In 1994 Susan Lass took out a mortgage on her house, which is an area that is designated under the National Flood Insurance Act as a special flood hazard area. (For older posts on flood insurance legislation, see here and then scroll down.)
As a named plaintiff in a class action lawsuit Lass alleged that Bank of America, the mortgagee, breached her mortgage contract by requiring her to have more flood insurance than was required under the terms of her mortgage and more than BOA's financial interest in the property.
In Lass v. Bank of America, N.A., 2011 WL 3567280 (D. Mass. 2011), the United States District Court for the District of Massachusetts noted that the NFIA prohibits federally-regulated lenders from giving loans secured by real estate in a special flood hazard area in which flood insurance is available unless the property is covered by flood insurance "in an amount at least equal to the outstanding principal balance of the loan or the maximum limit of coverage made available . . . , whichever is less."
Lass's original lender, RMC, required her to maintain insurance in the amount of her loan balance. In 2007 she chose to increase her coverage to $100,000.
RMC transferred the loan to BOA, which required her to increase her flood insurance to $145,086, the replacement value of the improvements to her property. When she did not purchase the additional insurance, BOA purchased it for her and paid for it out of her escrow account.
The court held that BOA did not breach the mortgage contract, because the contract requires Lass to maintain flood insurance "in the amounts and for the periods that Lender requires."
The real question is: Why would a homeowner with property in a flood zone not insure the property to replacement value? Weather patterns are getting more extreme. Insurance protects your investment. We quibble over exclusions and exceptions, but overall: Insurance is good. Make sure you have enough of it.