This seems like an insurance rating question to me. If it were a new loan I'd want to see the policy updated to accurately reflect the type of building prior to settlement. (The bank has leverage at that point.) But for an existing loan, as long as the amount of insurance is adequate I don't see much recourse for the bank. To the best of my knowledge there's no guidance that requires the bank to make sure that the right type of policy is in place, only that there is adequate flood insurance (amount, flood zone, etc.). There are two issues that could be problematic though:
If there is a flood, FEMA would come in and realize that the policy underwriting was not correct for the building use. My understanding is that the policy would be rerated at that time and the customer would need to pay any additional premiums (in arrears) prior to FEMA processing the claim. So you may want to send the customer a friendly reminder to talk to their insurance agent about getting the policy corrected since the building use has changed.
The other issue is if the current policy is capped at the $250,000 residential max. I suggest you run another flood calculation using the non-residential limits and if the loan amount and/or insurance value are more than $250,000 an increase will be required. That will trigger the customer to move the policy to the General Property form to obtain the increased coverage and avoid force placement.
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