This past week I helped a new client with condo insurance for his new home. The condo is in a high rise condominium tower located in the Turtle Creek area of Dallas. It’s beautiful and the view is amazing. He’s very excited and has been wonderful to work with. There was one little issue we had to work through involving the amount of insurance for his new home and what the mortgage underwriters would approve. It was an interesting conundrum.
Condo insurance is designed to cover the interior of a person’s condominium. Insurance agents and companies refer to this level of coverage as “walls in” which means the policy covers the sheetrock, flooring and floor coverings (hardwoods, carpet, tile, etc.), cabinetry, light and plumbing fixtures. In addition, the amount of coverage should also cover the owner’s personal property such as furniture, electronics, decorative accessories and artwork, kitchenware, clothing, and more.
Many insurance companies combine the total cost to replace both the condo’s interior finish out and the personal property into contents coverage. For instance, if the amount of coverage needed to replace the interior is $100,000 and the amount to replace the personal property is $50,000, then the amount of coverage would be listed as $150,000. Other insurance companies have begun to show these amounts as separate items on a condo policy under coverage for the home and then coverage for the home owner’s contents.
In either case, the total amount of coverage should equate what it would take to replace both the interior finish out and the person’s personal property in the event of a total loss such as a bad fire. Too much coverage and the client would be over insured; they’d be paying for coverage they may never receive. Too little coverage and they’d be under insured and that’s never a good thing.
In my new client’s case, the mortgage underwriters were requiring the amount of coverage be enough to cover the loan value of his mortgage. By insuring his home for the loan value meant insuring his home for approximately $185 a square foot (loan value divided by the condo’s square footage). I explained to the client’s loan officer the amount of insurance needed to replace the condo was between $85 and $100 a square foot or half the loan value. Unfortunately for the client, the mortgage underwriters would not accept anything less than the total loan value.
My next conversation was with the insurance company underwriter to discuss the level of coverage required by the mortgage company versus the amount of coverage needed to insure the condo at replacement cost. The underwriter understood and approved our writing the home with the amount of coverage equal to the loan value.
While many people may be inclined to say, “So what,” I believe there are at least two things that are wrong with this issue including:
- The client’s paying for coverage they’ll not be able to use.
- The mortgage company will not receive the payment they expect.
Client Issue: In this case the client is over insured and as such, is paying for coverage they’ll not be able to use. Texas insurance law states no one can make a profit off their insurance loss. This means, even if the client has a bad fire that destroys his home completely, the most the insurance company will pay is the amount it takes to rebuild his home and not a penny more.
Mortgage Company Issue: While the mortgage underwriter thinks the loan is protected, the most they would be paid is the amount it would take to rebuild the condo as it is now. This means their loan is no more protected than the replacement cost amount of $85 to $100 a square foot. While the mortgage company believes they’ve protected the loan value of the client’s new home, they really haven’t.
The answer to the conundrum is to insure the home for what it would take to replace it regardless of the loan value. The client should not be forced to pay for a coverage amount that exceeds the replacement cost. I explained this to the client and he graciously understood and is willing to pay for an amount of insurance that allows him to buy his new home.
It’s not right, but maybe there’s no other way to get around this issue. What do you think? Share your comments, questions, or suggestions with me in the comments section of our blog or on our Facebook page. I’d love to hear what you think!