What do you do when lenders require insurance on the entire value of the loan, completely ignoring that the real property the house sits on has an intrinsic value which cannot be destroyed by fire or other peril.
Here is an example just down the street from our office:
Single family home with an appraisal value of $373,700
Land value is $207,000
Structure value is $166,700
If the structure was somehow lost entirely, the land is still worth $207,000 (probably more by the time you read this). Even if a purchaser borrowed 100% of the money to buy the property, the most, by law, a lender could require be insured is the replacement cost of roughly $166,700.
The law is Tenn. Code Ann. 56-8-106(b)(13):
56-8-106. Lending money or extension of credit; insurance.
(b) No person or depository institution, or affiliate of a depository institution, who lends money or extends credit shall:
(13) 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 that exceeds the replacement value the structures are expected to have upon completion of the construction or improvements.
Insurors reached out to the Consumer Insurance Services department and in conjunction with the Financial Services Division, they will look into any complaints of lenders requiring excessive insurance. The online complaint form may be found here https://sbs-tn.naic.org/Lion-Web/servlet/org.naic.sbs.ext.onlineComplaint.OnlineComplaintCtrl?spanishVersion=N . Since the form is tailored for an insurance complaint, select “other” and detail the complaint in the box provided.
For more information, please visit Tennessee Laws & Regulations Every Agent Should Know