The 80 percent rule inside your association's flood policy can cut the check
The 80 percent rule inside your association's flood policy can cut the check
2026-09-15 · New Mexico · Compliance
The federal flood policy written for condominium buildings contains a penalty clause that reduces the payout whenever the building is insured for less than 80 percent of its replacement cost — and the penalty is applied before the deductible, so the two compound. The policy form is codified at 44 CFR Part 61, Appendix A(3).1
The clause
“VII. Coinsurance A. This Coinsurance Section applies only to coverage on the building. B. We will impose a penalty on loss payment unless the amount of insurance applicable to the damaged building is: 1. At least 80 percent of its replacement cost; or 2. The maximum amount of insurance available for that building under the NFIP, whichever is less. C. If the actual amount of insurance on the building is less than the required amount… then loss payment is determined as follows…: 1. Divide the actual amount of insurance carried on the building by the required amount of insurance. 2. Multiply the amount of loss, before application of the deductible, by the figure determined in C.1 above. 3. Subtract the deductible from the figure determined in C.2 above.”
FEMA's own arithmetic
The policy form works the example itself, which is worth reproducing exactly because the numbers are the argument:
“Example #1 (Inadequate Insurance). Replacement value of the building—$250,000. Required amount of insurance—$200,000 (80 percent of replacement value of $250,000). Actual amount of insurance carried—$180,000. Amount of the loss—$150,000. Deductible—$500. Step 1: 180,000/200,000 = .90… Step 2: 150,000 × .90 = 135,000. Step 3: 135,000−500 = 134,500. We will pay no more than $134,500. The remaining $15,500 is not covered due to the coinsurance penalty ($15,000) and application of the deductible ($500).”
A ten percent shortfall in coverage produced a ten percent haircut on a claim that was itself far below the policy limit. The association was not over its limit; it was under its ratio.
The clause that surprises association boards
What counts toward the replacement cost figure is not everything in the building:
“D. In calculating the full replacement cost of a building: 1. The replacement cost value of any insured building property will be included; 2. The replacement cost value of any building property not insured under this policy will not be included; and 3. Only the replacement cost value of improvements installed by the condominium association will be included.”
Owner-installed improvements — common in older New Mexico conversions, where successive owners have upgraded kitchens, flooring and fixtures — therefore do not count toward the 80 percent test and are not covered by the association's policy either. They sit in a gap that neither document reaches.
The stacking limit that catches unit owners
“G. A Dwelling Form policy with building coverage may be issued to a unit owner in a condominium building that is also insured under a Residential Condominium Building Association Policy (RCBAP). However, no more than $250,000 may be paid in combined benefits for a single unit under the Dwelling Form and the RCBAP. We will only pay for damage once. Items of damage paid for under a RCBAP cannot also be claimed under the Dwelling Form policy.”
An owner who buys their own flood policy on top of the association's is not buying a second layer above $250,000. They are buying, at most, coverage for what the association's policy does not reach.
One policy per building
The form states: “This policy insures only one building.” A New Mexico association with several buildings needs a policy for each, and each is coinsurance-tested independently. A portfolio that averages above 80 percent across the property is not compliant; one building below the ratio is penalised on its own claim.
Why the ratio drifts in New Mexico
Coinsurance shortfalls are rarely deliberate. They happen because replacement cost moves and the policy limit does not. An association that set its limit at 2019 replacement cost and renewed at the same figure each year may be well under 80 percent of today's rebuild cost — and New Mexico's construction costs have been pushed by post-fire rebuilding in Ruidoso and in San Miguel and Mora counties, which is the same population facing the highest burn-scar flood probability.
The drift got easier this year. Both Fannie Mae and Freddie Mac retired the requirement that project insurance carry inflation guard — Freddie Mac's wording was “The inflation guard requirement has been retired in its entirety” — so the automatic annual increase that used to keep limits tracking construction costs is no longer required on the property side, and revaluing has become a board task rather than a policy feature.2
The one number to check
Current replacement cost of each insured building, and the building coverage limit on each policy. If the second is less than 80 percent of the first, the association is carrying a penalty it will not discover until it files a claim — and the shortfall comes out of the claim, not out of the premium.
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