Answers about Flood Insurance

The loan balance on my home has decreased over the years so that I now owe $50,000 on my home. I have a new servicer and it is requiring that my flood insurance be increased. My present policy satisfies the minimum flood insurance requirement. Can my lender require more flood insurance than the minimum required by the regulation?

Yes.  Lenders are permitted to require more flood insurance coverage than the minimum amount required by the Flood Disaster Protection Act (FDPA or Act).  If the flood insurance requested by the lender is greater than $250,000, then you or the lender may have to seek such coverage outside the NFIP.

Under the Act, the mandatory purchase amount is the lesser of:

  • The outstanding principal balance of the loan(s), or
  • The maximum amount of insurance available under the National Flood Insurance Program (NFIP), which is the lesser of:
    • The maximum limit available for the type of structure ($250,000 for a residential structure), or
    • The insurable value of the structure (typically the replacement cost value of your home).

For example, on a home with only a first lien (no home equity loan or home equity line of credit), an insurable value greater than $50,000 and a principal balance owed of $50,000, the minimum required amount under the Act would be $50,000.

Some lenders may require in their loan agreements that the amount of flood insurance equal that of your hazard insurance so you are not underinsured.  The reasoning is that if the insurable value (replacement cost) of the home is higher, and there is a total loss due to a flood, the lower amount, in this case $50,000, might not be adequate to rebuild your home.

Each lender has the responsibility to set its own flood insurance policies and procedures to meet its business needs and to protect its interest in the collateral. However, lenders should avoid creating situations where a building is over-insured.

February 2011