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Home / Insurance / Significant Damage and Questions About FEMA’s 50% Rule | Property Insurance Protection Law Blog

Significant Damage and Questions About FEMA’s 50% Rule | Property Insurance Protection Law Blog



Hurricane Ian caused significant damage to many structures that may not be consistent with current flood elevation maps. If the damaged structures are deemed to have “substantial damage,” the owners could face even greater rebuilding costs to comply with current flood elevations.

I noted this problem in Hurricane Ian Victims Learn about FEMA’s 50% Rule:

What is the 50% rule? If the cost to repair a damaged building exceeds 50% of the building’s market value, the building must be brought into compliance with the National Florida Insurance Program’s current surveying requirements. The market value is for the building value and not the land value. The value is determined by the county̵

7;s property assessment or a licensed appraiser.

My experience has been that many older buildings with significant damage in a flood zone will often not meet current flood elevation requirements and will also have damage greater than 50% of the building’s value. The property owner will then have to rebuild the structure at a higher height, which often means demolishing the structure or raising it.

What is significant harm?

Substantial damage, as defined in 44 CFR § 59.1, means “damage of any origin to a structure where the cost to restore the structure to its previously damaged condition would equal or exceed 50 percent of the market value of the structure before the damage occurred .” Most damages occur during a single and sudden event, such as a fire, windstorm, lightning strike, falling tree, tornado, earthquake, flood, or natural gas explosion. Damage can also be unrelated to a specific event, such as ground settlement, exposure to the elements, termite infestation, vandalism, deterioration over time, and other causes.

Can I avoid falling into the definition of “substantial damage” by not making all the repairs? The answer is no:”

If a local official determines that a damaged building… has sustained significant damage, the structure must be brought into compliance with floodplain management requirements (and building codes) for new construction based on flood zone. The work required to restore a substantially damaged structure to its pre-damage condition constitutes a substantial improvement, regardless of the actual repair work performed. Therefore, when the NFIP regulations refer to substantial improvement, repair of substantial damage is included.

Even if an owner intends to perform less than all the work required to fully repair the damage, the cost of fully repairing and restoring the structure to its pre-damage condition must be determined.

If the total repair costs are equal to or greater than 50 percent of the structure’s pre-damage market value, the structure must be brought into compliance. The same requirements for constructions that are substantially improved apply to constructions that are substantially damaged.

Who decides if a structure is significantly damaged?

Local officials are responsible for reviewing the validity of all cost estimates provided by applicants, whether prepared by licensed contractors, engineers, architects, professional cost estimators, or property owners. When applicants submit professional appraisals of market value, local officials should review the documentation to determine whether the appraisals reflect the specific characteristics of the buildings. Local officials should also inspect damaged buildings and manufactured homes to verify that the proposed costs include all work required to restore the structures to pre-damage condition.

Estimates can be used for both costs and market values. To be consistent, local officials should decide in advance and document the estimation methods that will be used, especially in post-disaster situations when many damaged structures may need to be evaluated to determine whether they have been significantly damaged.

When using estimates, the closer the ratio of estimated costs to estimated market value is to 50 percent, the greater the accuracy required to make the SI/SD determination. Particularly in the post-disaster period when using estimates to focus attention on those structures for which additional data are needed, local officials may decide that if the ratio of estimated costs to estimated market value is less than 40 percent, no further evaluation is necessary because the work is clearly does not constitute SI/SD. By the same logic, society may decide that if the ratio is greater than 60 percent, no further evaluation is needed because the work clearly constitutes a significant improvement. However, when the ratio falls between 40 percent and 60 percent, the local official may require the applicant to provide a detailed cost list or obtain a professional appraisal of the structure’s market value.

How is market value determined?

Market value refers to the price that a seller of real property can expect to receive from a buyer in a fair and open negotiation. For SI/SD determinations, only the market value of the building or manufactured home is relevant (land, land improvements and accessory structures are excluded). In addition, the market value must always be based on the condition of the structure before the improvement was carried out or before the damage occurred. If structures have not been maintained and have deteriorated over time, the market values ​​for improvements or before damage are the values ​​in effect on the date permit applications are submitted.

Many communities require permit applicants to obtain market value appraisals prepared by qualified professionals licensed to perform appraisals in the state or community where the properties are located. In addition, three other methods can be used to estimate the market value:

• Values ​​produced for property assessment purposes, adjusted to approximate market value
• Estimates of a structure’s actual cash value, including depreciation
• “Qualified estimates” based on the professional judgment of a local official

Can fair cash value or replacement cost values ​​be used to determine fair market value for the damaged building?

If depreciated to account for physical conditions, the actual cash value (ACV) or replacement value (RCV) can be used to estimate the market value.

ACV is the cost of replacing a structure on the same parcel with a new structure of similar type and quality, less depreciation due to age, use and neglect. ACV does not take into account loss of value due to obsolete design or location factors. Depreciation accounts for the physical condition of a structure. The ACV concept is used in both the insurance industry and the construction industry. In most situations, ACV is a reasonable estimate of market value, provided that depreciation is accounted for.

RCV is the cost of replacing a structure on the same parcel with a new structure intended for the same purpose and with comparable materials and quality (currently cost of materials and labor). The term RCV is also used by both the insurance industry and the construction industry. Definitions may vary from state to state.

RCV can be easily estimated, even when a large number of damaged structures must be assessed. Therefore, local officials may find it useful to use RCV to estimate market values ​​in the post-disaster period.

What items should be included in the cost to repair?

“Repair costs” include the costs of all work required to restore a damaged building or manufactured home to its pre-damage condition. Both include the cost of all materials, labor and other items required to perform the proposed work. Most costs must be included, although some costs can be excluded.

The person applying for a permit must submit estimates of the cost of the proposed work. Acceptable sources of cost information include:

• Itemized costs of materials and labor, or estimates of materials and labor prepared by licensed contractors or professional construction cost estimators.

• Building valuation tables published by building code organizations and cost estimating manuals and tools available from professional construction cost estimating services.

• “Qualified estimates” of cost prepared by the local official using professional judgment and knowledge of local and regional construction costs.

• Structure owners can submit cost estimates that they prepare themselves. Owners should submit as much supporting documentation as possible.

Items to be included in the improvement costs are those that are directly linked to the work carried out on a building or manufactured home. The costs of repairs must include all work required to restore a structure to its pre-damage condition. Whether determining costs of improvement or costs of repairs, the determination shall include costs to comply with any other regulations or code requirements triggered by the work. A list of costs that must be included cannot be exhaustive; However, the following list characterizes the types of costs that must be included:

• Materials and labor, including the estimated value of donated or discounted materials and owner or volunteer labor
• Site preparation in connection with the improvement or repair, such as foundation excavation or basement filling
• Demolition and removal of construction debris
• Labor and other costs associated with demolishing, moving or altering structural components to accommodate improvements, additions and repairs
• Costs associated with meeting other requirements and codes that may be triggered by the work
• Construction management and supervision
• The contractor’s overheads and profit
• Sales tax on materials
• Structural elements and exterior finishes, including:

•Foundations
•Monolithic and other types of concrete slabs
•Bearing walls, tie beams, trusses
•Joists, beams, sub-floor, framing, ceiling
•Interior non-load-bearing walls
•Exterior finish
•Windows and front doors
•Roofs, gutters and downpipes
•Hardware
•Bust decks and porches

• Interior elements, including:

•Floor finish
• Tiles and furnishings in the bathroom
•Wall finish
•Built-in cupboards
•Interior doors
•Interior finish carpentry
•Built-in bookshelves and furniture
•Hardware
•Insulation

• Tool and service equipment, including:

•Equipment for heating, ventilation and air conditioning (HVAC).
•Plumbing fittings and piping
•Electrical wiring, sockets and switches
•Solar panels and equipment
•Light fixtures and ceiling fans
•Security and fire, smoke and CO2 warning systems
•Built-in appliances
•Central vacuum system
• Water filtration, conditioning and recirculation system

What items can be excluded when calculating the cost of repair?

Objects that can be excluded are those that are not directly associated with the structure. The following list characterizes the types of costs that can be excluded:

• Cleaning and removal of rubbish

• Costs to temporarily stabilize a structure so that it is safe to enter to evaluate and identify necessary repairs

• Costs of obtaining or preparing plans and specifications • Surveying costs

• Permit fees and inspection fees

• Carpets and re-carpets installed over finished floors, such as wood or tiles

• Outside improvements, including landscaping, irrigation, sidewalks, driveways, fences, yard lighting, swimming pools, pool enclosures and detached accessory structures (eg, garages, sheds, gazebos)

• Costs required for the minimum necessary work to correct existing breaches of health, sanitation or safety regulations

• Plug-in appliances, such as washing machines, tumble dryers and cookers

The answers to these frequently asked questions can be found in a FEMA pamphlet 213 on the subject, Answers to questions about significantly improved/significantly damaged buildings.

Policyholders, adjusters and contractors must be aware of these federal regulations. If a building is deemed “significantly damaged” and did not comply with the flood maps, it potentially affects the insurance recovery loss measure and the amount required to rebuild the structure, assuming the structure can even be rebuilt.

Today’s thought

There is no such thing as free regulation.
-John Hutton


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