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?

Generally, yes.  Lenders are permitted to require more flood insurance coverage than the minimum amount required by the National Flood Insurance Act (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 from a private insurance company.

Under the Act, the mandatory flood insurance purchase amount for a one-to-four family non-condominium residential structure 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), 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 of flood insurance 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 than the minimum amount of coverage required 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. (Massachusetts state law, however, limits the amount of coverage that a lender may require to the outstanding principal balance of the mortgage loan.)

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 in which a building is over-insured.

September 2017