When a consumer borrows money from a financial institution to finance the purchase of a home, the lender will usually require the borrower to carry insurance on the property. This insurance requirement protects the lender's financial interest in the mortgage. Keep in mind, however, that the minimum amount of hazard insurance required by a lender does not always protect your investment entirely. Learning the difference between insurance the bank requires and what you actually need will help you protect your assets.
Hazard insurance required by banks does not include the comprehensive coverage portion of an insurance policy that a homeowner needs. For one thing, liability coverage is excluded. Liability coverage protects your assets in the event someone is injured on your property or because of some danger posed by your property. In addition, hazard insurance does not protect your personal possessions and business equipment is generally excluded. Expensive items like art and collectibles are not usually covered under hazard insurance, so you need to get a policy that will also protect you against these losses.
According to the Comptroller of the Currency, if a property is located in what is deemed a Special Flood Hazard Area and flood insurance is available through the Flood Disaster Protection Act, lenders subject to federal regulatory policies will require that borrowers contract flood insurance. In regions that are not part of the special flood areas, it is up to the lender to decide whether flood insurance is required. A bank may have this as part of standard procedures for a consumer to obtain a mortgage loan.
Most basic hazard insurance policies exclude natural disasters unless the perils are specifically written into the policy as an added provision or rider. Across the United States, homeowners experience different conditions depending on the region of the country. For example, if you live in Florida you are more subject to hurricanes and wind damage than if you live in South Dakota. In addition, although floods can happen almost anywhere, certain areas are more prone to flooding than others. The bank will generally require the borrower to obtain the appropriate coverage for the area in which the property is located. You want to be sure you're covered for the hazards that prevail in your area.
Force-placed Hazard Insurance
In instances where a borrower does not follow through in maintaining hazard insurance, the lender may contract a policy without the consent of the property owner. This force-placed insurance, as it is called, can cost you much more than if you contracted the insurance on your own. The bank may send you notice that a particular type of hazard insurance is needed on your property. If you receive such a notice, contact your financial institution and work out the details of the coverage you need. Failure to heed the directives of your lender can result in extra expenses tacked onto your mortgage.
- FDIC: FIL-81-2001 Summary of Flood Insurance Requirements
- FDIC: Supervisory Insights Wind Hazard Insurance
- Nolo: Homeowners' Insurance What You Need to Know
- The New York Times: How to Handle Force-Placed Insurance
- U.S. Department of the Treasury Comptroller of the Currency: Answers about Flood Insurance
- U.S. Department of the Treasury Comptroller of the Currency: Answers about General Property Insurance