Buyers and Exercise Due Diligence on Flood Zone Determination

As part of the home buying process, lenders are required under federal law to determine whether the property is located in a flood hazard area. If it is, then the buyer will be required to purchase flood insurance. If it is not, then insurance is unnecessary. However, if it is later determined the property is in a flood hazard area, buyers will have to pay for flood insurance. The problem is that flood insurance premiums are expensive, and buyers argue they should have known about the expense prior to their purchase. Unfortunately, these buyers will have no recourse against their lender or its vendor the initial erroneous flood zone determination.

The National Flood Insurance Act was adopted in 1968, to aid in the economic hardship from floods and to standardize flood insurance. It requires lenders to determine whether property, that will be the subject of a mortgage loan, is located in a flood hazard area. To comply with NFIA, lenders contract with third parties to make the flood zone determination. In accordance with federal law, if the property is determined to be in a flood zone, the lender then has to provide notice to the buyer and information on the availability of flood insurance from the government or private insurers. The lender may escrow flood insurance premiums along with homeowner’s insurance and property taxes.

Forced placed insurance is required if the lender later determines that the house has less coverage than is necessary or no coverage at all. If forced placed insurance is necessary the lender will notify the buyer and if the buyer does not obtain insurance within 45 days, the lender will purchase a policy and bill the buyer for the premiums.

Because a lender’s duty to obtain a flood determination for purposes of flood insurance is created by federal statute, a buyer is precluded from any cause of action arising out of the lender’s flood determination. A case out of North Carolina illustrates federal cases on this point. In that case, the buyer obtained a mortgage from a lender, and as part of the process, the lender obtained a negative flood zone determination. The buyer proceeded with the purchase believing the property was not located in a flood zone and that flood insurance was not required. Years later when the buyer tried to refinance his mortgage, he learned that the property was in fact in a flood hazard area and the initial determination was in error.

The buyer sued his lender and the vendor that provided the initial erroneous flood zone determination. In dismissing the buyer’s lawsuit, the Court noted that both federal and state courts refuse to allow either federal or state common law causes of action arising out an erroneous flood zone determination. In short, neither the lender nor the lender’s vendor could be liable for their failure to correctly determine that a property was located within a flood zone.

Buyers purchasing property that is even remotely located near a flood zone should exercise their own due diligence to determine whether their property will require flood insurance. FEMA provides a flood hazard map for public use, and based on the property’s address will also provide relative risk levels for flooding. Buyers can also consider retaining the services of a professional such as an engineer, surveyor, or architect to make the determination. In the end, buyers should appreciate the risks associated with a property in a flood zone and take action to familiarize themselves with the associated costs. Here’s more about deductions for destroyed property.