Over-Insurance: Requesting That A Borrower Over-Insure Their Property Violates the Law

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The Enforcement Unit has received information that some lenders, brokers, and mortgage loan originators (MLOs) are requiring consumers to increase their homeowner’s insurance to cover the entire mortgage amount rather than just the replacement cost of the improvements. While requiring an applicant to do so is prohibited, as the consumer might pay hundreds more in additional premiums for zero additional coverage, it is important that our licensees know that requesting that a consumer over-insure their property is a violation of the law.

Title 48 of the Revised Code of Washington (RCW) governs all insurance, insurance transactions, and persons having to do with insurance in Washington. Chapter RCW 48.27, dealing with property insurance, specifically prohibits over-insurance on property, and specifies that over-insurance may exist, and is prohibited, “in those instances when insured value is for improvements and land.” See, RCW 48.27.010(1).

In some geographic areas here in Washington the current market for real estate has been skyrocketing, with the value of the improvements (the home) lagging behind the increased value of the land (including the view, neighborhood, and civic improvements). When a consumer in that situation seeks financing, the mortgage loan amount is going to be driven by the value of the land as much as by the value of the house. A lender may want to condition making the loan on the consumer obtaining homeowner’s insurance in an amount that covers the entire mortgage, rather than just an amount to cover the replacement cost of the house.

Not only is it a violation for an insurance company or agent to issue such a policy, it is a violation for any person, including a lender, broker, or MLO to even request over-insurance. See, RCW 48.27.010(3) and (4).

While any insurance company or agent found to have been involved in this conduct would be subject to enforcement action by the Office of the Insurance Commissioner (OIC) (https://www.insurance.wa.gov), any licensed consumer loan company, mortgage broker, or employee of a licensed consumer loan company or mortgage broker, including MLOs, would be subject to enforcement action by the Department of Financial Institutions.

Over-insurance is classified by the OIC as an Unfair Practice and Fraud pursuant to RCW 48.30.260. As any violation of an applicable state law is also a violation of the Consumer Loan Act and Mortgage Broker Practices Act (See, RCW 31.04.027 (13) and RCW 19.146.0201(11), respectively), the Department of Financial Institutions would likewise charge any person requesting or compelling over-insurance with employing a scheme, device, or artifice to defraud or mislead any borrower, and engaging in any unfair or deceptive practice toward any person.

If you or someone you know has engaged in, or been a victim of this conduct, please contact the Consumer Services Division’s Enforcement Unit at (360) 725-7842.