I have tried for years to get FEMA, banks, mortgage lenders and other lending institutions to understand the way they are writing flood insurance policies for condominiums is incorrect. I understand that condominiums are but a small part of the residential community, but these owners are being ripped off by lenders who require them to purchase building flood insurance when they don’t need it.
These lending institutions require purchasers to buy flood insurance as part of their loan requirements. This cost is part of the purchase escrow to pay for taxes, property and liability insurance and mortgage insurance if needed. There are times when they will even force place coverage because what you have has lapsed or is not insured at 80 percent to loan value so you have replacement cost coverage.
The reason for this is the way condominium flood policies are being written by FEMA. The associations’ flood policies are the primary flood coverage for the building interior and exterior. The condo association can only purchase up to $250,000 per unit. Therefore a four-unit building would have a $1 million flood policy. Now according to FEMA, they will only pay up $250,000 per unit on a total flood loss.
So, if the association’s flood policies are primary and FEMA is only going to pay up to $250,000 per unit, why are banks, mortgage lenders and other lending institutions requiring buyers to purchase building flood policies on which they will never collect? Condominium owners should only need to purchase contents coverage.
The oddity of these FEMA flood policies are that the lenders want to be added as additional insured on the association’s flood policies as well. Can you imaging 100 lenders being involved in trying to settle a flood claim on an association flood policy?
The way they would handle it would be to escrow the association’s money for repairs and pay the association draws to assure their investment is repaired. You can’t build out the interiors until the building structure and sub-structure are completed. If a building cost $1 million to rebuild, there are no monies left to do build-outs on the interiors, and owners can’t collect on their own flood policies.
Congress and FEMA need to fix the issue of selling policies to condominium owners that they may never collect on a claim. What they are doing is fraudulent.
Maybe what FEMA and the government needs to do, like they are doing with health insurance, is make everyone buy catastrophe insurance for earthquakes, mudslides, floods, fire etc. and spread the risk. Insurance companies are getting to the point where they don’t what to include these perils in their basic coverage anyway.