Catastrophic Flooding Loss

Situation

  • One of the largest special servicers engaged our team to evaluate coverage for a loan assumption. The collateral consisted of five retail locations exposed to hurricane and flood risks. The buyer stated that their master insurance program was fully compliant with the loan documents as evidenced in the insurance certificates.
  • In the evaluation process, we pressed for complete policies and exposure information, ultimately revealing that flood coverage was provided by a “shared” policy covering hundreds of locations and billions of dollars in exposure which all encompassed the same limit.
  • Further, the insurance certificates failed to disclose the reduced overall flood limit for coverage in the 100-year flood zone and, rather, indicated only the limit for non-critical flood zones, which was many multiples of the critical flood limit.

Process and Challenges

  • We worked with the client to develop other options to bring the coverage into compliance while keeping costs in check.
  • Our team recommended that a dedicated difference in limits (”DIL”) policy be obtained in favor of the five locations; if a catastrophic flood occurred and the shared limits were exhausted, the DIL would be in place to protect the collateral. Since a DIL policy is often far less expensive for a borrower than a dedicated stand-alone policy, the asset would benefit from a lower debt service coverage ratio when compared to other properties similarly situated.

Results

  • As fate would have it, two months after the assumption closed, major regional flooding occurred which completely exhausted the master policy’s critical flood limit.
  • However, as a DIL policy was in place, the loan remained compliant and at a cost that was nearly $250K lower than what it would have been had dedicated primary policies been obtained for the five retail malls. Given the devastation that is known to result from hurricane associated storm surge and river flooding, loan collateral is at risk of having no coverage if other properties access shared insurance coverage.