Insurance on a MFH - overpriced binder?

[Christen G.]

Hi all,

I'm closing on triplex here in the next couple of weeks (yay!) and went to my regular insurance guy to grab a quote/binder. My lender red flagged it for me when the binder came in as the coverage was for a little over $100k of the purchase price. The insurance guy said in his defense, "We are working with tools that estimate the cost to rebuild the home after a total loss. That is different than the transaction value that you paid. I would be happy to match the inspection “cost new” when you have the report back."

I feel like I will have bigger problems on my hands if there's a "total loss..."  But the lender replied that, "...typically you would never have a home over-insured for even the purchase price." So I just don't know what's going on.

When I asked the insurance agent to lower it or we'd look elsewhere he seemed surprised and offended. "I'm just looking out for your property." 

What is going on here...does anyone have experience with this sort of philosophy? I'm kinda thinking I should look for a new insurance broker and could be saving a lot of money. Thanks in advance.

[Jason Bott]

@Christen G. Your agent is correct & your loan officer does not understand insurance.

Many times market value is less than Replacement Cost, especially when it comes to properties that cash flow. 

In my local market, cash flowing properties are $40-$50 per sq/ft and the Replacement Cost is closer to $100-$125 per sq/ft.

You can underinsure to the market value, but please keep in mind, your policy may penalize you at claim time.  Think of it like this, if you insure it for 50% of what it will cost to rebuild, then the insurance company will only pay you 50% of the claim.