Farm Bureau Over Insured home?

[InsCommentary]

North Carolina

58-63-25 "Unfair methods of competition" or "unfair and deceptive acts or practices"
The following are hereby defined as unfair methods of competition and unfair and deceptive acts or practices in the business of insurance:

(13) Overinsurance in Credit or Loan Transactions. In connection with a loan or extension of credit secured by real or personal property or both, requiring the applicant to procure property and casualty insurance against any one risk which results in coverage which exceeds the replacement value of the secured property at the time of the loan or extension of credit. In connection with a secured or unsecured loan or extension of credit, requiring the applicant to procure life or health insurance against any one risk which exceeds the amount of the loan. In connection with a loan secured by both real and personal property, requiring credit property insurance, as defined in G.S. 58-57-90, on the personal property. For the purposes of this subsection, "amount of loan" shall be deemed to be the amount of the principal and accrued interest to be paid by the debtor including other allowable charges.

 

[InsCommentary]

Don't Insure for the Mortgage Amount (Regardless of What the Bank Says)

Author: Bill Wilson

Every agency has experienced this to one degree or another: A client buys a house and the replacement cost of the dwelling is considerably less than the mortgage amount. The insurer refuses to issue a policy with a Coverage A amount greater than the replacement cost, but the lender insists on a policy limit equal to the mortgage amount.


Here's a typical situation:

"We need your help! We're getting beat up by lenders insisting that we insure a home for the loan amount rather than replacement value. In our area, selling price values are soaring but replacement values are steady. People are refinancing with lower interest rates, starting a vicious battle between the loan officer (representing the lender) and us (representing the insurance company).

"Here lies the problem: the loan officer will absolutely accept nothing short of the loan amount and they become angry and very threatening if we don't do exactly as they demand. The insurance companies demand some type of proof as to why we are requesting an increase (and a refinance is not the reason).

"A typical situation is as follows: The bank faxes our office a request to change the mortgage clause and increase coverage to the loan amount. We respond that we need an appraisal showing replacement value from them to increase coverage. They normally supply an appraisal which agrees with our current coverage. We then advise them that we cannot increase coverage as we currently insure at replacement value and that their appraisal agrees. Now the trouble starts. We normally receive multiple calls from the loan officer calling us illegal, unprofessional, not serving our client, threatening to take the business away from us, and on and on. The calls start at the CSR level, then move up to the personal lines manager, and sometimes moves up to me, the owner, with each one of us explaining the same thing.

"This problem is only getting worse and I'm afraid it could get a lot worse. I'm concerned that banks will use this issue as leverage to rewrite our policies into their markets.

"I contacted the local insurance department office and he advised I could lodge an individual complaint on each situation with them. We're getting about 7 to 8 requests per day of which 1 or 2 can get real ugly."

The lender's position is understandable, but misguided. Clearly, they want to protect their investment. That investment consists of two components: (1) the real estate (land, home, outbuildings, etc.), and (2) the loan itself. Insurance is the mechanism designed to protect against the pure risk of loss to the real property. However, the loan itself is a speculative business risk...that's not the function of insurance.

As an example, let's say the purchase price and loan amount for a home is $200,000...for the sake of simplicity, we'll forget about any down payment. This $200,000 represents market value, not insurable value. The cost to rebuild the home itself might be $140,000, with the $60,000 balance being the value of the land and other structures. The purchase price includes the value of land, all structures, and even other property that may not be covered by a homeowners policy.

The purchase price may also include the "value" of the location. I once looked at two new homes, both built from the same floor plan by the same contractor. The asking price for one of the homes was 50% higher than the other based SOLELY on the location of the home in a "preferred" neighborhood. The cost to rebuild the homes would be virtually identical.

Under a homeowners policy, the insurance company would never pay more than $140,000 if the home was completely destroyed unless required to by a state's valued policy law (which is another reason for not insuring the loan amount). There has been no damage to the land or the "location value" (or at least the policy isn't going to pay that amount), so it would largely be pointless to insure the property for more than the structural replacement costs.

It does not serve the bank's interest in any way to be the mortgagee on a policy with a policy limit equal to the loan amount because neither the insured nor the bank will ever collect that amount. The policy will only pay an amount based on the valuation method included in the contract. Again, this is the case if no valued policy law applies...if it does, then the insured could actually profit from the loss by insuring the loan amount rather than the replacement cost of the property. This would violate one of the fundamental tenets of insurance and, conceivably, could create a moral hazard.

If an insurance company issues a replacement cost (or, worse, an ACV) policy with a limit greater than the actual cost to repair or replace, they may be in violation of the insurance laws in most states. I'm pretty sure all states require that rates/premiums be adequate, not excessive, and not unfairly discriminatory. What these banks are asking is that the insurance company issue a policy with an excessive premium (payment for coverage the insured can never collect without a total loss and triggering of a valued policy law, which has a likelihood of maybe 1-3%) and that's probably illegal.

For example, TENNESSEE has an "Unfair Competition and Deceptive Practices" statute regarding loan amounts that exceed the value of a building or structure:

"Lenders of money - Extenders of credit.

"(a) No person who lends money or extends credit may:

"(8) Require, in connection with a loan or extension of credit secured by real property, that the debtor procure insurance for the protection of the property for an amount that exceeds the replacement cost of the structures existing on the secured property at the time of the loan or extension of credit or, in the case of a construction or improvement loan, insurance which exceeds the value the structures are expected to have upon completion of the construction or improvements."

This law was enacted by an initiative of IIABA's state affiliate, the Insurors of Tennessee, in response to the situation described above.

So, as you can see, a lender should not be permitted to demand an insurance limit that exceeds the value of the property insured as defined by the insurance contract. The insured or lender should never receive more than the actual value of the damaged property. In addition, "over-insuring" the property could be illegal, by statute or contract.

Note: For another excellent article on this subject, and specific to FLORIDA law, check out Insuring for the Mortgage Amount on the Florida Association of Insurance Agents web site. As the article explains, Florida Administrative Code prohibits a mortgage lender from requiring insurance in an amount that exceeds the replacement cost of the home:

"4-167.009 Mortgage Fire Insurance Requirements Limited
No mortgage lender shall, in connection with any application for a mortgage loan in this state which is secured by a mortgage on residential real estate located in this state, require any prospective mortgagor to obtain by purchase or otherwise a fire insurance policy in excess of the replacement value of the covered premises as a condition for granting such a mortgage."

Another state that has responded to this situation via insurance department directive is GEORGIA. According to Georgia Directive 98-PC-1, Establishment of Property Values and Corresponding Insurance Amounts on Mortgaged Properties Insured in Georgia (June 26, 1998):

"Land values may not be included in the computation when determining the amount of appropriate homeowners insurance because homeowners insurance does not insure the land on which the home is located. Therefore, such activities are in violation of O.C.G.A. 33-6-5(6)(A) which provides as follows: 'No person shall knowingly collect any sum as premium or charge for insurance, which insurance is not then provided or not in due course to be provided subject to acceptance of the risk by the insurer by an insurance policy issue by an insurer as permitted by this title.'"

The directive goes on to say that agents engaged in this practice can be fined from $1,000-$5,000 for each act and/or have his licensed suspended, revoked or placed on probation. Any insurer in violation of the law may have its certificate of authority suspended, revoked or placed on probation.

 

[InsCommentary]

Following the publication of this article, we heard from several other states who have similar "over insurance" laws besides Florida, Georgia, and Tennessee...below is a summary listing of the other states we're aware of with "over insurance" prohibitions. If you are aware of others, please send documentation to [email protected] or via fax to 775-249-9290.


Arizona
ARS 44-1208. Loans secured by real estate; prohibited practices; insurance. Except for consumer lender loans regulated pursuant to section 6-636, for any loan that is secured by real property, a person shall not require as a condition of the loan that the borrower obtain property insurance coverage in an amount that exceeds the replacement cost of the improvements as established by the property insurer.

[Note: The statute covers only real property (not mobile homes) and does not include commercial buildings. For more information, go to: http://www.azleg.state.az.us/ars/44/01208.htm]


California
California Civil Code § 2955.5 says, in part:
(a) No lender shall require a borrower, as a condition of receiving or maintaining a loan secured by real property, to provide hazard insurance coverage against risks to the improvements on that real property in an amount exceeding the replacement value of the improvements on the property.
(b) A lender shall disclose to a borrower, in writing, the contents of subdivision (a), as soon as practicable, but before execution of any note or security documents.
(c) Any person harmed by a violation of this section shall be entitled to obtain injunctive relief and may recover damages and reasonable attorney's fees and costs.
(d) A violation of this section does not affect the validity of the loan, note secured by a deed of trust, mortgage, or deed of trust.


Connecticut
Statute 360-757 originated with public act PA 84-212 which prohibits a mortgage lender from requiring a prospective home buyer to obtain a fire insurance policy in excess of the home's replacement value, as a condition of granting a mortgage loan on residential property located in the state and secured by such a mortgage. The act was effective on October 1, 1984. On October 1, 2000, the statute was broadened by PA 00-95 to include flood insurance, extended coverage insurance, or any combination of insurance, including fire insurance.

Illinois
Public Act 093-1021 Effective August 24, 2004:
Section 5. The mortgage Insurance Limitation and Notification Act is amended by adding Section 17 as follows:
Sec. 17. Insurance coverage.
(a) No lender shall require a borrower, as a condition of receiving or maintaining a loan secured by real property, to provide hazard insurance coverage against risks to the improvements on that real property in an amount exceeding the replacement value of the improvements on the property.
(b) Any person harmed by a violation of this Section shall be entitled to obtain injunctive relief and may recover damages and reasonable attorney's fees and costs.
(c) A violation of this Section does not affect the validity of the loan, note secured by a deed of trust, mortgage, or deed of trust.

Massachusetts
General Law, Chapter 183, Section 66 says, in part:
A bank, lending institution, mortgage company or any mortgagee doing business in the commonwealth, when making a mortgage loan, shall not require, as a condition of a mortgage or as a term of a mortgage deed, that the mortgagor purchase casualty insurance on property which is the subject of the mortgage in an amount in excess of the replacement cost of the buildings or appurtenances on the mortgaged premises.


Michigan
MORTGAGE LENDING PRACTICES (EXCERPT)
Act 135 of 1977
445.1602a Property/casualty Insurance as condition to loan; limitation on amount required; amount as condition of sale, transfer, or assignment. [M.S.A. 23.1125(2a)]
Sec. 2a. (1) Except as provided in subsection (2), a credit granting institution that requires a mortgagor to maintain property/casualty insurance as a condition to receiving a mortgage loan shall not require the amount of the property/casualty insurance to be greater than the replacement cost of the mortgaged building or buildings.
(2) A credit granting institution may require an amount of property/casualty insurance that is required of the credit granting institution as a condition of a sale, transfer, or assignment of all or part of the mortgage to a third party. This subsection does not require that the credit granting institution anticipate a sale, transfer, or assignment at the time the mortgage loan is made.
History: Add. 1995, Act 214, Imd. Eff. Nov. 29, 1995


Montana
In 2009, SB 375 amended MCA 32-1-430, 32-3-604, and 32-10-401 to provide that a "lender may not require insurance on improvements to real property in an amount that exceeds the reasonable replacement value of the improvements.."

 

[InsCommentary]

New Hampshire
RSA 417:4 printed 01-12-2006 from NH Insurance Dept website
XVI. COERCION IN REQUIRING INSURANCE.
(a) No creditor or lender engaged in the business of financing the purchase of real or personal property or of lending money on the security of real or personal property may require, as a condition to such financing or lending, or as a condition to the renewal or extension of any such loan or to the performance of any other act in connection with such financing or lending, that the purchaser or borrower, or the purchaser's or borrower's successors shall negotiate through a particular insurance company or companies, insurance agent or agents, broker or brokers, type of company or types of companies, any policy of insurance or renewal of a policy insuring such property. This provision does not prevent the exercise by any mortgagee of the right to approve on a reasonable nondiscriminatory basis only insurance companies authorized to do business in this state, selected by the borrower.
(b) There shall be no interference either directly or indirectly with such borrower's, debtor's or purchaser's free choice of an agent and of an insurer which complies with the foregoing requirements, and the creditor or lender may not refuse the policy so tendered by the borrower, debtor or purchaser. Upon notice of any refusal of such tendered policy, the insurance commissioner shall order the creditor or lender to accept the tendered policy, if the commissioner determines that the refusal is not in accordance with the foregoing requirements of this subparagraph. Failure to comply with such an order of the insurance commissioner is a violation of this section.
(c) Whenever the instrument requires that the purchaser, mortgagor, or borrower furnish insurance of any kind on real or personal property which is being conveyed or which is collateral security to a loan, the mortgagee or lender shall refrain from disclosing or using any and all such insurance information to its own advantage and to the detriment of either the borrower, purchaser, mortgagor, insurer, or company or agency complying with the requirements relating to insurance.
(d) Notwithstanding any other law to the contrary, a creditor or lender of a loan secured by an interest in real property shall not require the borrower to keep the mortgaged property insured under a property insurance policy in a sum in excess of the value of the buildings on the real property.
(e) Notwithstanding any other law to the contrary, no creditor or lender shall require as a condition to closing a loan that the borrower provide an original insurance policy at said closing; provided, however, that the creditor or lender may require the borrower to produce at closing a binder showing the borrower as a named insured and creditor or lender as mortgagee, and confirming that insurance has been issued, is in force, and will remain in full force until a copy of the final policy is delivered to the creditor or lender or until the creditor or lender has received notice of cancellation in accordance with the policy conditions.
(f) No insurer may automatically write insurance on a debtor who has contracted credit based on the principle that the insurance is applicable unless specifically rejected by the debtor, unless the premium or such other identifiable charge as may be applicable is paid in full by the creditor.


New Jersey
NJAC 3:1-13.1
Insurance tie-in prohibition
(c) No lender shall, in connection with any application for a loan secured by a mortgage on real property located in New Jersey, require any mortgagor to obtain by purchase or otherwise a fire insurance policy in excess of the replacement value of the covered premises as permitted under N.J.S.A. 17:36-5.19 as a condition for granting such mortgage loan.


New York
3 NYCRR 38.9 Limitation on excess insurance and required disclosures
(a) Limitation on excess insurance.
No mortgage banker or exempt organization shall require any mortgagor, in connection with the granting of a mortgage loan, to obtain a hazard insurance policy in excess of the replacement cost of the improvements on the property as a condition for the granting of such mortgage loan.


North Carolina
58-63-25 "Unfair methods of competition" or "unfair and deceptive acts or practices"
The following are hereby defined as unfair methods of competition and unfair and deceptive acts or practices in the business of insurance:
(13) Overinsurance in Credit or Loan Transactions. In connection with a loan or extension of credit secured by real or personal property or both, requiring the applicant to procure property and casualty insurance against any one risk which results in coverage which exceeds the replacement value of the secured property at the time of the loan or extension of credit. In connection with a secured or unsecured loan or extension of credit, requiring the applicant to procure life or health insurance against any one risk which exceeds the amount of the loan. In connection with a loan secured by both real and personal property, requiring credit property insurance, as defined in G.S. 58-57-90, on the personal property. For the purposes of this subsection, "amount of loan" shall be deemed to be the amount of the principal and accrued interest to be paid by the debtor including other allowable charges.


Pennsylvania
Here is a paper written by our Pennsylvania association on this issue relative to PA laws.


Rhode Island
CHAPTER 27-5 - Fire Insurance Policies and Reserves - SECTION 27-5-3.2
§ 27-5-3.2 Property insurance. No person, bank, or lending institution doing business in this state, whether acting under state or federal authority, which includes but is not limited to (1) a bank, savings bank, or trust company, as defined in this title, its affiliates or subsidiaries, (2) a bank holding company, as defined in 12 U.S.C. § 1841, its affiliates or subsidiaries, (3) mortgage companies, and (4) any other individual, corporation, partnership, or association authorized to take deposits and/or to make loans of money under the provisions of chapters 20, 21, 22, 23, 24, 25, 25.2, and 25.3 of title 19, making a mortgage loan, shall, as a condition of the mortgage or as a term of the mortgage deed, require that the mortgagor carry property insurance on the property which is the subject of the mortgage in excess of the replacement cost of any buildings or appurtenances subject to the mortgage; provided, that if a mortgage is sold, transferred, conveyed, or assigned, it shall be the responsibility of the holder of the mortgage to notify the insurance producer issuing the property insurance policy in writing of that sale, transfer, conveyance, or assignment. This notice shall be made in writing and shall be sent to the insurance producer within thirty (30) days of the sale, transfer, conveyance, or assignment by registered mail. In the event that the holder of a mortgage shall fail to notify the insurance producer who issued the property insurance policy that is in force, in writing, of that sale, transfer, conveyance, or assignment within thirty (30) days, the holder shall indemnify and hold the insurance producer harmless.


Virginia
The question posed was if a bank could force the consumer to have an insurance policy with the insured amount being the loan value even if this exceeds the value of the building. Under Virginia Banking code banks are not allowed to do this. The statutes does not reference personal or business loan so we would assume it applies to both.

VA Code- 6.1-2.6:1. Fire insurance coverage under certain loans not to exceed replacement value of improvements.

A. No lender shall require a borrower, as a condition to receiving or maintaining a loan secured by any mortgage or deed of trust, to provide or purchase property insurance coverage against risks to any improvements on any real property in an amount exceeding the replacement value of the improvements on the real property.

In this section, 'property insurance coverage' means insurance against losses or damages caused by perils that commonly are covered in insurance policies described with terms similar to 'standard fire' or 'standard fire with extended coverage.'

In determining the replacement value of the improvements on any real property, the lender may:

1. Accept the value placed on the improvements by the insurer; or

2. Use the value placed on the improvements that is determined by the lender's appraisal of the real property.

B. A violation of this section shall not affect the validity of the mortgage or deed of trust securing the loan."

Wisconsin
632.07 Prohibiting requiring property insurance in excess of replacement value. A lender may not require a borrower, as a condition of receiving or maintaining a loan secured by real property, to insure the property against risks to improvements on the real property in an amount that exceeds the replacement value or market value of the improvements, whichever is greater.


For an example of a related article regarding flood insurance prohibitions on this practice, "Flood Insurance Mandatory Purchase Guidelines".




Last Updated: May 17, 2014

 

[fish69]

It's hard to say which number is the closest to "correct" in terms of the estimated replacement cost without know all of the details of the home but I would guess it's probably somewhere between the two amounts you mention.
Regardless, the company's obligation (if it is a true "replacement cost" contract), is to offer to re-build/repair with "like kind & quality" based upon the re-construction replacement calculation done by the claims adjuster after the loss occurs. The amount of "Coverage A" a specific carrier requires on the policy is really just an estimate and their numbers can differ quite a bit between companies even if they subscribe to the same RC service.
Even if the home is vastly over-insured, the company is obligated to offer enough to re-build OR the ACV if the insured decides not to rebuild. There is no settlement aspect of the claim that would provide the insured any more money, regardless of what it was insured for. There can, however, be underinsurance penalties taken is the home had too little coverage and does not meet the RC requirements.
I've seen many cases over the years where, depending upon a given carrier's internal processes, they allow the "inflation guard" to continue to increase the coverage every year & never re-run the RC to make sure they're not getting out of whack! This may be part of the reason, as you mention, that the two amounts are so far off!
All you can do is to make sure you have all of the construction details of the home correct & that your RC agrees with your company---if your carrier is putting a lower coverage maximum on the house for some other reason, you may be comparing "apples to oranges"!

 

[Todd Shaner]

There's a lot to get through in this thread, but if we circle back to OP's original post, our agents have always had a lot of success sharing the replacement cost estimate with the clients. If you make the client part of coming up with the RCE, it tends to be even more beneficial.
You're still going to get the occasional person that doesn't agree and maybe that's a sign that they're not the right fight for you as a client. On the lender side, we've also had success sharing the RCE and showing there is extended dwelling coverage. Often times you're dealing with a loan processor who is simply a go-between to the underwriter. Keep in mind that they're often just the messenger and not someone to state your case too. I believe that communication and education is the key to successfully addressing everyone's concerns and winning the business with proper coverage.