Limitations on Forced Flood Insurance Coverage by Mortgage Holders in California

Michael Papuc
Attorney at Law
44 Montgomery Street
Suite 2405
San Francisco, California 94104
415-773-1755
Fax: 415-723-9703

email:  Michael.Papuc@gmail.com

San Francisco attorney Michael Papuc represents policy holders in lawsuits against their insurance companies for bad faith claims handling.

Many homeowners in California who live near flood zones are faced with prospect of having to purchase flood insurance when the flood maps are re-drawn to place their homes within the flood districts. When this occurs, the mortgage holder typically has a clause in the deed of trust which allows the mortgage holder to require the homeowner to purchase flood insurance.

The National Flood Insurance Program, through private insurers, offers insurance policies for buildings, for contents, and for combined coverage for both structural damage to buildings and loss of contents. A residential building only policy covers up to a maximum of $250,000, while a contents only policy covers up to a maximum of $100,000. The combined coverage policy covers the building up to $250,000 and the contents up to $100,000.


Under California law, the mortgage holder can require the homeowner to purchase insurance to cover the building only up to the amount of debt on the property. "(T)he beneficiary of the deed of trust only has an interest in insurance proceeds ... when his security is impaired. Even then, his interest extends only to the extent of the impairment." (Kreshek v. Sperling (1984) 157 CA3d 279, 282; Washington Mut. Bank v. Jacoby (2009) 180 CA4th 639, 646.) "A mortgagee’s insurable interest under an insurance policy is limited to the amount of the debt." (Washington Mut. Bank v. Jacoby (2009) 180 Cal.App.4th 639, 646-647; Altus Bank v. State Farm Fire & Cas. Co. (C.D. Cal. 1991) 758 F.Supp. 567, 571.)

Thus, if the amount of the outstanding debt on the property is only $100,000, the lender cannot require the homeowner to purchase the maximum amount of insurance of $250,000 allowable under the National Flood Insurance Program. The maximum amount of flood insurance the lender can require the homeowner to purchase in California is the amount of the debt.

When lenders force coverage on a homeowner who is newly placed in a flood zone due to re-mapping, the language of the insurance policy the lender purchases will limit the lender’s recovery to the lender’s insurable interest in the property, which is the amount of debt on the property. This language will be found under the insurance policy’s "Conditions."

Homeowners in flood zones are free to purchase whatever amount of flood insurance they feel comfortable with. However, they are not required under California law to purchase more than the amount of the remaining debt on the mortgage on the property.