I was recently asked if a homeowner could rely upon their mortgage lender’s statement that the lender would purchase a “force place” flood insurance policy if the homeowner did not do so themselves. These homeowners could not secure a flood insurance policy on their own and never heard from the bank. Naturally, they assumed the bank purchased the policy and they were covered. Months later Hurricane Sandy flooded the home and the homeowners learned that bank had not purchased the insurance and the home was not covered for the loss.
In researching this issue, I came across the Federal Deposit Insurance Corporation’s regulations and was surprised by what their compliance manual says. According to the FDIC’s compliance manual, a lender must purchase flood insurance on the homeowner’s behalf:
The Reform Act imposed the requirement on an institution or a servicer acting on its behalf to purchase or “force place” flood insurance for the borrower if the institution or the servicer determines that coverage is lacking. The final rule, therefore, provides that an institution, or servicer acting on its behalf, upon discovering that security property is not covered by an adequate amount of flood insurance, must, after providing notice and an opportunity for the borrower to obtain the necessary amount of flood insurance, purchase flood insurance in the appropriate amount on the borrower’s behalf.
Therefore, mortgage lenders should keep a watchful eye on their portfolios and purchase flood insurance where necessary. In this client’s case, it’s too late, and their case may well be destined for litigation.