Flood Insurance, Force Placement, and Gap Period

Issue/Inquiry

When a flood insurance policy came up for renewal, the Bank determined that the amount of insurance was inadequate.  It reached out to the insurance agency, which increased the amount of coverage and gave the Bank a bill. The issue is that there is a 30-day waiting period before the new coverage goes into effect. Is the Bank required to force place the shortage for that gap period, even though it knows that there will be coverage in 30 days? The Bank does have a blanket coverage policy that will protect it during the gap period.

Response Summary

The failure to provide the forced placement notice when the Bank determined that the coverage provided by the existing policy was inadequate would be considered a violation of the Flood Rules. While the effective date of the new coverage is within the 45-day period of the notice, the Bank should send out the notice anyways, in order to mitigate against any penalty and protect the Bank in the event of an occurrence preventing the new coverage from going into effect. During the gap period, the Bank should be protected by its blanket coverage policy.

Response Detail

The Flood Rules indicate that if a financial institution determines, at any time during the term of a designated loan, the building securing the designated loan is not covered by flood insurance or is covered by flood insurance in an amount less than the amount required, the institution must notify the borrower that flood insurance should be obtained, at the borrower’s expense, in an amount at least equal to the required amount, for the remaining term of the loan. If the borrower fails to obtain flood insurance within 45 days after notification, the institution or its servicer must purchase insurance on the borrower’s behalf. 12 CFR 339.7(a).

This means that when the Bank determined that the existing policy provided insufficient coverage, it should have sent out the required forced placement notice to the borrower. It might also contact the insurance provider, as it did, but the notice is required by the Flood Rules. The failure to send it out is a violation.

The Bank now has proof of flood insurance coverage for the difference between the coverage provided by the existing policy and what is required under the Flood Rules. While the new policy providing this coverage, it does not go into effect for 30 days.

In a similar situation, a source of federal guidance indicated that a blanket policy can be used when NFIP insurance is unavailable or when a policy has expired and the borrower has failed to renew coverage. For example, when a policy has expired and the borrower failed to renew coverage, a blanket policy can be adequate protection for the financial institution during the 15-day gap in coverage between the end of the 30-day grace period after the policy has expired and the end of the 45-day force-placement notice period. However, the institution must force-place insurance in a timely manner and may not rely on the blanket policy as a permanent solution. Federal Reserve Bank of Philadelphia, Consumer Compliance Outlook, Second Quarter, 2008.

In this situation, the Bank is aware that flood coverage in a sufficient amount will take effect in 30 days. As with the example of the expired insurance coverage, the Bank’s blanket policy will provide coverage until the new policy goes into effect. Since the 30-day period before the new coverage goes into effect is well within the 45-day period of the forced placement notice, providing the notice now may seem unnecessary.

The Bank should send out a forced placement notice anyways to have the protection of the notice in the event of an occurrence preventing the new policy from going into effect. The delay in providing the notice may still be considered a technical violation, but it could be mitigated to an extent by providing it at this time.

This response is for informational purposes only and is not intended for legal guidance.

This entry was posted on Monday, October 26th, 2020 at 9:38 am.