I know, but you still have the land
I had a client recently close on their new home at Mueller and they had a conceptual battle with their lender – USAA. It was concerning their home-insurance, also provided by USAA.
The lender was arguing that the insurance coverage was not enough and my client was concerned as the insurance value was less than the loan and less than the price of the home. I asked local insurance expert James Snyder for his take on it, while we were kickboxing. This is my synopsis.
The lender wants the insurance to cover their loan in the event of a catastrophe (fire, asteroid impact, hurricane etc). The insurance company wants to cover the replacement cost of the building, which they calculate based on average construction costs for your area. The insurance company does not generally cover replacement cost for the lot, as their argument is that the lot is (relatively) indestructible, and hence does not need coverage.
So you end up with several different values: the cost of the home (including lot), the replacement cost of the structure, and the value of the loan.
What can you do if the lender won’t accept the coverage provided by your insurance company? Well if you called James this probably wouldn’t ever surface – his number is 512.814.7132. This is how he describes it:
“Should the lender ever fight (maybe question is a better is a word) an insurance company (more specifically me or an insurance agent) on the insured amount of a home here is what I as the insurance agent would say.
“First understand the client/insured probably doesn’t know this is occurring (the fight/the questioning). It usually only takes place between the lender and the agent. The lender wants their “monies” in the event of a loss, understandably. See what isn’t understood is that an insurance company finds replacement cost of the home ONLY, by today’s standards (price per square foot, exterior, interior make (brick, stone, granite, tile, etc)). A good rule of thumb here is about $100 a square foot on average for a 1 story home.
The lender wants replacement cost of their loan and this just doesn’t happen as the lender is lending monies for the land as well as the home. From an insurance stand point there is no replacement risk involved in the land. The land will still be there in the event of a fire, tornado, or hurricane, therefore we do not include the value of the land in replacement cost. Once this is explained the lender is usually accepting of the amount the home is insured for.
If the lender still has a question (or still wants to fight), what I or any great agent would do is work with the lender to come to an agreement or compromise on what value is acceptable. This is done several ways. One we add extended replacement cost to the policy. This is typically a 25% sometimes 50% extension above the insured value of the home or coverage. Second we can tweak coverages to include custom or designer work in the kitchens or bathrooms to increase the value. Obviously both options have and affect on the premium.”
So if you have a good insurance agent working on your side, you would probably never even hear about the issue. As a Realtor it’s something I trust my buyer’s insurer to handle for us. Call me on 512 215 4785 if you want to
discuss buying a new home.
1 Comment
James Snyder · October 25, 2011 at 7:37 pm
I was happy to hear Garreth was asking this question. As an insurance agent I find this occurs more often than not, so I was happy to share what I would do in this instance. I welcome further questions and would happy to help evaluate any homeowners policy should anyone have concerns about their current coverages. Call me on 512.814.7132 or shoot me an email at james@snydersinsurance.com. Thanks Garreth, great blog.