First, thanks to Concurring Opinions for inviting me back. It’s been years. What took you so long?
I plan to spend some of my month’s effort here discussing coastal land use and disasters and the law. In light of Superstorm Sandy and likely future megastorms, and given climate change and sea level rise, I can’t help noting that, whatever is going on with managing CO2 levels at a global scale, one class of disasters results from what I have come to call in conversation (and now in writing) Stupid-A** Land Use Decisions (SALUD). We build houses in harm’s way. I’ve written about the folly of allowing homes on the parts of barrier islands that are most likely to flood or wash away, noting in passing the folly of building homes on scenic hillsides subject to rock- and mudslides. In the news lately, there’s much about the costs of rescuing homes built in forests that are just waiting to catch fire. At some point, we have to disincent SALUD, or at least insist that the full cost of risk and rescue and rebuilding be reflected in the market cost of building in Stupid-A** places, and let that expense disincent. It’s very hard to do. As my own dear New Jersey Governor Chris Christie said after Superstorm Sandy, we will rebuild!
Which brings me to the case I’m discussing today. It came down last Friday. The case is Kolbe v. BAC Home Loans Servicing, LP (1st Cir. No. 11-2030, Sept. 27, 2013) (en banc), 2013 WL 5394192. It is a First Circuit en banc decision, on a 3-3 vote, failing to reverse the District of Massachusetts, which granted a motion to dismiss a putative class action seeking an interpretation of a form mortgage contract provision concerning flood insurance. Warning, I’m not an expert in all of the doctrinal areas involved, so please forgive if I miss something, but boy, is it interesting.
The provision in dispute is Covenant 4, a three-sentence paragraph required by the Department of Housing and Urban Development (HUD) to be included in all single family dwelling mortgage contracts insured by the Federal Housing Administration (FHA). Covenant 4 was established by a regulation promulgated in 1989 after notice and comment rulemaking. It allows a lender to require that the homeowner purchase insurance for “any hazards . . . in the amounts and for periods that the Lender requires.” Covenant 4 also requires the borrower to insure against loss from floods to the extent required by the Secretary of HUD. HUD requires flood insurance whenever a property is located in a “special flood hazard area,” the most risky category under the National Flood Insurance Program (NFIP) classification scheme. HUD requires flood insurance at least equal to the outstanding balance of the mortgage, that is, the lender’s stake in the property, but there is a cap of $250,000. Thus, as to hazard (but not flood), the lender clearly has authority under Covenant 4 to require further hazard insurance. But it is, arguably, unclear whether Covenant 4 empowers the lender to require a homeowner to purchase additional flood insurance. Perhaps the provision of Covenant 4 referring to requirements by HUD insulates the homeowner from lender requirements as to purchasing flood insurance. Perhaps Covenant 4′s authorization for lenders to require additional hazard insurance includes flood insurance, because floods are a type of hazard. That’s the interpretation question. Read More