Options for Protecting asset - forced placement insurance?

[May Rodriguez]

Hello, I am a private lender. My mortgagor's insurance only covers dwelling replacement. How do I protect my investment as the loan amount is more than the replacement cost of the property? I have looked at forced-placement insurance but the ones I have found only cover commercial properties. Property is in Florida.

Thank you 

[John Mocker]

Mary,

I am not aware of a normal insurance product that would cover more than Replacement cost for most structures.  The thought is, if the structure is rebuilt, you would be in the same (or most likely better shape) than pre-loss.  

The value of the Land can cause the Loan amount to exceed the Rebuilding (Replacement Cost) in some areas (NY Metro area, LA, DC, etc).  It became a problem in CT for borrowers because the banks insisted on the loan amount for the Insurance.  Eventually, laws were passed that required the Banks to accept Replacement Cost coverage.

Suppose you loan $500,000 on a property.  The house is 1500 sq ft and has a rebuilding cost of $300,000.  It burns the ground and is rebuilt with the $300,000 coverage.  Wouldn't you be in at least the same place after it was rebuilt (barring changes in he local market I would guess the value of the property with an newly built house to be greater than before) 

[May Rodriguez]

Quote from @John Mocker:

Mary,

I am not aware of a normal insurance product that would cover more than Replacement cost for most structures.  The thought is, if the structure is rebuilt, you would be in the same (or most likely better shape) than pre-loss.  

The value of the Land can cause the Loan amount to exceed the Rebuilding (Replacement Cost) in some areas (NY Metro area, LA, DC, etc).  It became a problem in CT for borrowers because the banks insisted on the loan amount for the Insurance.  Eventually, laws were passed that required the Banks to accept Replacement Cost coverage.

Suppose you loan $500,000 on a property.  The house is 1500 sq ft and has a rebuilding cost of $300,000.  It burns the ground and is rebuilt with the $300,000 coverage.  Wouldn't you be in at least the same place after it was rebuilt (barring changes in he local market I would guess the value of the property with an newly built house to be greater than before) 

 Thank you John for your reply. The issue I have and seen being thru several hurricanes in Florida is that once a hurricane passed and there is damage, most contractor's raise their fees as well as materials. It is all supply and demand. All of the sudden, then a roof replacement cost went from example $5K to $8K - $10K after a hurricane. Who pays for that increase cost? The insurance company allows an additional 25% increase in cost; but we all know after a hurricane it will most likely be way more than 25%