Q: I have the following question regarding coverage for contents if the Bank does not have a specific interest (via UCC-1) in a building’s contents, and contents were not included in the determination of value of the real estate, but the language in the Mortgage document does state the Bank has an interest in such by virtue of the mortgage. If the flood insurance policy does not include content coverage, but building only, and the amount of the flood insurance for the building adequately covers the outstanding balance of the loan, is it necessary to require content insurance?
A: If the Bank removes the language in the Mortgage document declaring its interest in the contents, then content insurance is not required.
If the language remains, then it is necessary to require flood insurance for both the building and contents in this instance because the Bank has a security interest in the contents as noted by the Mortgage document. In this scenario, the insurable value of the building appears to be greater than the loan amount. Even though the minimum amount of flood insurance required may be less than the insurable value of the building, both the building and contents must be covered by flood insurance. While there is no prescribed formula the lender must use, the lender may apply any reasonable approach to cover both the real estate and contents for the minimum amount of flood insurance required by the Act and Regulation. Furthermore, a borrower and lender may contractually negotiate for a higher level of flood insurance coverage than what the law requires.
– This Q&A was included in the materials from the FDIC New York Region Regulatory Teleconference: “Flood Insurance – Flood Insurance Compliance and an Examiner’s Perspective” which took place on December 3, 2012. These materials may be found here: https://www.fdic.gov/news/conferences/NY/2012-12-03.html