Mortgage Value Limit for Homeowners? That Sounds Like a Bad Idea

For context, I suggest that you read this Insurance Journal story that provides some details related to the bill that I want to discuss. Here’s the link: https://www.insurancejournal.com/news/southeast/2024/01/04/754264.htm.

We put this Florida story in the “Politicians don’t understand insurance” file.

A bill has been submitted for the 2024 Florida legislative session. This bill, HB 809, and its identical companion SB 1070 have been referred to their appropriate committees. It is completely possible that these bills will never make it out of committee so that might make you wonder why we are discussing them. These bills speak to the greater truth that there can be no legislative solution to the issues that the Florida insurance market faces. These bills require that “Before issuing a personal lines residential property insurance policy, the insurer shall offer a policy that provides a coverage limit on the dwelling equal to the unpaid principal balance of all mortgage loans on the risk.”

I have several problems with this bill.

The first problem with this bill is that there is no wording that excludes those dwellings that have no mortgage. You might say that it doesn’t make any sense to make an insurance company offer this when there is no mortgage, but the bill doesn’t make that exception, which indicates that the policy would still have to be offered. This means that the state is mandating that an insurance company must offer a policy that essentially provides no coverage. If the goal is to provide low-cost coverage, that might fit the bill. On the other hand, if the goal is to provide coverage for losses, this might be a problem.

There’s also the problem of lower mortgage limits and higher replacement cost values. The cost of rebuilding a house doesn’t generally go down. It goes up. Conversely, as a result of paying on the mortgage, that value generally goes down. The exception would be if the insured took out a HELOC or refinanced the mortgage and added to their loan during the policy term, in which case the limit could go up next year. That is unless the insured neglects to tell the insurance company about their new loan terms.

Then there’s the problem of what happens with the check once the claim is paid. The bill doesn’t make that clear.

Let’s say that there is a house with a replacement cost of $300,000 and a mortgage value at inception of $100,000. For the sake of our example, let’s say that there is a loss of $120,000. The insurance company writes a check for the policy limit of $100,000 in the name of the insured and the mortgage company because of the mortgagee condition on the policy. The mortgage company knows that this is not enough to repair the property but enough to cover their exposure. So, what happens next? In a perfect world, the insured finds someone who will do the work to repair the house for the amount of the check, and the mortgage company signs off on the check allowing the insured to use it for the repairs.

This isn’t a perfect world. It’s Florida.

What is more likely to happen is that the insured and their mortgage company argue about the disposition of the check. Neither one wants to endorse the check because both want to use it for different purposes. The mortgage company wants to pay off the mortgage and the insured wants their home put back together.

My last problem with this bill is that it has a signature requirement.

Here’s how the bill reads. “…, the insurer shall obtain a statement signed by all insureds…” My guess is that the representative intended that to mean the named insureds or the adult insureds, but an insured is not necessarily a named insured and it’s possible that there may be more insureds than the representative intended.

Before I get to the definition of insured from the ISO HO 00 03 05 11, I have to make two quick notes. First, individual policies may have differences in this definition so read the actual policy that you’re dealing with to ensure that you have the correct details. Second, this is the first iteration of this bill, the final bill (if passed) may read differently. Third, we concede that it’s likely that this law cannot compel insurance companies to require that minors must sign legal documents because that’s just not how it works. Back to our definition with one final note. I have made some formatting changes in quoting the policy.

“Insured” means:

Let’s begin the scenario. The Wraight family (no relation, of course) includes Mr. and Mrs. and their three children who are 22 and in college in Michigan, 20 and living at home taking technical training, and 17. If this bill is passed, when this family shops for insurance on the home that they have been living in for 10 years (with 10 years left on the mortgage), their insurance company will have to offer them a policy with a policy limit equal to the mortgage amount at the policy inception.

If the family chooses that coverage, the way the bill is written, the agent or insurance company must obtain the signatures of the two adult homeowners and two of their adult children. One of them lives in another state because they are going to school.

This demonstrates that the representative doesn’t understand insurance policies and needs more insurance education or an insurance professional available to consult. Or the representative knows that this won’t work and wants to be seen trying to make insurance more affordable for the residents in her district.