"It's called being smart. I don't see what the big deal is, if the house wasn't paid for and got washed away in the flood they'd still have to payoff the loan."
Doubt it. Most people DO NOT have flood insurance, it's extra, just the same way your house IS NOT covered by acts of war (read that as terrorism).
They'll still have to pay for it. The "they" in question isn't the insurance company, it's the debtor/ renter.