Legal Question in Real Estate Law in California

Re: Mtg. lender requires excessive coverage?

Your insurance policy is not governed by the real estate market, but by the cost of the materials and labor involved in rebuilding your home. Insurance companies have formulas that they use to evaluate the replacement cost of your home. Since the formulas developed are unique for each company, different insurers may suggest or require different limits of coverage for your dwelling limit.

Ca. Civil Code 2955.5 basically says that lenders cannot require a borrower to get insurance in an amount exceeding the replacement value of the improvements on the property.

Based on the information provided, I would say your insurance company is wrong. I would define replacement value as the actually cost to rebuild the home in terms of current costs of construction. I have no idea where they are getting the idea that the need to use the depreciated value, UNLESS they are really trying to sell you an "actual cash value" policy. Your lender's request sounds perfectly reasonable to me. You might consider shopping around to other carriers.

Re: Mtg. lender requires excessive coverage?

I generally agree with Mr. Starrett's conclusions. "Replacement value" is not defined in the Code; each insurer may have its own definition implanted in the fine print of its policy. One that mifht be fairly standard is "the cost to repair or replace the property with new property of equivalent kind and quality to the extent practicable, without deduction for depreciation." I copied this verbatim from a Court of Appeal case, where the court was quoting from a policy that was before it for interpretation.

The problem with insuring for the amount of the loan is that 2955.5 and most policies deal with the value of improvements only, while the loan is often based on borrowing on land as well as improvements. If you have a small house on a valuable lot or a large acreage, the loan can easily exceed any definition of replacement value.

I would guess that if you are insured to replacement value, the insurance company is obligated to replace whatever improvements are lost "in kind" at current prices. In other words, if you have a simple 1920s bungalow that cost $5,000 to build in 1925, and it burns down, the insurance company must pay to build you a brand-new simple bungalow at 2006 prices, which could be closer to $500,000.

You need to get the insurance guy and the loan guy on the same page. Maybe have them sit down together with you, rather than obliging you to be the bearer of demands and instructions you yourself are not in a position to understand. There's no rule that forbids a principal from having his hired-gun specialists in lending and insurance participate in a face-to-face encounter. That's why you're paying them the big commissions....to give you competent expert advice.