Hello-
This is more of an educational piece for both professionals and consumers that's specific to CT but may apply in other states. When you purchase a home or refinance a home you are usually asked to provide proof of home insurance that covers one year and is paid in full. And for our example here let's say you bought a new home at $300,000 and the mortgage is $270,000. We on the insurance side could care less what the mortgage amount is or the home purchase price is -- not a factor at all in calculating the replacement cost of the home. Let's say in this example we calculated the replacement cost (rebuilding cost) of the home to be $220,000. We issue a binder of insurance to the bank stating you're covered for that amount. Then you get the call from the bank saying that $220,000 is not sufficient to satisfy the loan and you have to raise the homeowner coverage up to $270,000 or provide proof that you have guaranteed replacement or some sort of extended coverage on the home to get it to $270,000.
In many cases the insurance policy will have provisions to give extended coverage automatically -- if you look at one of my previous blogs it gets into detail about this. You typically can have 25%, 50% or fully guaranteed extended coverage above and beyond the replacement cost on the home which might satisfy the loan. But as I have seen time and time again in this business over the years -- we do get those homes that don't qualify for extended coverage based on year built etc and when we insure the home at the $220,000 as our example showed --- that's the maximum coverage that will be provided by the insurance carrier. So in this case the bank or broker calls me and says raise the limits to match the mortgage amount. I tell them - the mortgage amount is for house and land - we're just insuring the house and it's illegal for you to request that of me or the consumer.
Now this is where it gets a bit sticky. I've gotten into some heated discussions with attorneys, banks, brokers, realtors etc over this issue. In the State of Connecticut the Department of Banking has clearly defined a statute that protects consumers from the above example when a bank asks someone to increase the coverage on their home to satisfy a loan. It is illegal to request this and is a direct violation of the CT Banking Regulations for ANY mortgage company doing business in the State of CT. Here is the exact statute:
Sec. 36a-757. (Formerly Sec. 36-9u). Mortgage insurance requirements limited. No mortgage lender shall, in connection with any application for a mortgage loan in this state which is secured by mortgage on residential real estate located in this state, require any prospective mortgagor to obtain by purchase or otherwise a fire insurance policy, flood insurance policy, other extended coverage policy, or any combination thereof, in excess of the replacement value of the covered premises as a condition for the granting of such mortgage.
Once I speak to high enough levels of people at the banks - they waive the request to increase the coverage on the home and the loan goes through without a problem. My customers are extremely pleased when I can assure them they won't have to pay more in home insurance premiums due to these requests from the bank. However, it's something that realtors, mortgage brokers and banks should be aware of as well. If you can act on behalf of your customers and head this off before it becomes a problem, everyone wins. Imagine how many people are paying unneccessary costs in insurance due to these requests.
If you have any questions at all on the CT statute above please call the CT Department of Banking at 800-831-7225.
Thank you as always for reading.
Pete
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