If you are among the many Californians who purchased or refinanced a home recently to take advantage of low mortgage interest rates, your lender may have violated California law by requiring you to purchase excess hazard insurance as a condition of receiving a loan.
In California, lenders may require homeowners have hazard insurance (also called homeowners insurance or fire insurance) as a condition of extending credit. However, the lender may not require a borrower to purchase insurance over and above the cost of replacing the buildings on the property. In other words, you cannot be required to purchase more insurance than would cover the cost of constructing a new home if yours burned down.
Unfortunately, some lenders in California may be violating that law by adopting unlawful policies, such as requiring a borrower have hazard insurance that covers 80% of the property’s total value, as opposed to the replacement value. A policy like this could lead to unlawfully high insurance requirements because the total value of real property can be much higher than the cost of the buildings on that property. For example, a small home on a piece of prime real estate might only cost $300,000 to build; but the property itself might be worth substantially more than that because of the location, particularly in a hot real estate market. Thus, basing the insurance requirement on the property’s total value would force homeowners to borrow much more than the replacement cost of their homes, which would in turn violate California law.
If your lender required you to purchase homeowners insurance coverage that exceeds the replacement value of your home, you should contact an experienced consumer attorney. The attorneys at Haeggquist & Eck can determine if you might have a claim against the lender to recover for the damages caused by such an unlawful practice.