When Banks Require Flood Insurance
Buying a House or Opening an Equity Line
We get calls and emails all the time from homeowners who have recently been required to carry flood insurance. In most cases, when you borrow money from a bank to buy real estate that’s in a special flood hazard area the bank or lending institution is required, just like homeowners insurance, to ask homeowners to carry flood insurance.
How Much Am I Required to Carry?
Nobody can force you to carry flood insurance unless you have a federally backed mortgage, or loan attached to the property. This includes equity lines. As a homeowner, banks can require you to carry flood insurance, but only up to $250,000 in building coverage, or 100% replacement cost; whichever is lower. For example, if you have a small cottage on the water and the cost to replace that home (per your agents replacement cost report) is only $190,000 then $190,000 in building coverage is all you’re required to carry. You can also, in most cases, carry up to a $10,000 deductible. Higher deductibles keep the cost of flood insurance down. Please check with your bank to make sure a higher deductible is allowed. I have yet to see higher deductibles rejected. And lastly, banks cannot ask you to carry contents coverage.
But just because a bank can only ask for a limited amount of flood insurance doesn’t mean you necessarily should! If flooding is expected you should seriously consider full coverage to protect your home and personal property from flood loss!
My Bank Recently Sent Me A Notice That I’m Required to Carry Flood Insurance
If you received a letter from your bank stating that you’re required to carry flood insurance it means either you have recently been placed into a special flood hazard area (SFHA) due to recent flood map zone updates, or they haven’t until now enforced a federal requirement to carry it.
For awhile FEMA and the NFIP (National Flood Insurance Program) did not monitor banks and lending institutions to make sure they required flood insurance for homes with mortgages backed by the federal government that were in Special Flood Hazard Areas. Just like you’re required to carry home insurance they also are supposed to require flood insurance.
TIP: Just because the bank states you are in a SFHA zone, isn’t always true. Often we find errors in a banks flood determination. We highly recommend contacting your insurance agent and ask to review your flood zone location. Or contact us!
I Own a Townhouse / Condo and Part of the Structure’s in A Special Flood Zone
First, if you on a condo or townhouse, or belong to a Homeowners Association it’s best to have the association carry the flood coverage so all owners are equally protected. If you are closing on your new condo a bank may ask for flood insurance. If the condo association does not have a Master Flood policy then what do you do? Well, for some reason condo associations have yet to be required to carry flood under the association. Most likely, it’s because of the high cost for flood insurance and the push back by many condo owners not willing to pay for the expense either because they do not have a mortgage, or do not feel it is necessary.
You can buy flood insurance for your condo only and close on that property, but this can be a serious problem if a major flood loss occurs. For example, the board for a 20 unit condo association year after year votes down to carry flood insurance for the entire association even though the buildings are in a Special Flood Hazard Area. Since the association has no loan on the properties they are not required to carry a master flood insurance policy. The association is made up of 5, four unit buildings closely built together. Only 5 unit owners have loans on their property and therefore only 5 of the 20 units have flood coverage. A devastating a flood occurs damaging half the condos in the association. All 5 buildings have significant flood damage. Only 2 of the 5 buildings have enough flood insurance to make repairs. The remaining condo owners are looking at 200k in repairs for each condo. Most owners simply walk away leaving the remaining condo owners holding property that is significantly worth less due to the flood damage.
My Neighbors Townhouse Is Attached to Mine and Is In A Flood Zone, Do I still need to Buy Flood Insurance?
According to FEMA as long as any part of the building is in or is touching a special hazard flood zone you are required to carry flood coverage up to the replacement value of the property or the loan amount; whichever is less.
What if Just the Land is in A Special Flood Area?
If the building, deck, porch or any part of the covered structure is not touching or in the SFHA then you would not be required to carry flood insurance by a lending institution. However, with the special flood zone that close it would be in your best interest to buy flood insurance.
Other Important Things To Know About Flood Insurance
What’s An Elevation Certificate?
Completed by a licensed surveyor an elevation certificate provides specific elevation figures about your home or commercial property and may be able to greatly reduce your flood insurance cost. Contact your insurance agent for more information or feel free to send us an email or call.
What Is a Special Flood Hazard Area?
Everyone is in a flood zone. Flood Zone X, however, is the safest zone and is not considered a high risk zone. If an area has at least a 1% chance of flooding FEMA considers that a Special Flood Hazard Area. In most cases these areas are labeled Flood Zones AE or VE.
Feel free to call or email if you have more questions about flood insurance.