First Circuit vacates District Court ruling that mortgagee can require flood insurance in excess of amount of mortgage

I posted here about the decision of the United States District Court for the District of Massachusetts in Lass v. Bank of America, in which the court held that under the terms of the mortgage agreement that mortgagee bank could require the homeowner to have more flood insurance than the bank's interest in the property (in other words, more than the mortgage amount).

The United States Court of Appeals for the  First Circuit has now vacated that decision and remanded the case.  In Lass v. Bank of America, __ F.3d __, 2012 WL 4240504 (1st Cir.), the court held that although the pertinent mortgage provision gives the lender discretion over the amount of flood insurance, a supplemental document given to the borrower at her real estate closing may be read to state that the mandatory amount of flood insurance imposed at that time would remain unchanged for the duration of the mortgage. 

The mortgage agreement required the borrower to have flood insurance to "be maintained in the amounts and for the periods that Lender requires." 

A separate document, entitled "Flood Insurance Notification," stated, "At the closing the property you are financing must be covered by flood insurance in the amount of the principle [sic] amount financed, or the maximum amount available, whichever is less.  This insurance will be mandatory until the loan is paid in full." 

Lass obtained flood insurance equal to $40,000, the full amount of her loan.  She subsequently voluntarily increased the coverage to $100,000. 

The lender later told her that she needed an additional $145,086 in flood insurance, to reflect the replacement value of the improvements on the property. 

Lass refused to purchase the additional insurance.  After notice to her, the bank purchased it for her and charged her escrow account for the premium. 

Applying contract interpretation principles, the court held that the mortgage and notification, taken together, are ambiguous as to the lender's authority to demand increased flood coverage on Lass's property.