Can I Refuse to Pay for Forced Placed Flood Insurance?
Federal regulations require that homeowners whose homes are located in a flood plain or areas with a high risk of flooding purchase flood insurance through the National Flood Insurance Program. Lenders are required to force homeowners to purchase flood insurance through force-placed policies. Your lender will likely send you a bill with your mortgage statement. If you refuse to pay a disputed amount, your lender may decline to accept your entire payment, according to the Federal Trade Commission.
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Basics
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Buyers of high-risk homes are required to purchase flood insurance because the federal government insures most of the mortgages in the United States. Large natural disasters often cost the U.S. government huge sums of money. Federal agencies often pay for the clean-up while losing revenue on mortgages that aren't paid. The government defines high-risk areas as those with a 1 percent chance of flooding annually. This translates to a 26 percent chance of flooding over the life of a 30-year loan. Though private insurance companies act as salesmen for the NFIP, coverage through private carriers is rare. It is almost always more expensive than what the NFIP offers and typically features very large deductibles. Floods typically hit a large area and cause extensive damage, making flood insurance unprofitable for most companies. The NFIP, in 2010, was still paying off debts it incurred for damages from Hurricane Katrina in 2005, an indication that the program does not charge enough to cover the risk it insures even though it has ratepayers throughout the country.
Notice
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Banks are required to notify buyers that a home is located in a flood zone sometime before the purchase of a home. They make this determination based on a review of maps from the Federal Emergency Management Agency. These maps can change, and homeowners may find themselves in a flood zone. In these cases, a lender will notify the homeowner that insurance is required.
Cost
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Flood insurance is offered through the government-sponsored National Flood Insurance Program. The average policy is $570 per year. But lenders who force insurance onto borrowers are only required to purchase insurance that covers the outstanding balance of the loan. This means that force-placed coverage may be inadequate to rebuild a property. The policy -- even though it is paid for by the homeowner -- will only go to pay off a loan. At the same time, forced-place policies can be more expensive than voluntary ones.
Refusal to Pay
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If your lender bills you for flood insurance, it might be difficult to dispute it. They may not have to accept partial payments, and they may place your payment into a suspense or "hold" account. Under these situations, the lender may not consider your mortgage paid, late fees may apply and you could wind up in default of your mortgage. If you believe that insurance is required in error, you may dispute that determination with FEMA.
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References
- Photo Credit flood image by dinostock from Fotolia.com
