“When we had this big real estate boom, everybody and their brother signed up to be a mortgage broker, so we had more brokers than attorneys there for awhile,” said Robert “Bob” Fowinkle, the president of Bradenton-based insurance agency Moore Fowinkle & Schroer. “Problem was, they didn't know what they were doing.”

The issue is even more problematic when the lender or broker is out of state. “The guy in Atlanta or Memphis handling the financing is not aware of Florida law,” Fowinkle said. “When I see one [an insured value] that looks like it's out of line, I hand that rule out.”

Senior Appraiser Bruce Riemann of the Lake Mary office of GAB Robins experienced the problem first-hand. “My carrier wanted to throw a 'lot value' into the overall policy for my home,” he said. “I knew that wasn't right, and they finally backed off it. But the average person doesn't know [to fight it]. I don't know where this practice is coming from or how long it has been adopted by carriers, but when you get into tens of thousands of policies, it becomes real money.”

Apples and Oranges

“Insurable value and market value are not synonymous,” Riemann stressed. “The cost of labor and materials to construct the building equals insurable value. Market value includes the land.

“In basic terms, an insurance appraisal is a replacement cost analysis that provides an accurate estimate of the amount of insurance required to replace each structure and amenity insured exactly as it stands when the report was prepared,” Riemann said. “If a property has never had an insurance appraisal performed, previous policy limits may have been based on erroneous values. By estimating the percentage to increase coverage each year, this error may have been perpetuated, if not increased. This could result in the property being over-insured, in which case property owners are paying excess premiums, or the property could be underinsured, in which case owners could be faced with having inadequate funds to rebuild the structure should a loss occur.”

“If there is no loss, nobody ever knows. But when a claim occurs, you get into a real mess with the carrier and the payout,” Fowinkle echoed.

“One of the biggest cases we ever ran across was a guy on Longboat Key with a house on a canal lot. He told us the bank wanted us to write $850,000 on it,” Fowinkle said. “I went and looked at it and asked how they arrived at that dollar amount. Turned out, it was the total mortgage on the house. We ended up writing the coverage based on house only, as we should have. It certainly lowered his insurance costs.”

In Case of Flood

FEMA has a similar land-not-included provision in its National Flood Insurance Program (NFIP) guidelines: “The maximum amount of flood insurance coverage available under the NFIP is the lesser of the insurable value of the building or the maximum amount of coverage available in that type of property under the NFIP. This is especially significant in cases where the loan exceeds the value of the insurance building(s). Where the outstanding principal balance of the loan exceeds the insurable value of the building, the insurance amount should be the insurable value of the building rather than the outstanding principal balance of the loan. If the lender does not take into account separate valuations of uninsurable land and property improvements, then the insured may be paying for coverage that exceeds the amount the NFIP will pay in the event of a loss. Lenders should avoid creating such a situation.”

“The insurable values for flood coverage are higher than for hazard,” Riemann said. “The reason for this difference is that most insurance companies do not include coverage for the foundations or unit interiors. With FEMA, coverage is from the top of roof to below the slab, all improvements, even pilings. It usually recommends the inclusion of unit interior finishes and foundations in the insurable value.”

Condominiums pose an additional problem for people who want flood insurance. In Florida, condominiums must insure to the full 100 percent replacement costs, but FEMA imposes a $250,000 cap per condominium unit for replacement, too low to fully insure many units, especially waterfront units. That forces consumers and agents to go to other markets, such as Lloyd's of London, for additional coverage.

Florida has, so far, suffered minimal impact this hurricane season. However, the significant damage from floods and wind in other states provide a cautionary tale for agents to address with their clients.

What the Florida Statute Says:

“No mortgage lender shall, in connection with any application for a mortgage loan in this state which is secured by a mortgage on residential real estate located in this state, require any prospective mortgagor to obtain by purchase or otherwise a fire insurance policy in excess of the replacement value of the covered premises as a condition for granting such a mortgage.”

[Specific Authority 624.308(1) FS. Law Implemented 624.307(1), 626.9551(1) FS. History-New 1-27-92, Formerly 4-167.009, Amended 9-15-05.]