A condominium unit securing a designated loan is covered by a master flood policy, but the allocated coverage is below the amount required for the unit. What should the lender do?

Correct Answer

B) Evaluate the allocated coverage and require additional coverage if needed to meet the applicable amount

Why this is correct: For a condominium unit, flood insurance coverage can be provided by a master policy held by the condo association. However, the lender's duty is to ensure the coverage amount protecting the unit meets the regulatory minimum (typically the lesser of the outstanding loan balance, the maximum NFIP coverage available, or the insurable value). The lender must evaluate the "allocated coverage" from the master policy to the specific unit. If that amount is insufficient, the lender must require the borrower to obtain additional coverage. The correct choice, "Evaluate the allocated coverage and require additional coverage if needed to meet the applicable amount," describes this required analysis and action. Why the other choices are wrong: "Assume any master policy amount is sufficient" is wrong because the lender cannot assume adequacy; it must verify the amount. "Use hazard insurance to satisfy the flood requirement" is wrong because hazard (fire) insurance and flood insurance are separate, distinct requirements; one cannot substitute for the other. "Exclude the unit because condominiums can never be in an SFHA" is factually wrong; condominium buildings can absolutely be located in SFHAs. Exam tip: A master policy is acceptable, but the lender must always verify that the coverage amount allocated to the specific unit meets the required minimum.