OGC Op No. 06-05-05
The Office of General Counsel issued the following opinion on May 10, 2006, representing the position of the New York State Insurance Department.
Re: Mortgagee's Requirement that Buyers Obtain Homeowner's Insurance Covering the Amount of the Mortgage
Question Presented:
May a mortgagee require that a buyer purchase homeowners insurance in an amount that covers the full mortgage amount even though that amount is in excess of the actual replacement cost?
Conclusion:
There is nothing in the Insurance Law that prohibits a mortgagee from requiring that a buyer purchase homeowners insurance in an amount that covers the full mortgage amount. However, such a requirement may be excessive because neither the insured nor the mortgagee is covered for the amount of the mortgage that is in excess of the replacement cost or actual cash value of the building. Moreover, the New York State Banking Department limits excess insurance under Banking Department Regulation, N.Y. Comp. Codes R. & Regs. Tit. III, § 38.9(a) (1998).
Facts:
No specific fact pattern was presented.
Analysis:
Homeowner policies are typically written on an actual cash value basis or on a replacement cost basis.1 If the policy is written on an actual cash value basis,2 the insurer will determine any amount payable to the homeowner as a result of a covered loss by taking the current replacement cost of the insured property and subtracting an amount for wear and tear and/or depreciation. If the policy is written on a replacement cost basis, the insurer would pay the amount it would cost to replace or repair the property without deducting anything for depreciation.
The forms of homeowners' policies commonly used by insurers are those developed by Insurance Services Office, Inc. (ISO) or similar thereto.3 Most of the policies covering realty provide generally for coverage of loss to the dwelling on a replacement cost basis. Insuring in amounts over that replacement cost is generally unnecessary because neither the insured nor the mortgagee is usually covered for the amount of the mortgage that is in excess of such replacement cost.
Under "Homeowners 3-Special Form" (ISO Form No. HO-3), Section I, "Conditions," Subsection C, "Loss Settlement," ¶ 2 states:
Buildings [are] covered... at replacement cost without deduction for depreciation, subject to the following:
If, at the time of loss, the amount of insurance in this policy on the damaged building is 80% or more of the full replacement cost of the building immediately before the loss, we will pay the cost to repair or replace, after application of any deductible and without deduction for depreciation, but not more than the least of the following amounts:
(1) The limit of liability under this policy that applies to the building;
(2) The replacement cost of that part of the building damaged with material of like kind and quality and for like use; or
(3) The necessary amount actually spent to repair or replace the damaged building.
If the building is rebuilt at a new premises, the cost described in (2) above is limited to the cost which would have been incurred if the building had been built at the original premises.
If, at the time of loss, the amount of insurance in this policy on the damaged building is less that 80% of the full replacement cost of the building, the insurer will pay the greater of actual cash value or (2) the proportion of the cost to repair or replace which the total amount of insurance in the policy on the damaged building bears to 80% of the replacement cost of the building.4
There is nothing in the Insurance Law that prohibits a mortgagee from requiring a buyer to purchase homeowners insurance in an amount that covers the full mortgage amount. However, such a requirement may be excessive because the recovery the mortgagee would receive from the insurer is usually limited to the replacement cost or actual cash value.
Please note that there is a New York State Banking Regulation that limits excess insurance. Banking Department Regulation (N.Y. Comp. Codes R. & Regs. tit. III, § 38.9(a) (2005)) states:
Limitation on excess insurance. No mortgage banker or exempt organization shall require any mortgagor, in connection with the granting of a mortgage loan, to obtain a hazard insurance policy in excess of the replacement cost of the improvements on the property as a condition for the granting of such mortgage loan.
The New York State Banking Department should be contacted for guidance if there is a specific matter at issue.
For further information you may contact Senior Attorney Elizabeth Barrett at the New York City Office.
1 See also Circular Letter No. 6 (1991) titled "Proper Amount of Insurance Protection on Dwellings."
2 Section 216.6 of N.Y. Comp. Codes R. & Regs. tit. XI, pt. 216 (1998) (Reg. 64) states:
"Actual cash value," unless otherwise specifically defined by law or policy, means the lesser of the amounts for which the claimant can reasonably be expected to:
(1) repair the property to its condition immediately prior to the loss; or
(2) replace it with an item substantially identical to the item damaged...
3 The most commonly used form is "Homeowners 3-Special Form" (ISO Form No. HO-3)." Copyright, Insurance Services Office, Inc., 1999. This policy covers the dwelling and other structures on an all-risk basis and personal property on a named-perils basis. All physical loss to the dwelling and other structures is covered unless specifically excluded. See also the policy entitled "Homeowners 2 - Broad Form," ISO Form No. HO-2, which insurers against direct physical loss to the dwelling, other structures, and personal property caused by enumerated perils. Under both, HO-2 and HO-3, coverage of loss to personal property is on an actual cash value basis.
4 "Homeowners 3-Special Form" (ISO Form No. HO-3) [1], Section I, "Conditions," Subsection C, "Loss Settlement," ¶ 2(b). Copyright, Insurance Services Office, Inc., 1999.