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Common Flood Violation
How much flood insurance is enough? Too often, institutions make mistakes in the insurance requirements and require or accept insurance policies that provide too little insurance. Lenders and their customers tend to resist flood insurance and make attempts to minimize the amount of insurance that is necessary. In doing this, they fall into a trap. The mistake is subtracting the land value from the loan amount to determine the insurance amount. Wrong! To calculate the required insurance, you may subtract the land value from the total value of the collateral, but you may not use the loan amount as the starting point. Remember that there are two purposes for flood insurance. One is to protect the lender. The other, and perhaps more significant purpose, is to protect the property owner. You don't protect your customer by finding ways to reduce their insurance coverage.
Copyright © 2003 Compliance Action. Originally appeared in Compliance Action, Vol. 8, No. 4, 4/03
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