Chip Merlin | Property Insurance Coverage Law Blog | September 8, 2018
Actual cash value polices should rarely be sold on a typical home. Insurance agents who sell these policies knowing that a mortgage exists are negligent because various federal laws and regulations generally require that negotiable mortgages are to be protected by replacement cost insurance:
Property insurance for properties securing loans delivered to Fannie Mae must protect against loss or damage from fire and other hazards covered by the standard extended coverage endorsement. The coverage must provide for claims to be settled on a replacement cost basis. Extended coverage must include, at a minimum, wind, civil commotion (including riots), smoke, hail, and damages caused by aircraft, vehicle, or explosion.
Fannie Mae does not accept property insurance policies that limit or exclude from coverage (in whole or in part) windstorm, hurricane, hail damages, or any other perils that normally are included under an extended coverage endorsement.
I can visualize and hear some insurance agent educators moaning and rolling off their chairs as they read this. The truth is that there are many federal regulations involving property insurance requirements which exist for various types of properties and licensed insurance agents should learn and sell insurance in compliance with these requirements or not be in the business of selling insurance.
Merlin Law Group attorneys have been noticing a trend of actual cash value endorsements being added to insurance policies. One obvious reason for this trend is that the insurance premium is cheaper. So, while the selling of these policies may violate various mortgage requirements, federal laws and regulations, more policies are having these actual cash value endorsements added to them.
A recent case held that actual cash endorsements attached to the policy effectively made the insurance contact an actual cash value policy rather than a replacement cost policy.1 The policyholder repaired and replaced his fire damaged property but was limited to the actual cash value.
As a side note to the case, the insurance company’s brief2 indicated that the policyholder‘s ex-wife originally purchased the policyholder’s policy years before the fire and before they were divorced. The policyholder may have been surprised to learn that his now ex-wife had obtained a short-term deal on “cheap insurance.” I am certain that he probably needs a little more post-marital therapy to cope with this post-divorce surprise.
1 Hatcher v. MDOW ins. Co., — F.3d —, 2018 WL 4255603 (8th Cir Sept. 7, 2018).
2 Hatcher v. MDOW ins. Co., No. 17-2410 (8th Cir. Appellee brief, filed Nov. 17, 2017).