Flood Insurance for Condos and Co-ops in New York City

Have you ever wondered why high-rise condominium or cooperative buildings would be required to carry flood insurance when such a small portion of the building typically sustains damage? In New York City, flood insurance for boards and owners of high-rise buildings is a topic of great concern following Hurricane Sandy in 2012, Hurricane Ida in 2021 and climate projections that predict a substantial increase in storms with the potential to cause significant flooding.
 
The Federal Emergency Management Agency (FEMA) defines a flood as “a sudden and temporary condition of partial or complete inundation of two or more acres of normally dry land area or two or more properties from an overflow of inland or tidal waters, unusual and rapid accumulation or runoff, or mudflow.” That might sound like a mouthful, but it’s a very important distinction. For example, a burst pipe or sprinkler system leak is not the type of scenario that is typically covered under a flood insurance policy. A parking garage, basement unit or an upper-level apartment impacted by a deluge of water due to significant rainfall is more likely to be defined as a flood event and subject to coverage.
 
In general, flood insurance offered by FEMA under the National Flood Insurance Program (NFIP) is not as straightforward as other types of policies. Without a capable property management company that offers access to a team of dedicated  flood insurance experts, condo and co-op boards and building owners must carefully review their policies for exclusions, coverage amounts and terms on their own.
 

Weighing the Risk: Flood Insurance for Condominium & Cooperative Properties

Boards and building owners in New York City who recently experienced the remnants of Hurricane Ida in September, know first-hand the value of a flood insurance policy – the primary source of recovery for property damage caused by flooding. Within FirstService Residential’s New York portfolio, our company received notices of flood claims from more than 50 buildings that experienced severe property damage immediately following Ida. Those claims included buildings with an existing flood insurance policy, as well as many that did not have flood insurance. The latter group will likely have to finance building repairs out of pocket.
 
Decision makers in condo and co-op buildings located in low-risk flood zones typically choose not to purchase a flood insurance policy, because there is no requirement to do so for their area. Yet, according to FEMA, 25% of all flood insurance claims occur in areas that are considered low-risk hazard flood zones. *
 
*This figure was provided by FEMA and only accounts for claims reported on current FEMA flood policies already in place. It is impossible to know how many potential claims there would be for properties in low-risk flood zones without coverage in place, but it’s safe to say that statistic would be much higher.
 

Risk Rating 2.0: FEMA Recalculates Flood Insurance Premiums

FEMA recently announced changes to the way the NFIP calculates flood risk and insurance rates. The new methodology is known as Risk Rating 2.0 and will no longer use flood zones to calculate flood insurance rates. Instead, calculation will consider the building’s foundation and type of structural system (i.e., concrete, steel, timber), elevation, distance from a body of water, the area’s historic flood frequency and building replacement costs.
 
Prior to these changes, FEMA had not updated NFIP’s rating methodology in 40 years. The goal of these changes is to more fairly determine flood insurance rates based on a robust mix of risk factors. While a majority of policyholders across the country will see a decrease in their annual premiums, most condominiums and cooperatives in New York City will be paying more. To put that into perspective, 53,000 properties in New York City are currently insured by NFIP, a number that includes single-family homes. It is estimated that around 60% of all policyholders will see an increase.
 
Beginning October 1, 2021, new and existing NFIP policyholders are subject to the Risk Rating 2.0 methodology. This includes boards and owners with policies renewing on April 1, 2022.
 
It's important to note that only buildings located in a FEMA-classified flood hazard zone, areas at higher risk of floodwater inundation, are mandated to hold an NFIP policy. In New York City, however, these zones were not defined until 2007, five years before Hurricane Sandy wrought billions of dollars in damage to buildings, infrastructure and personal property. Since that time, a decreasing number of properties in New York City hold flood insurance policies despite immediate risks posed by strengthening storms in the area.

"Every building needs flood insurance. Considering that more than 25% of flood claims come from properties located outside of a high-risk flood zone, it’s understandable those properties are less likely to have adequate flood insurance. We always advise building owners and board members of our managed properties to invest in quality coverage as emergency weather events are increasingly more common.”

—Sean Kent, Senior Vice President | FirstService Financial, the banking and insurance affiliate of FirstService Residential

FEMA is expected to update its Flood Insurance Rate Maps (FIRM) and release preliminary data in 2023. Following review by local governments and the public, final maps are on track to be released in 2024. The maps will determine low, moderate, and high-risk flood zones, and will also define which properties will be required to retain an NFIP policy.


 

Residential Condominium Building Association Policy (RCBAP): Standard Flood Insurance Policy Updates from FEMA

RCBAP is a flood insurance policy issued by FEMA specifically designated for condos and co-ops and includes coverage for the foundation, drywall, paint, floor coverings (i.e. carpets or tile) and ceilings, as well as cabinets, fixtures, and appliances. To qualify for this policy, the building’s residential component must comprise 75% or more of total floor area.
 
The maximum amount of building coverage that can be purchased under the RCBAP is the lesser of:

• 100% of the replacement cost of the building including the cost of repairs or replacement of the foundation and its supporting structure
• $250,000 per unit in a condominium building or $500,000 per building in a cooperative property (the more commonly utilized calculation for determining a building’s flood insurance property limit)

An RCBAP can only be purchased by the condo or co-op board and is typically retained on behalf of the unit owners or shareholders to meet flood insurance requirements enforced by mortgage lenders. It is uncommon for a board to purchase flood insurance on behalf of the condo or co-op when the building is not located in a designated Special Flood Hazard Area (SFHA).
At present, it will be interesting to see how this evolves in light of FEMA’s updated rating methodology and the fact that many of those non-SFHA buildings were severely impacted by recent flood events.
 

Added Value Through FirstService Residential’s Exclusive Insurance Services

It’s important to conduct an annual audit of insurance coverage to verify that all of your information and property valuations are current and complete. Boards and owners should not wait until after a disaster to find out that their property valuation does not include costly upgrades or improvements recently made to the building.
 
FS Insurance Brokers, FirstService Residential’s in-house insurance brokerage, leverages the size of our property portfolio, historical claims and loss data and our property managers’ certification in risk management to negotiate policies that result in lower annual premiums with better terms and coverage limits.
 
Buildings managed by FirstService Residential have access to a comprehensive suite of services from strategic planning and analysis and program design, to alternative risk financing, loss control and claims management. To date, FS Insurance Brokers has co-brokered over 3,200 placements for our clients, saving them over $5.5 million in annual insurance premiums.
 

Key program features include:

• Access to exclusive umbrella liability options that provide additional limits in excess of the building’s general liability and your board’s Directors & Officers liability policies
• Independent insurance risk consultation at a discounted cost
• Complimentary review of your building’s contractors’ and vendors’ insurance policies and contracts to ensure adequate risk transfer
• Green upgrade coverage, premium financing, free boiler and machinery inspections, and optional guaranteed replacement cost coverage
• Access to exclusive Crime/Fidelity policy with enhanced limits and supplementary coverage options
• Cyber Liability coverage

Learn more about how FirstService Residential’s expert insurance services can benefit your building.