When homeowners fail to maintain or obtain sufficient flood insurance, lender placed flood insurance helps lenders insure their real estate collateral and stay compliant despite the complexities of flood insurance regulation.
Any FDIC financial institution must determine, before making a loan, if the property is in a Special Hazard Flood Area (SFHA). If it is, then flood insurance is required by federal law. Lenders who underwrite residential and commercial loans in the United States may need flood hazard and contents policies for their financed properties.
Flood hazard and contents policies are primarily interested in protecting the lender’s financial interest in a property. To this purpose, the policies’ physical damage insurance coverages often are restricted to only the lender’s investment.
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Flood insurance is required by federally insured lenders when properties are in federally designated high-risk flood zone. Structures located in high-risk flood zones are required by federal law to be insured against flood damage for the term of the loan. However, not all homeowners obtain nor maintain adequate flood insurance. When borrowers fail to maintain sufficient flood insurance, flood hazard and contents policies indemnifies the lender’s collateral from the peril of flood.
Flood hazard and contents policies are specialized physical damage insurance that fills in gaps when property owners don’t obtain flood insurance or don’t have enough flood coverage. Because this is highly specialized insurance, lenders should work closely with a knowledgeable insurance agent, like QuieTrack, when selecting and setting up lender-placed flood policies.
Lenders that originate or service mortgages need insurance tracking and flood hazard and contents policies to comply with federal regulations as well as protect themselves against uninsured collateral losses. This includes lenders who underwrite residential mortgages, investment property loans, commercial property loans, and other improved real estate loans.
Flood hazard and contents policies are available for buildings, residential and commercial structures, as well as commercial contents. Any lender that’s interested in procuring this insurance for multi-dwelling residential, farm and agriculture, commercial, or industrial properties should speak with us at QuieTrack.
Flood hazard and contents policies are specifically designed to protect a loan’s collateral from the peril of flood. Coverage is typically restricted to a lender’s financial interest in a property and risk exposure.
Flood hazard and contents policies cover the lesser of the loan balance, replacement cost or the maximum coverage limit available from the National Flood Insurance Program (NFIP). Any equity that a property owner has, may not be covered when a lender places this insurance.
For example, consider a homeowner’s waterfront property that’s worth $650,000 and they have $200,000 equity and a $450,000 loan balance. A flood hazard and contents policy would only provide the NFIP limit of $250,000 of flood coverage for the property, leaving the homeowner exposed to structural loss, personal property loss, and liability lawsuits.
Additionally, flood hazard and contents coverage does not provide the borrower/property owners with personal property or liability coverage.
The 2015 Flood Rule and most recently refined in the Joint Agencies Q&A in May 2022 established regulations stipulating when a lender may institute flood hazard and contents policies and when they must cancel those policies. The requirements for enacting and revoking these policies generally are as follows.
Lenders must send the borrower a “45-day” letter when the borrower’s flood coverage is determined to be non-renewed, canceled, or insufficient. The purpose of this letter is to inform the borrower of their specific deficiency and notify them that they have 45 days to provide proof of flood insurance with no lapse in their coverage
Provided the 45-day letter has been sent and its time period expired, lenders must procure flood hazard and contents coverage, effective the day that the borrower’s own coverage becomes deficient.
When lenders are notified that borrowers have obtained the required flood insurance, the lender is required to cancel any lender-placed flood policy and refund any unearned premiums within 30 days.
Although the physical damage insurance coverage that flood hazard and contents policies offer, typically benefit the lender, borrowers normally pay the policies’ premiums. This is because the borrower is required by their loan agreement and federal regulations to always carry flood insurance throughout the loan term.
For help purchasing lender-placed flood insurance, contact an agent at QuieTrack Insurance Services. Our agents have helped many lenders across the nation with their lender-placed insurance needs, and we’ll make sure your financial institution gets the coverage that it requires.