National Flood Insurance Program; Standard Flood Insurance Policy

Federal RegisterFeb 25, 1997

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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: