Education

SO YOU DON'T WANT TO INSURE FOR THE MORTGAGE AMOUNT?

By FAIA Education Department Instructor David Thompson

When insurance companies provide coverage on a structure, they strive to write an amount of insurance that is equal to the current replacement cost. Current replacement cost is best described as what it would cost (in today's dollars) to rebuild only the structure from the slab up. That figure can be determined from a contractor's estimate, an appraisal showing the "estimated cost new," or by an insurance agency figuring the estimated replacement cost using methods which account for local costs and classes of construction. The insurance policy does not insure the land and is not based on any other fixtures, such as mortgage value, assessed value, appraised or market value.

Often a mortgage lender will ask that the insurance policy provide coverage equal to the mortgage amount. However, the mortgage is made based on the value of the house and land. Since the insurance policy does not cover land, the two figures have nothing to do with each other. But try convincing the lender.

For example, let's assume that someone purchases a lot worth $100,000 and then builds a house that costs $100,000 to construct. The house and land have a total "market value" of $200,000 and the lender may loan $160,000 on the property. Since the house has a replacement cost of $100,000, that is all the insurance policy should provide. The lender may say, "We have to protect our interest so we want $160,000 of insurance." Since the insurance company only insures the house itself, the company should not provide the amount of coverage the lender has requested. The lender has its interest protected because, even if the house is totally destroyed, they still hold a mortgage on the land, which has a value of $100,000 - also they will be paid for the loss of the house by the insurance company. When your client has trouble explaining this to a lender, tell them Florida's Administrative Code (see below) prohibits a mortgage lender from requiring insurance in an amount that exceeds the replacement cost.

Florida Administrative Code 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.