When a customer doesn’t pay their flood insurance premiums and allows their flood insurance to lapse, financial institutions are required to force-place flood insurance for an appropriate amount.  While customers who allow their flood insurance coverage to lapse often do so because they can’t or don’t want to pay for such coverage, it can be difficult for financial institutions to collect for the premiums (or cost) of the force-placed flood insurance.

Flood insurance is a challenge for both consumers as well as financial institutions.  The rules are complex, cumbersome, and flood insurance can be extremely expensive - so expensive, in fact, that some consumers have found it more affordable to pay for forced placed flood insurance than to get a separate flood insurance policy.  While this this current trend can help to save the customer some money in the short run, it could cause some compliance challenges down the road.

We all know that the flood insurance rules apply when a loan is secured by a primary residence or a warehouse in which a business operates.  These situations are very straightforward and would seem logical to be subject to flood insurance rules. The challenge with flood insurance, however, relates to less common situations that wouldn’t seem logical for the rules to apply.  For example, many commercial lenders don’t think that flood insurance rules should apply when a structure is not given any value on an appraisal, even though it is technically part of the loan collateral.