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Flood Insurance - Replacement Cost Figure
by Dan Persfull, BOL Guru
Guru Bios
Question: When calculating proper amounts of insurance coverage for both hazard and flood, what does the replacement cost figure mean in the insurance policy? Example, the building coverage for a particular loan is $204k and the replacement cost is $130k. What does the $130k constitute and is it applicable to the determination of coverage?
Answer: For flood insurance coverage the replacement cost is encouraged but it is not required. The flood rules only require you to carry flood insurance in amount equal to the lesser of the outstanding principal balance of the loan (including senior liens, if applicable), the value of the structure (appraised value less land value), or the maximum coverage under the NFIP for the structure type.
In general, replacement cost means the property is insured in an amount to fully cover the cost of replacement. However there can be different limitations from company to company, so you will have to read the policy or contact the agent for any specific limitations.
First published on BankersOnline.com 11/21/2005
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