I have always understood flood insurance to work this way (in this instance residential 1-4 family):
Flood Insurance must be for the lesser of these amounts:
Max flood insurance: 250,000; value of dwelling less the land value, or the loan amount. In the case I am describing the loan amount is significantly less than the $250,000, yet the insurance company wants to insure the dwelling for more than $250,000.00. Is this even allowed by the law? Have I misunderstood this for years? Thank you for your help.

What a bank is required to obtain under banking law may not be the best risk decision for the customer. If you have a higher value property with a low amount loan, it is in the customer's best interests to properly insure the home to cover their risk, not just the bank's loan.

I don't know of anything that would prohibit it, but the question is whether it would be over-insured. What you've quoted is the amount of insurance a lender is required to obtain. However, a customer could want more coverage, especially in a case where there is a really low LTV ratio.

The bank must require the lesser of the 3 (aggregate balances of all loans secured by the building, the insurable value of the building, the max available under the NFIP for the structure). The bank can always require (or accept) more than the lesser of calculation.

My question would be why does the insurance company want to insure the structure for more than the NFIP maximum? If the insurer is a private insurer (ie Lloyds of London) it is possible for them to issue a policy for more than the NFIP max.

The insurance company is saying they won't insure it for any less because if there is a flood they could not rebuild the structure for the amount insured. Can you point me to anything in the regulation or Act that says that if the borrower wishes to obtain more insurance coverage the bank can't hinder that decision? Thank you.

The property may be worth more than the NFIP maximum. When I was working in private banking mortgage lending we required that the property be insured to value...if they could afford a multi-million dollar home, they could afford to insure it and we wanted our collateral to be covered.

Why would the bank want to hinder that decision? If the home floats away, do you want to be responsible for the customer being underinsured? The law requires the bank to demand a minimum. It is a good risk decision to require that the property be adequately insured. It makes no sense at all for a bank to demand only the minimum when a customer and their insurer (who is giving good advice) want proper insurance.

We would not want to force the borrower into taking on more risk, but we also don't want the regulators to come in and say we did not follow the rules or that we required the borrower to take on more insurance than what was required by law. Do you have any idea where I can find what you are describing in the regulation? Thank you.

Interagency q and a address this question.

16. Can a lender require more flood insurance than the minimum required by the Regulation?
Answer: Yes. Lenders are permitted to require more flood insurance coverage than required by the Regulation. The borrower or lender may have to seek such coverage outside the NFIP. Each lender has the responsibility to tailor its own flood insurance policies and procedures to suit its business needs and protect its ongoing interest in the collateral. However, lenders should avoid creating situations where a building is “over-insured.”

If the borrower WANTS more flood insurance than the minimum you are not requiring it (in reality banks should require as much as is available.)