Q: If a borrower purchases a private flood insurance policy, may a lender require more than the maximum amount of insurance available for a particular type of building for an NFIP policy? For example, requiring a private flood insurance policy with more than $250,000 of coverage for a residential building?
A: The National Flood Insurance Act and the agencies' regulation provide that the minimum amount of insurance required equals the lesser of: the outstanding principal balance of the loan or the maximum amount of insurance available under the NFIP, which is the lesser of the maximum limit available for the type of structure or the insurable value of the structure. As the agencies have provided in the Interagency Flood Q&As, lenders are permitted to require more flood insurance coverage than required by the regulation. However, the Interagency Flood Q&As also provide that a lender should avoid creating situations where a building is “over-insured.”
This Q&A was part of the discussion in the Outlook Live – 2019 Interagency Flood Insurance Update on Private Flood Insurance Rule webinar held on 6/18/19 and focused on the new private flood insurance rules that become effective 7/1/19. Information may be found here: https://www.webcaster4.com/Webcast/Page/577/30085