Flood Insurance Webinar Follow-Up

By:  Tammy LoVecchio, Gulfshore Insurance (Naples & Ft. Myers) and Greg Marler, Becker & Poliakoff, P.A., (Naples)

We were pleased to present a one-hour flood insurance webinar on August 19th.

We especially appreciate the interest shown and questions raised by the attendees. There were some recurring follow-up questions that warrant brief discussion.

Mortgagee Demands
First, it appears that several owners and associations have recently received demands from mortgage lenders to obtain flood insurance.  Some report being asked to increase the amount of current coverage above the maximum available through the National Flood Insurance Program (NFIP), that being $250,000 per home or unit, or in some cases, above the replacement cost of the property.  Some associations have even been threatened with force-placed insurance on the entire community.

As we discussed during the webinar, the most common source of the requirement to have flood insurance is the National Flood Insurance Reform Act of 1994, which requires most lenders to require flood insurance on any property located in a Special Flood Hazard Areas (SFHA).  But that Act, and all of the regulations and guidelines adopted by FEMA and government sponsored entities such as Fannie Mae, clearly only require flood insurance up to a maximum of $250,000 per home/unit.  It is not at all clear why these new demands are being made.  It is certainly within the authority of a lender to make risk management decisions and impose insurance requirements in excess of those imposed by the Act.  To determine if the lender can then force place insurance on you as a borrower, you must read your mortgage.  But there is no legal authority for a lender on a home or unit in a shared ownership community to force place flood insurance on an entire association.  Our advice is that you inquire directly with the demanding lender to determine its specific basis for making the request.

Homeowners’ Associations
Some questions seek clarification of flood insurance requirements for a homeowners’ association.  Because single family homes, and usually the lots on which they are built, are separately owned and freestanding, insurance on those homes must be obtained directly by the owner.  But what about an association’s clubhouse or other amenities?  Must the association carry flood insurance for those improvements?

Unlike condominiums, the law governing homeowners’ associations in Florida does not contain mandatory insurance coverage requirements.  But you should review your governing documents to determine if they contain insurance requirements.  Unless the association has a mortgage on its property, in which case it would be reasonable to expect there are insurance covenants, the only possible, remaining source of a flood insurance requirement on homeowners’ association-owned improvements is the fiduciary obligation of the board to protect and maintain the property against known or reasonably foreseeable risks.  We are not aware of any cases that have established that a homeowners’ association has a legal obligation to carry flood insurance.  But since the issue will likely arise only after a catastrophic flood loss when the stakes are high, there is some risk to simply dismissing the issue.

To add to the risk, directors and officers liability insurance policies typically exclude coverage for claims against the directors based upon the failure to obtain insurance.  It is true that the exclusion can be removed, but obtaining flood insurance is a condition of removing the exclusion.  This is akin to obtaining auto insurance on the condition that you agree never to own or drive a car.