insurable value of the improved real property, the borrower will incur unnecessary charges by paying for coverage that exceeds the amount NFIP will pay in the event of a loss. After calculating the insurable value of the improved real estate, the lender must compare that value with the outstanding principal balance of the loan and require flood insurance for that amount or the maximum amount of flood insurance allowable under NFIP, whichever is less.