Question from an IIABNY member: I know that banks cannot require more insurance than the replacement value of a dwelling. My question is, if a loan is less than the replacement value, can the bank require that the home be insured for full replacement. I have an account that has flood insurance at $72k while the homeowner’s policy covers it for over $300k. The loan is for $50k and the bank is requiring that the flood insurance be increased to the $250k maximum available under FEMA. Can they insist on that?
Answer: The issue is the guidelines the federal government gives to lenders with regard to flood insurance. They encourage lenders to require RC coverage for flood. This document tells lenders that the flood limit must be, but is not limited to, the least of:
- The mortgage balance
- The maximum amount available from the NFIP, or
- The building’s RC.
It goes on to state,
“A sound flood insurance risk management approach follows the insurance industry practice of insuring buildings to full RCV. Such a risk management strategy meets or exceeds the minimal compliance requirements and is the easiest approach for lenders to implement. Security interests in (special flood hazard areas) should be protected with flood insurance to the full insurable value, to the extent possible under the NFIP.”
Essentially, the lender is just doing what it’s being told, and nothing in New York law prohibits it from requiring the higher limit.
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