Flood Insurance Requirement Nightmare

[mathewbailey08]

Hey Everyone, this is a bit of a long story, but I'm hoping someone can provide some direction on our options.

TL;DR - Mortgage company wants to charge us extra for not having flood insurance when we didn't originally need it, only found out about it recently (FEMA map change) and added it after they told us to. Can they do this?

So we've lived in our home for 10+ years. The community was newly built at that time and the builder raised all the properties 7-8' to take us out of the flood zone (AE) and filed an LOMR-F to put us in X. This has been a bit of a pain since when we got our first mortgage, as well as when we refinanced about 5 years ago, we had to jump through hoops proving that we were NOT in a flood zone. Everything was fine until about a month ago.

Our mortgage is with PenFed, and we got a letter from them (or more specifically I believe their outsourced insurance monitoring service mycoverageinfo.com) saying that our flood insurance had 'lapsed' and we needed to get insurance and provide proof of it in 45 days, otherwise they would purchase an expensive policy for us. The letter was dated 11/23, but we didn't get it until the first week of December. Originally, I thought it was the same old problem we had, where they didn't realize we were not in a flood zone. I called and spoke to someone, explained all this, and they said to email our documentation to [penfed@mycoverageinfo.com](mailto:penfed@mycoverageinfo.com) and someone would review it within a week. I did that, but never heard back.

Around the end of December, I get a 'final notice' to buy our own flood insurance otherwise they would charge us ~$2000/year for their own. The letter was more of a plead saying that they strongly recommend us getting our own to save money. At this point, I started doing some more research on the issue and found out that FEMA redid the flood maps around August of last year and we somehow got put into a flood zone. I reached out to FEMA and they said the previous LOMR-F wasn't renewed, which was likely a mistake, and to file a LOMA request to get it fixed. Unfortunately, this process could take months and I didn't have that long.

We decided to just purchase flood insurance in the interim to put the matter to rest with PenFed, and once we get the flood zone issue fixed, we could either drop it or get refunded the difference between AE and X. So we bought a policy on 1/3 for almost $1400 which went into effect on 1/4. We uploaded the info to mycoverageinfo.com and figured we were good to go at this point.

Unfortunately, that wasn't the case. We got a letter yesterday thanking us for showing proof of the new policy, but saying we had a 'lapse' between 10/1/2021 and 1/4/2022 and we either needed to show proof of coverage during this time or be charged $508 as a penalty.

This is insane. We never had flood insurance before, never needed it before, and we got the new policy within the time period they told us to. Now they want us to magically go back in time and get it on 10/1, over two months before they ever told us about the problem.

I called the number on the letter, again I think this is the outsourced company, and explained the situation. They agreed that it doesn't make sense, but said the mortgage contract requires us to have flood insurance if we are in a flood zone, etc. I said that's fine, but we weren't in one and only recently got put into one and are working to get that fixed. She said there wasn't anything she could do, but she escalated the ticket and I should get a response in about a week.

I plan on sending emails out to PenFed directly to try and explain how, IMHO, this situation is ridiculous. We bought a policy we really shouldn't have needed, paid $1400 for it, and now they want to basically fine us over $500 for the period of time before they even told us about the issue. It's bad enough that we had such a large initial OOP expense, but the $500 fine is basically salt in the wound and was never once mentioned in the previous letters.

Is this legal/permitted? Is there anything else we can do to dispute this extra fee if they come back refusing to remove it? The rep I spoke to kept saying "lapse" in coverage, but it wasn't a lapse since we never needed it before and followed their directions to get the situation resolved.

Thanks!

 

[nay_sayer]

@mathewbailey08 Since you are now mapped into a high risk flood area, you are required to have flood insurance. This requirement triggers the date that the map change is official. This additional "fee" is for retroactive coverage that protected you during the time between the map change and when your own policy started.

You may or may not have success with getting a new LOMA/LOMR because there could have been other things in the area (flood control devices, channelized streams, upstream development, etc) that actually did increase your risk sufficiently that you're now in the SFHA.

 

[mathewbailey08]

@nay_sayer Thanks for the response!

I understand what you are saying, but based on what the letters said, they never actually provided any retroactive coverage. Both letters said IF I didn't purchase my own flood insurance within the grace period allowed, only then would they purchase it on my behalf. Specifically, they said "We plan to buy flood insurance for your property if we do not receive proof of adequate flood insurance within 45 days after the date of this letter... You must pay us for any period during which the insurance we buy is in effect." I complied with this request within the prescribed time period and they confirmed I am in compliance. But now they are basically charging me what seems to be just a fee for what their coverage would have cost between 10/1/21 and 1/4/22. At no point did they ever say or indicate they purchased coverage for me during that time, so I don't see how it is justified to charge me for it. Especially since, until I received the first letter around 12/8, I didn't even know it was an issue. That was the first time anyone ever contacted me, and even if I purchased insurance that very day, they likely still would have said I owed them money from 10/1->12/8ish. I just don't see how that is fair or justified.

As to the LOMA, I am a little worried about that. The FEMA rep I spoke to didn't seem to think it was a problem. And based on the now-current map, only a very small portion of my house is technically "in" the flood zone, and the rest of the house is at the exact same elevation, etc. so it seems like they just didn't calculate the correct elevation. It's going to suck if I can't get them to fix it, but I'll do whatever I can to hopefully get it changed back.

 

[nay_sayer]

@mathewbailey08 I truly don't know the answer to this, but laying out how this could be interpreted. This is a lending/servicing issue, not an insurance issue, so it's enough out of my wheelhouse for me to be certain about this.

We have to treat that 11/23 date of their letter as the start of the clock, since it says "within 45 days after the date of this letter...", unless you have the envelope that's postmarked vastly differently from that date (the "lost in the mail" excuse doesn't fly without extenuating circumstances). You purchased flood insurance that was effective 42 days after the date of the letter, so you can check that box.

Federal Law (42 USC 4012a(e)(3), but I'm not a lawyer) then says that within 30 days of you providing proof of coverage, the lender/servicer must refund you for the force placed coverage "during any period during which the borrower’s flood insurance coverage and the insurance coverage purchased by the lender or servicer were each in effect". So if the force placed coverage they purchased was in effect from 11/23 to 1/23, you'd be entitled to a refund of a portion of it, the portion from 1/4 to 1/23, but not the portion from 11/23 to 1/4 (for instance).

The part I don't know about is the chunk from 10/1 to 11/23. But they might not be charging you for that, you'd have to ask them that. But again, the date that started the timer was that 11/23 date. I would try escalating to PenFed, and a supervisor, focusing in particular on the fact that it seems you're being backdated to 10/1, before the 11/23 date demanding action. In terms of regulation, this is a banking issue, not flood insurance, so CFPB is probably the best bet if PenFed can't answer that 10/1-11/23 gap and tell you precisely what days you're being billed for coverage.

EDIT: Strictly speaking, there was a gap from 10/1-11/23. Someone is responsible for it. The question is whether it was you or PenFed.

only a very small portion of my house is technically "in" the flood zone

If any portion of the home is in the flood zone, the whole home is considered in for requiring it. I know you don't want to pay for this, but it would really suck if you decided to get out on a technicality and then have a flood. Flood cleanup sucks, and even if you're not in the highest risk area, you're so close it might as well be the same.

 

[mathewbailey08]

@nay_sayer Thanks for the detailed reply.

To clarify, the letter I received yesterday said:

"Our records still show that there was a lapse in coverage from 10/01/2021 to 01/04/2022. An insurance charge of $508 may be charged to your account for the period of time that the coverage was in force. In order to avoid this charge or have it reversed from your account, please provide us with evidence of insurance for this lapse period."

The rep I spoke to this morning actually told me to ask the company I got my flood insurance from to see if they would back date it to 10/1/22, which I don't think is possible or legal.

So it definitely looks like they are trying to charge me going all the way back to 10/1/21, not just 11/23/21 when they printed out the letter. Based on their earlier quote of ~$19xx for lender provided flood insurance, it also sounds like that $508 is the prorated amount from 10/1-1/4. So even if the clock started ticking on 11/23, that should only be about half of what they are asking. And it's still confusing because the letter says "may" charge me...

It just seems very confusing since the first two letters clearly said they were going to buy it, not that they had already. Though maybe they can retroactively do so?

In any case, I'll definitely be sending emails to various PenFed people to hopefully get this straightened out. If they do end up charging me, I'll certainly file complaints with CFPB, etc. since it doesn't seem right what they are saying they will do.

Is flood insurance on mortgaged homes actually required legally, or just by company policy? I always assumed it was the latter to minimize liability, not that they had to have it by law or anything like that.

And to your last point, when (if) we get it changed back to X, I'll probably keep the flood insurance. But I'd rather pay the $400/year for X vs $1400 for AE if I can help it.

Thanks again.

 

[nay_sayer]

@mathewbailey08

Is flood insurance on mortgaged homes actually required legally, or just by company policy?

It's been a Federal law requirement since 1974.

But I'd rather pay the $400/year for X vs $1400 for AE if I can help it.

FEMA has introduced new rates that don't take the zone into consideration whatsoever for pricing purposes. Since you bought your policy after 10/1 (dates are a coincidence, I swear), you should already be on that new rate plan. You can check on your flood insurance declarations page, it'll say something like "rating method computer". If it says that, that'll be the rate you pay regardless of your letter zone.

 

[mathewbailey08]

@nay_sayer Wow, this is just getting worse and worse...

I just checked the declaration and Rate Category says 'FEMA Rating Engine'.

The rep at USAA (where I bought the policy) did mention something about how not only did the FEMA maps change recently but so did the way that they determine rates. He said something along the lines of how, prior to this change, everyone in Zone X paid the same amount regardless of actual risk, whereas now they use other factors to determine rates. But he did say that while I might end up having to pay more going forward even in Zone X, it should be less than AE if I can get it changed. I asked about this because I wanted to see what would happen when/if they change it back, and he confirmed I would get a refund (he wasn't sure if it would be prorated or not) when/if the zone changed back to X. But you're saying that my bill would still be $1400ish regardless of zone now?

While I could have gotten less coverage for a little bit of savings, I ended up maxing it out at $250k in coverage because he said that would be give me replacement value vs actual cash value, and the only way to get that would be to get the max (250k) coverage. The price difference was like $100/year so I figured in for a penny in for a pound...

 

[nay_sayer]

@mathewbailey08

He said something along the lines of how, prior to this change, everyone in Zone X paid the same amount regardless of actual risk

Yep. Spot on. You, just barely outside of the high risk zone, would be paying the same rate as some house on a mountain in a desert.

But you're saying that my bill would still be $1400ish regardless of zone now?

To my knowledge, there aren't any situations where changing the zone would change the rate. This whole thing is still new so there may be nuance I haven't run across, but I'm not aware of any.

Living in Florida, you should check to see if there are any private flood options available. USAA doesn't sell any, but if you Google "independent insurance agent" and your area, you can ask and have them look around. It may not be available depending on your mortgage, though. FHA doesn't allow it and I'm not sure about VA (guessing with Penfed and USAA...), but it's worth looking into to see if there are cheaper options.

 

[mathewbailey08]

@nay_sayer I'll definitely check out private flood insurance next year, assuming I can't get the zoning/price/etc. resolved and am forced to keep it at the higher cost. I am completely new to flood insurance so didn't really know how best to proceed, especially given the time crunch, and kind of just assumed that FEMA backed policies would be better and the pricing fixed so no point in shopping around, etc. From what I read, after the fact of course, private insurance can actually be cheaper, though somewhat more risky as you can be dropped if they change their mind later on and think you are too high a risk yourself.

As to our mortgage, it's just a conventional loan, though I can see how the PenFed/USAA combination could indicate otherwise. I have USAA membership through my dad who was in the military, and I got PenFed through one of the affiliate programs where they can let anyone join. Our regular HOI is through AMI (via AAA), and had been pretty inexpensive since we moved in, with the rate staying between $900-1100 all those years, and actually going down in some. But this year our renewal came in at $1800 and change out of the blue. We couldn't get USAA when we first bought the house, because at the time they would only cover home insurance for people here on active duty orders, but since then they've changed and opened it up to anyone. But when I got a quote a few years ago, it came in MUCH higher than AMI was charging us so we didn't consider switching. But now it's probably worth shopping around a bit. Sadly, the flood insurance through USAA wasn't subject to any membership discounts nor does it qualify to discount other products because of the government fixed rates and whatnot.

 

[resjudicata]

@mathewbailey08 I’m an Underwriter for property and typically we exclude flood coverage for flood zone AE.

When you say you “maxed out at 250k” to get RC over ACV, what did you mean by that?

 

[mathewbailey08]

@resjudicata According to the person I worked with at USAA to get the policy in place, he said that with the FEMA policy I could only get coverage up to $250k. So that was the maximum coverage. But he also said that by getting the $250k coverage, it would provide us with replacement value on any claims. He said if we went with a lower coverage amount, say $200k, that the claim would be paid based on actual cash value which would be substantially less on any damaged stuff.

 

[resjudicata]

@mathewbailey08 Ok, I am a little confused is your policy with USAA or with NFIP?

Typically all your property is valued at RC unless there’s an endorsement or term/condition saying property is valued at ACV.

To be honest I work in commercial insurance and not for USAA, so I may just be cluttering your comments section.

 

[mathewbailey08]

@resjudicata I’m obviously far from an expert in this matter but my understanding is my policy is a NFIP plan that was sold and managed by USAA. It’s not private insurance. USAA is simply the reseller or whatever you call it.

 

[thebiblesays]

@mathewbailey08

The rep I spoke to this morning actually told me to ask the company I got my flood insurance from to see if they would back date it to 10/1/22, which I don't think is possible or legal.

You would broadly be right.

Is flood insurance on mortgaged homes actually required legally, or just by company policy?

I mean, the term legally means a lot of different things. You are only required to have homeowners insurance because of the terms of your loan. Federally conforming loans that use standards loan forms and markets are going to require the same things. The only personal lines insurance that is required by statute in most of the US is auto liability insurance in most states, (well and of course, health insurance under the ACA.) There will also be commercial insurance requirements, like to be a licensed contractor you must be insured and/or bonded, but that is driven much more by local rules.

For the same reason the loan company requires you to carry homeowners coverage, they will require you to carry flood if you are a flood risk. They also stipulate that homeowners coverage must be an amount to rebuild the house, that it needs to cover X things about the house (they don't like policies that exclude the roof or siding) the deductible needs to be under a certain amount, etc. Honestly, you would get the same sort of letter if your HO3/HO5 coverage lapsed, because it's in the terms of your loan contract. Your loan contract, I assure you, somewhere says, "if home exists in a designated FEMA flood zone of X or higher risk, buyer must provide proof of adequate flood insurance on the property, (blah blah blah legal language etc.)

Sucks that you live in a flood zone area now. That can also effect your normal policy in the future if it doesn't change back. I wish you the best of luck.

 

[mathewbailey08]

@thebiblesays Yeah, the letter stipulated that I needed to get flood insurance coverage at a minimum of my outstanding mortgage balance and the deductible couldn't be more than 1% of the coverage. I ended up going with the max coverage ($250k), which was more than I needed, since the rep said that was the only way to get replacement value vs ACV for claims and the price difference (~$1300 vs ~$1400/year) was negligible.

Regarding your last line, my HOI, which for 10 years has been basically the same price give or take $100 since inception, just went up about $800 this year. I think the renewal was just prior to the FEMA change so maybe it was a coincidence, but I wonder now if it was related. We've never had a claim or anything and I read rates in FL have gone up a lot due to hurricanes and whatnot.

Well I guess I'll see what they came back with. The whole thing just seems to ridiculous. It's enough to make me want to just move to the top of a mountain or something. Thanks again.

 

[thebiblesays]

@mathewbailey08

Regarding your last line, my HOI, which for 10 years has been basically the same price give or take $100 since inception, just went up about $800 this year.... I read rates in FL have gone up a lot due to hurricanes and whatnot.... It's enough to make me want to just move to the top of a mountain or something. Thanks again.

You're in FL? Oh man this is the tip of the iceberg. The whole state is going to be high risk flood within a decade, and every carrier is taking as much rate as they can.

My suggestion is to move now. The Florida market is a huge bubble because of this, (It's an exaggeration, but the climate change impact on Florida is probably the biggest in North America.) At some point it wont be financially feasable to live in a lot of FL, and then the question is who pays for the property? No one is going to buy a house that is worth $250,000 but has a annual insurance premium of $25,000, let alone the mortgage.

The insurance companies rates are reflecting this. Claims volume and severity is way, way up in the southeast, and only appears to be accelerating.

Come to MN. It's great here. We still get plenty of big storms, and our rates reflect that, but there isn't a serious risk of the whole state becoming designated flood plane anytime soon.

 

[mathewbailey08]

@thebiblesays Trust me, I wish we could move, but given jobs, school and family stuff, that isn’t an option right now. Both my wife and I are originally from up north and I definitely miss the seasons among other things. Eventually we plan on moving, but probably not for a few more years. Hopefully our house won’t be under water (literally) by then. Fortunately, it definitely isn’t figuratively under water since, just in the past year, we’ve seen a crazy rise in home values. Our home value has probably gone up to about 250% since we bought it 10+ years ago. However, one other concern I have if we are now in a flood zone (assuming I can’t get back out of it) is how that might affect selling it and if it could impact the price.

 

[thebiblesays]

@mathewbailey08 I predict that housing in FL goes crazy, where a bunch of homes become unaffordable to insure and there is a rush on the homes that are still occupy able for the time being in the state, while the rest of the market collapses.

 

[daroc585]

@mathewbailey08

"We plan to buy flood insurance for your property if we do not receive proof of adequate flood insurance within 45 days after the date of this letter...

The key word here is "adequate" - although their letter was dated 11/23, their definition of adequate insurance probably meant that it needed to be effective as of 10/01 (although they weren't clear about it on that letter). Sucks that they were vague and misleading.

The rep at USAA (where I bought the policy) did mention something about how not only did the FEMA maps change recently but so did the way that they determine rates. He said something along the lines of how, prior to this change, everyone in Zone X paid the same amount regardless of actual risk, whereas now they use other factors to determine rates.

This is correct. Risk Rating 2.0 is what they're calling it. It is similar to the way private flood insurers rate (instead of by geographical flood zone which covers a large area, it is more "per risk").

 

[mathewbailey08]

@daroc585 That makes a little more sense. Thanks.