I am not sure why you would deny a loan for this reason. Is there something unique/special about this specific loan. Every building on a piece of property has a replacement cost value less the overall property value when the land value is included in the total value. You cannot insure the land on any transaction.
I might have a house that has a replacement cost value of $250,000 and it sits on 10 acres worth $5,000,000. You might loan me $2,000,000 - why would I need $2,000,000 in hazard insurance on the house.
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