Is a Bank Required to Force Place Flood Insurance on the Contents of a Building?

Issue/Inquiry

The Bank inquires as to whether it is allowed to force place flood insurance on the contents of a building as well as on the building itself.

Response Summary

The Bank is not only allowed to force place flood insurance on the contents of a building as well as on the building, but it is also required to when both the building and its contents secure the loan and the building is located in a special flood hazard area.

Response Detail

When a loan is secured by a building located in a special flood hazard area and by a security interest in personal property, both the building and the personal property must be covered by flood insurance. 12 CFR 339.3(a).

If a financial institution determines at any time during the term of the loan that the building or any personal property securing the loan is not covered by flood insurance, or is covered by flood insurance in an amount less than required, the institution must inform the borrower to obtain flood insurance, at the borrower’s expense, in 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 is required to purchase insurance on the borrower’s behalf. The institution may charge the borrower for the cost of premiums and fees incurred in purchasing the insurance. 12 CFR Section 339.7.

In this case, the “personal property securing the loan” is the contents of the building. So, if flood insurance covering the building and its contents expires, the financial institution must notify the borrower of the borrower’s obligation to obtain flood insurance and force place flood insurance coverage on the building and its contents within 45 days after providing the notice, if the borrower has not provided proof of coverage within that time.

When a security interest is taken in the contents of a building located in a special flood hazard area, flood insurance is required for the contents only if the building is also securing the loan. For example, flood insurance is not required for a loan financing inventory, where collateral is stored in a building located in a special flood hazard area, but the building does not secure the loan.

However, if the loan is secured by the contents of a building located in a special flood hazard area as well as the building itself, but the institution discovers that only the building is covered by flood insurance, it must force place flood insurance coverage on the contents 45 days after it has notified the borrower that flood insurance coverage is required on the contents, and the borrower has not provided proof of such coverage within that time.

This entry was posted on Monday, August 22nd, 2016 at 3:00 pm.