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Ignore the Bank, Go With Replacement Cost

Author: Chris Boggs

Every day, agents are asked, well required, by banks to provide Coverage A limits in excess of the developed replacement cost. Why are such requests made? So that Coverage A limits match the loan requirements of course.

Mortgagees tend to forget that the loan buys more than just the structure; it includes the land and location, location, location. The buyer/mortgagor is paying for the view and access to the office and shopping in addition to the house. The insurance policy only pays to replace the house.

Ignore the mortgagee and do what you know is right – insure only the value of the structure; at least in the 40 states that don't allow banks to require more insurance than is necessary as a condition for a loan. In these states it is illegal for the agent to over-insure or the mortgagee to require over insurance.

Click here for a list of the various state laws prohibiting over insurance simply to satisfy a loan. These laws aren't always found in the insurance statutes. Over-insurance laws are found in the Commercial Code, the Banking Law, the Real Property (or just Property) law, and various other places. Thus, it is possible the mortgagee is unaware of the law.

Maybe the mortgagee doesn't know these laws exist; or maybe they do but are ignoring them to see if the agent will comply without question. Push back, send them a copy of the law. Tell them they may be willing to violate the law, but you are not. Maybe even contact the state department that promulgated the law.

Use this list for the agency's and the customer's benefit. There is no need for your client to pay for insurance limits that will never be paid. However, we were unable to locate over insurance laws in 12 states. If you know where to find these missing laws, please let us know so that this document provides the most current and correct information.

Last Update: March 17, 2017

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