DOI Issues Bulletin On Statutory Notices Required For Residential Flood Insurance

Agency Checklists, MA Insurance News, Mass. Insurance News — Photo courtesy of the MA Division of Insurance.

On September 16, 2015 the Division of Insurance issued Bulletin 2015‑07, entitled “Mandatory Notice Requirement for Licensed Producers Selling Flood Insurance“. The stated purpose of the Bulletin is to “notify insurance producers licensed in Massachusetts of new requirements regarding a sale of flood insurance on properties located in the Commonwealth.” (Copies of Bulletin 2015-07 and the “Division of Insurance Flood Insurance Notice and Acknowledgement Form” mandated by the Bulletin are linked at the end of this article).

Chapter 183, § 69, mandates the new notice

As previously reported in Agency Checklists (“MA Flood Insurance Reform Bill Is Now Law”) the Legislature passed and the Governor signed G.L. c. 183, § 69 into law on July 23, 2014. G.L. c. 183, § 69 prohibits creditors or their representatives from requiring flood insurance coverage in an amount greater than the balance of a residential mortgage or loan under certain conditions. The statute requires not only the mortgage lender but also any insurance producer involved in placing flood insurance to give the insured a notice that states:

Please note that the flood insurance we are requiring you to purchase will only protect your creditor’s or lender’s interest in your property. Massachusetts law prohibits a creditor or lender from requiring you to purchase flood insurance in excess of the amount of your principal mortgage and, in the case of a home equity line of credit, home equity loan or second and subsequent mortgage,the full value of the credit line, outstanding principal on the equity loan or second or subsequent mortgage on that property at the beginning of the year for which the policy will be in effect.

The statutorily required notice continues to advise that:

the insurance to protect the creditor’s loan amount may not be sufficient to pay for many needed repairs after a flood and may not compensate you for your losses in the property due to the flood. If you wish to protect your home or investment, you may want to purchase more flood insurance than the amount we are requiring you to buy.

This notice is required where the creditor legally requires in the terms of its mortgage or loan for a purchaser or owner of a residential property of one (1) to four (4) units to purchase or pay for flood insurance on the property.

There is no requirement in the statute that the residential property be owner-occupied.

Bulletin, Banking Department regulation and statute requires separate notice to insureds by producer

Under the statute, a mortgage lender cannot require a purchaser or owner of residential property with 1 to 4 units to purchase or pay for a flood insurance policy that:

exceeds the outstanding principal mortgage balance or for other loans secured on such residential property the greater of the loan balance or the full value of the credit line, or
includes coverage for contents; or
includes a deductible of less than $5,000.00.

Section 2 of the statute mandates the Commissioner of Banks to promulgate regulations to implement Section 69 of Chapter 183. These regulations became effective on September 11, 2015 and provided for insurance producers that:

An insurance producer required to provide notice as set forth in M.G.L. c. 183, § 69 must provide such notice to the purchaser or owner of the residential property in clear and conspicuous print at the time the purchaser or owner is notified of the need to purchase or pay for flood insurance or at the time the purchaser or owner submits an application for flood insurance. (209 CMR 57.04(4)(a))

The Banking Department regulations also specified the role of the Division of Insurance to administer and enforce the legal requirements of the statute and the regulations by stating:

The Division of Insurance shall administer and enforce the requirements set forth in 209 CMR 57.04(4)(a) , including the determination of the form of notice to be provided by an insurance producer. (209 CMR 57.04(4)(b))

Bulletin 2015‑07, constitutes the DOI’s provision on administering the mandate from the statute and the Division of Bank’s regulations as to the form of the notice required.

Differences in Division of Insurance and Department of Banking notices

The mandatory regulations promulgated by the Division of Banks have a notice form that is similar but not exactly the same as the one that the Division of Insurance included in its Bulletin. The Division of Insurance form adds an additional paragraph that is not in the statute or in the Banking Department regulations. This extra paragraph entitled: “ACKNOWLEDGEMENT” states:

I understand that my lender cannot require me to purchase flood insurance above the amount of my principal mortgage balance, or purchase coverage for the contents of my property, or require a deductible of less than $5,000. I understand that if I choose to purchase flood insurance only to the limit of my principal mortgage balance, that I, and not the lender or insurance producer, will be responsible for any loss over that amount. I also understand that having a high deductible or failing to purchase coverage for the contents of my property could expose me to a significant loss should a flood event occur. My insurance producer has explained my flood insurance options and I understand that I am free to purchase flood insurance in an amount above the principal mortgage balance, with a lower deductible, and contents coverage. (Emphasis added).

This particular acknowledgement in the Division of Insurance form is unsigned, however. The actual acknowledgement states only that:

Each of the undersigned acknowledges receipt of a copy of the above Notice of Flood Insurance Coverage.

A careful agency that has explained the options available to its insureds may wish to consider having its insureds put their initials on the paragraph added in the Division of Insurance’s notice to avoid any subsequent claim that an insured did not, in fact, actually receive an explanation of their available insurance options.

Bulletin charges insurance producers to explain flood coverages to insureds

Any insurance producers dealing with insureds entitled to receive a Division of Insurance Flood Insurance Notice and Acknowledgement Form should note that the Division of Insurance’s bulletin charges them with explaining fully:

The potential ramifications of underinsuring a property,
Failing to purchase contents coverage, and
The impact of a high deductible

to all prospective purchasers of flood insurance.

The Bulletin specifically warns insurance producers that:

The failure of producers to comply with the requirements of Section 69 and this Bulletin may subject such producers to fines and other enforcement proceedings by the Division.

Bulletin 2015-07 may have the force of law and create legal liability for producers

Division of Insurance Bulletins ordinarily do not have the force of law. See Agency Checklists’ August 1, 2011 article: “Division of Insurance Bulletins Do Not Have the Force of Law”. Bulletin 2015-07, however, may be the exception that proves the rule.

The provisions of G.L. c. 183, § 69, and the Division of Banks’ regulations establish a duty on the part of insurance producers to give the required notice to insureds within the statute’s terms. Bulletin 2015-07’s requirements follow from the Banking Department’s regulation granting the Division of Insurance authority to specify the form of the notice required by insurance producers.

In this case, the Division of Insurance has required that insurance producers obtain a signed copy of the notice. As a result, in an E&O claim for an underinsured flood loss to a property subject to the statute, the lack of a signed “Division of Insurance Flood Insurance Notice and Acknowledgement Form” from the insured could create legal liability for the insurance producer involved in the placement of such a policy with inadequate limits or coverage.