Hello, I was having a discussion with a lender on appropriate coverage amounts for real estate when he brought up coinsurance penalties. It looks like insurance companies will impose a penalty on the insured if they under-insure their property.

https://www.gocgo.com/blog/property-coinsurance/#:~:text=Coinsurance%20is%20a%20penalty%20imposed,and%20the%20amount%20under%20reported

I have not heard about this penalty before and to my knowledge it has never come up in any bank examination. While doing some of my own research it looks like Texas might not allow coinsurance clauses and therefore this penalty would not come into play with any properties insured in Texas.

https://texas.public.law/statutes/tex._ins._code_section_2002.005

Does your institution monitor your insurance policies to ensure a coinsurance penalty would not be assessed? Or am I correct in that this is not a concern for properties in Texas?

Thank you

Outside of fire insurance, I am not sure that applies to other insurance. If you require that property, be insured, do you not just require it to be insurance up to 80% of the insurable value? I think that is what most lenders do, if they require insurance.

Yes, that is our requirement but some lenders have occasionally made exceptions to this in the past. The lender that I was discussing insurance with thought relaxing this requirement might have bigger repercussions than we were aware of, especially if this exception was applied to a high-dollar loan property.

So if I am reading your response correctly, coinsurance penalties cannot be applied to fire insurance coverage in Texas.

According to that statute - other limitations can be imposed by the Texas Department of Insurance on other insurance types, but you would have to talk to an insurance expert to figure out if that has ever happened.

Thank you for your help!