Why Your Bank Can Force You to Buy Flood Insurance

Protecting your home with insurance not only gives you peace of mind and the financial resources to rebuild or repair your home, it’s also a legal requirement of your mortgage. Depending on where your home is located, homeowners insurance might not be enough. You may also need a flood insurance policy.

A standard homeowners policy doesn’t cover flood damage. If your home is located in a flood plain or an area that the National Flood Insurance Program (NFIP) has designated a high or even moderate flood risk area, your lender may require that you carry a flood insurance policy.

If you have taken out a mortgage to purchase your house and choose to skip flood insurance, or let your current flood policy lapse, your mortgage lender or the bank that holds your mortgage has the legal right to put a force-placed flood insurance policy in place and bill you for it.

If you own your home free and clear, it is up to you whether to purchase a flood insurance policy.

What Happens If You Don’t Have Flood Insurance?

Floods cause tremendous damage to homes; an average flood claim is more than $46,000. If you are not carrying a flood insurance policy, all of the costs to repair your home or replace it if it is completely destroyed will fall to you. Can you easily afford an unexpected $50,000 bill? If the answer is no, you need a flood insurance policy.

Flooding can cause major damage to many parts of your home, including the foundation and systems behind the walls such as the electrical and plumbing, all of which are expensive to repair or replace.

Here are just a few things flood insurance covers:

• Foundation issues
• Electrical and plumbing systems
• Central air conditioning, furnaces, and water heaters
• Free-standing appliances like refrigerators and cooking stoves
  and built-in appliances such as dishwashers
• Permanently installed carpeting over unfinished flooring
• Permanently installed paneling, wallboard, built-in bookcases,
  and cabinets

Flood insurance doesn’t have to be a budget buster. According to the NFIP, the average flood policy premium in 2015 was $700 a year, but the cost can go up dramatically if you live on the water or have an oceanfront home.

You may not even have a choice when it comes to carrying a flood policy. Your lender or the NFIP can require that you carry flood policy as a condition of your mortgage.

The NFIP sets all of the standards for flood insurance, including the areas where it is required, and even policy prices. Here are a few details about who is actually required to carry flood insurance:

• High-risk area: If you live in an NFIP-designated high-risk area, there is a 1 in 4 chance that flooding will happen during the course of a 30-year mortgage. All home and business owners in these areas that have mortgages from federally regulated or insured lenders are legally required to buy flood insurance.
  
  
• Moderate- to low-risk areas: While these areas have a reduced risk of flooding, they actually produce more than 20% of NFIP claims. In these areas, flood insurance is not federally required, but your lender may require it.
  

How Your Mortgage Lender Can Make You Pay for Flood Insurance

If your lender or federal law requires that you have a flood insurance policy on your home and you let it lapse or are not carrying the proper amount of flood coverage, your lender can put a policy in place and bill you for it. It is written directly into the fine print of your mortgage that they have a legal right to protect their asset (your home) against flood damage.

Force-placing insurance ensures that their asset is protected in the event it is damaged or destroyed by flooding.

Letting a policy lapse simply means that you neglected to the pay the premium and the policy is no longer active, so there is no flood insurance on your home. If it floods, you are on your own.

A lapse can happen for a number of reasons.You may accidentally forget to pay your premium. Your insurer could cancel your policy due to numerous claims. It's possible that you simply can’t afford the policy and let it lapse.

Once a lapse occurs, your lender can purchase a flood policy and bill you for the cost of that policy. This type of policy goes by a number of names, but the most common is force-placed flood insurance. It can also be referred to as lender-placed flood insurance or credit-placed insurance.

A force-placed policy shouldn’t appear out of nowhere; there are notification requirements. A lender must send you a notice 45 days before they can force-place a flood insurance policy. If you fail to provide proof of coverage in that time period, say hello to your new force-placed flood policy.

How Much Does Force-Placed Flood Insurance Cost?

The NFIP sets flood insurance prices, so a force-placed policy should not cost any more than a policy you can buy in the open market. But if you haven’t been carrying flood insurance, the cost of your new flood policy can be shockingly high. While the average premium is $700 a year, premium costs can easily range up to $2,000 a year or higher if your property is in the wrong place.

The NFIP takes a number of factors into account when setting premium prices, including:

• The amount and type of coverage being purchased
• Location of the home and flood zone rating
• The age and design of your home

The NFIP will write policies that cover up to $250,000 for the structure of your home and $100,000 for personal property. If you need more coverage than that, you will have to shop for excess flood insurance in the private market, and that can be extremely expensive.

While a flood policy may not be required when you purchase the house, if flood maps change, you could suddenly find yourself in the middle of a flood plain. Your lender will notify you of the status change and you will need to purchase a flood policy. If you fail to provide proof of flood insurance in a timely manner, a force-placed flood insurance policy is headed your way.

What Should You Do About Lender-Placed Insurance?

If your policy has lapsed or your lender has sent you a 45-day notice that you need to add or update a flood insurance policy, there a few things that you should do.

1. Pay up: The first thing you should do is pay the premium. While you may disagree with the need for flood coverage or the amount of flood insurance being imposed, if you refuse to pay, the bank can initiate foreclosure proceedings.
2. Contact your mortgage lender: The next step is to contact your mortgage lender to determine why you need flood insurance if the requirement is a new one.
3. Get a policy: Contact your insurer and purchase the proper levels of flood insurance.
4. Remove the force-placed policy: Once you have proof of your policy, send copies over to your mortgage lender and ask them to remove the force-placed flood insurance and refund any duplicate coverage premiums that were paid.

Be aware that if you have a flood policy in place already and let it lapse, there is a 30-day grace period, during which time you will still have coverage.

How to Avoid Forced Placed Flood Insurance

The best way to avoid a surprise force-placed flood insurance policy is to be diligent about your insurance policies. Here are a few tips for avoiding a forced-placed policy:

• Be aware of the flood insurance requirements of any property you are considering and get a quote before signing on the dotted line to ensure that you can afford to insure your new home.
• Read your mortgage paperwork regarding flood insurance to see if your lender requires a flood policy and the consequences if you do not have the proper coverage or let your policy lapse.
• Always pay your homeowners and flood insurance bill on time.
• If possible, set up an automatic payment to avoid missed payments.
• Open and read any notices sent to you by your insurance company and your mortgage company.
• If for some reason your flood policy does lapse, immediately contact your insurer to get it reinstated.

Remember, even if your home doesn’t require flood insurance when you purchase it, requirements can change over time and your lender or the NFIP may require it some time in the future.