Flood insurance hiatus impact on FAR and FAR/BAR contracts
ORLANDO, Fla. – April 7, 2010 – Congress’ failure to renew the National Flood Insurance Program (NFIP) has impacted some home closings in Florida. While the program will undoubtedly be renewed after Congress returns to Washington on April 12, the void in coverage has created problems for some Realtors, buyers and sellers. Most mortgage companies demand flood insurance for homes located in Federal Emergency Management Agency (FEMA) flood zones.
As long as the NFIP program is on hiatus, closing under the FAR/BAR-8 contract and the FAR 9 contract should not be impacted at all if the following conditions are met:
1. If the contract isn’t contingent on financing and, consequently, isn’t contingent on the buyer’s ability to obtain flood insurance. However, flood coverage is still highly recommended.
2. If the contract is contingent on the buyer obtaining flood insurance (either within a specific contract contingency dealing with flood insurance or as a condition of financing) provided the seller has an effective flood insurance policy that can be assigned to the buyer, and the contract requires the buyer to accept the assignment from the seller.
Closings will be impacted under both contracts if the following conditions apply, however:
FAR/BAR-8 Contract
The contract will not close if the home sale is contingent on the buyer obtaining financing from a lender, that lender’s commitment of funds is conditioned upon obtaining flood insurance, and the seller has no flood insurance policy to assign to the buyer.
In this case, the contract will, in all likelihood, terminate on the closing date with the deposit returned to the buyer. In Florida, impossibility of performance and frustration of purpose are well-recognized defenses to nonperformance of a contract.
However, the parties could also choose to extend the contract based on the likelihood that Congress will reinstate NFIP.
FAR 9 Contract
If the contract is contingent upon financing and the buyer’s loan commitment is contingent upon the buyer obtaining flood insurance – and the seller has no flood insurance policy to assign to the buyer – then the contract cannot close as scheduled.
In paragraph 11 (c) of the FAR 9 Contract, buyer and seller are relieved of their performance obligations if the performance is delayed, caused or prevented by force majeure.
Force majeure includes any cause not reasonably within the control of the buyer or seller. Under force majeure in the FAR 9 contract, the time periods stated in the contract are extended – not to exceed 30 days – for the period of time that the force majeure event is in place. If the force majeure event continues beyond 30 days, either party can cancel the contract without liability to the other.
Congress’ failure to reauthorize NFIP may be interpreted under the FAR 9 Contract as a cause not reasonably within the control of the buyer or seller. Therefore, the buyer and seller may be relieved of their performance obligations during the hiatus period since Congress failed to reauthorize the flood insurance program.
© 2010 Florida Realtors®