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Whenever a loan is obtained for a building or mobile home the lender is required to perform a flood hazard determination. This includes completing a Standard Flood Determination Form that is provided by the Federal Emergency Management Agency. Flood insurance will be required of the borrower if the building or mobile home is determined to be in a Special Flood Hazard Area.
The amount of coverage needed for a flood insurance policy depends upon the value of the building and/or contents to be insured. Premiums are based on the amount of coverage and whether there is a basement or enclosure. Policies can be purchased for the building and contents or for the contents of a building only. The maximum amount of coverage that can be purchased for a flood insurance policy is $250,000 for the building and $100,000 for contents.
Lenders can calculate the amount of flood insurance that is required in a variety of ways. One way in which a lender can calculate the amount of coverage that is needed to have an insurance company provide an estimate. The calculation of flood insurance should
be the same as calculating the coverage that is needed for a homeowners insurance policy. This includes an estimate of rebuilding costs if a home is completely destroyed.
The amount of flood insurance that is needed for compliance with federal law is based on the lowest value of various requirements. These include the outstanding balance of a loan or the maximum amount of coverage provided for a building by the National Flood Insurance Program. Another requirement is using the replacement cost value of the building or its full insurable value. The market value of a building should not be used nor should the value of any land.
Lenders, such as banks or mortgage companies, that provide a loan to a borrower may need to force coverage placement on that borrower. This can occur when a borrower fails or refuses to obtain or maintain coverage for a flood insurance policy. When a lender is forced to purchase a flood insurance policy the premiums can be included in the payments that the borrowers makes for the loan. The same coverage calculations need to be used to determine the amount that is needed for a policy.