Am i being taken advantage of with insurance?

Question

So, i bought a triplex in Keene, NH in March of this year. This is my first property, so it's all very new to me. My insurance agent gave me a great quote on the house that was cheaper than all the competitors. I ended up prepaying for one year's worth of insurance, and my lender escrowed 2 months worth of insurance on top of that. I also put more money into escrow every month. Now, a couple months after i bought the property, I wonder if this is excessive. Why do they need 14 months of insurance plus a monthly escrow? I recently found out that a different lender (TD Bank) doesn't escrow for insurance at all, so now i'm really wondering if i made a mistake.

In addition to that, my insurance agent recently sent me an email saying that after sending an inspector to my property, they've decided that their estimate of my house's replacement cost is really $527,000. Their previous quote was $413,000, which is over $100,000 less/ roughly 20% less. I'm wondering how they could be off by so much? Now they want me to sign a statement agreeing to the increase after i've already pre paid based on the $413k quote. I'd only have to pay $20 more a month, so the actual cost to me isn't that big of a deal. However, i can't help but feel as if i've been misled. I wonder if they deliberately underquoted me so that i'd choose their policy over their competitors?

Do you think i'm overreacting to the new estimate? Would you sign the document if you were me? Is 14 months of insurance prepay/ escrow plus a monthly escrow reasonable to begin with?

Lynn McGeein · Answer

Some (most in my experience) lenders require escrow for insurance and taxes.  If they do, it's usually the first annual insurance premium paid in advance, then 2-3 months escrow for next year's insurance, so 14-15 months total due at settlement. That way you'll have paid in the full insurance amount for next year by the time it's due again, and they are  allowed to keep 2-3 months in escrow at all times.  They will send you an escrow analysis once a year to show you how they are handling your money and will adjust the escrow payment for any increase or decrease if it goes over their allowed limit or if you're not paying enough to cover your insurance and taxes.   If you feel the insurance company is charging too much, you can always shop around and switch.  The current company will usually refund all payments covering dates after cancellation of the policy, either sending it back to mortgage company escrow or directly to you, unless they have a minimum coverage period.  You'll need to ensure the mortgage company receives required information for the new insurance policy or it's a huge headache.  Instructions for notifying the escrow department of changes are usually on your bill or your online account, and you should have that information ready to give to any new insurance company, then double-check to make sure it's been received by the mortgage company or they'll force-place expensive insurance on you and it takes months to get it straightened out, even if you're already covered by someone else.

Sean LeBlanc · Answer

14 Months is of insurance is actually totally normal on financed transactions. With homeowners insurance you always pay one year up front ( 12 months) and then typically start paying monthly installments towards next years premium.  if you put down less than 20%, most loan programs will require you to "escrow" your taxes and insurance.

At closing, a "cushion", usually 2 months, is deposited in your escrow account. There are federal laws in place that force lenders to retain a certain amount of cushion in your escrow account, the reason for this is so that there is money to pull from if your taxes or insurance increase, instead of just submitting a delinquent payment.

When taxes and insurance go up, you will get an escrow shortage letter, and they will adjust your payment to make sure the required cushion is always in the account.

If you put down 20%, most lenders will give you the choice on whether or not you want to escrow for taxes and insurance. Some lenders will allow you to waive insurance on less than 20% down, but all will require an escrow for taxes if not putting down 20%.

As far as the insurance company re-trading on your premium, this has happened to me as well on an older rental property in NH, they did an inspection and discovered old wiring and jacked up the premium, I shopped it around and it seemed to be par for the course on an old building like that.  They all said if I made a few improvements to wiring premium will go down.

Tucker McCarthy · Answer

@Sasha Fukuda honestly those premium numbers don't sound too bad. I have policies for duplexes in Milford, NH that are about the same. Numbers are always higher when the property isn't owner occupied.

Sasha Fukuda · Answer

The annual premium was $1,570, and at 80% replacement cost insured up to $331k on the property I bought for $190k plus $1 million liability. They want to raise the amount insured to $426k, which would make the annual premium $1,800.

Dennis M. · Answer

How much is the actual policy ? You never gave us numbers

Jacob Sampson · Answer

@Tucker McCarthy you are so right!!  Every industry built up around buying or selling houses irritates me!  Humans have been doing this for 1000s of years.  It should be the most well oiled machine in existence.  Instead you get scenarios like this one.

@Sasha Fukuda this is a perfect example of something that makes no sense.  80% of replacement.  If replacement is $527k then 80% is $420kish.  If that property gets destroyed you wouldn't take that payout and just rebuild the absolute nicest building in the neighborhood (IMO), you would pay off the loan and go find 5 new deals.

I would shop around for an insurance company that lets you insure for purchase price or slightly above.

Tucker McCarthy · Answer

I have never paid more than 3 months of insurance at closing, 14 months is ridiculous. That could be your specific lenders requirements though so if that's the case, there is nothing you can do about that.

If they are going to up your insurance after your closing like that, I would highly suggest shopping for another insurer.

I don't know why insurance companies are so frustrating to work with! I've had multiple problems... I now shop between two companies for each property.

Sasha Fukuda · Answer

Ok, I remember now why i have insurance on 80% replacement cost. The insurance agent said that if i had 80% or more, I'd get the face value of that policy. So, if my property suffered damage equalling 75% of replacement cost, the insurance would pay the full amount. However, if i got less than 80% of replacement cost, any payout whatsoever would never be higher than that percentage. So if i got insurance equalling 75% of replacement cost, i could only collect 75% of any damage that occurred to my property. If i got insurance equalling 50% of replacement cost, i could never collect more than 50% of any damage that occurred to my property, etc.

Sasha Fukuda · Answer

1) I can accept that i have to pre pay something, but i'm wondering if 14 months worth of insurance up front plus a monthly insurance escrow is typical?

2) The bank based their insurance requirements off the amount lended. However, the insurance agent said there was some state specific reason why i had to insure to at least 80% of the replacement value, although i don't remember what it was. I bought it for 190k and the appraisal came back at 205k.

Jacob Sampson · Answer

To point #1 - This may be state specific but I think insurance has to be paid in advance so the bank is escrowing for the following years payments.  Either way, you aren't being screwed.  If you have overpayed into escrow you will be refunded the overage next year.  You could also just talk to the bank to understand what is going on.

To point #2 - You don't care about replacement cost because you don't insure for replacement on an investment property.  You insure for purchase price (maybe a little more) so that if the property is destroyed, you pay off the bank collect the remaining cash and move onto the next investment.

What did you purchase the property for?

Am i being taken advantage of with insurance?

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