Recent events have been highlighted in the press, regarding the redrawing of federal flood hazard maps and proposed increases in premium rates for flood insurance for property owners within special flood hazard zones, which may have a significant impact on the cost of home ownership in Florida and other states which are subject to coastal flooding as premiums for flood insurance increase and the areas located in special flood hazard zones increase. The National Flood Insurance Act, 42, U.S.C. §§ 4001-4129 (the “Act”), was enacted in an effort to promote affordable flood insurance. The Act, and regulations promulgated by federal agencies regulating lenders to implement the Act mandate that the lender require its borrower to obtain flood insurance on improved properties located in special flood hazard areas. Specifically, for Federal Housing Administration guarantied residential mortgages, HUD requires a standard covenant in each such mortgage requiring that the borrower insure the improvements as required by the lender for all hazards including floods to the extent required by HUD.
In the case of Feaz v. Wells Fargo Bank, N.A., the United States Circuit Court of Appeal for the 11th Circuit, just decided February 10, 2014, the Court held that the lender may require that the borrower maintain flood insurance coverage in an equal to the replacement value of a home (up to $250,000, which is the maximum amount of insurance required under HUD regulation). The HUD regulation, in fact, requires a minimum of insurance coverage in an amount equal to the lesser of the amount of the loan or $250,000. Nevertheless, the Court concluded that the HUD regulation did not require the lender to limit its coverage to the amount of a loan if that amount was less than $250,000 (the loan amount in Feaz was $61,000). The Court held that, under the uniform covenant promulgated by HUD, the lender was permitted to require coverage greater than the HUD minimum and could therefore insist on coverage for the replacement value of the home, up to the maximum amount of $250,000.
In this case the lender force-placed the additional insurance coverage when the borrower did not do so. The Court recognized a split of authority among district courts, but concluded that the uniform clause in the mortgage was unambiguous and upheld the dismissal of the borrower’s claim against the lender on a breach of contract claim and other theories. It appears that the impact of this decision will be limited to loans in amounts of less than $250,000 (secured by mortgages with the HUD uniform clause, encumbering improved property in special flood hazard zones), where the replacement value of the improvements exceeds the amount of the loan. Since this case involves the application of federal law, this decision (unless revised on rehearing or reversed) will be binding in federal and state courts located in Florida.