Lenders Requiring Casualty Insurance Binders Which Guarantee Full Replacement Cost Of A Property Being Mortgaged - Q4 1998

Mass. Gen. Laws chapter 183, section 66 states that a bank, lending institution, mortgage company or any mortgagee doing business in the Commonwealth, when making a mortgage loan, "shall not require, as a condition of a mortgage or as a term of a mortgage deed, that the mortgagor purchase casualty insurance on property which is the subject of the mortgage in an amount in excess of the replacement cost of the buildings or appurtenances on the mortgaged premises." Based on the language of this section, the Division is of the opinion that insurance binders issued by insurance agents in a mortgage transaction must state that insurance coverage is for the replacement cost of the mortgaged premises. Section 66 does not include any other type of insurance, and a lender may not require such coverage in excess of that authorized by statute.

Mass. Gen. Laws chapter 175, section 95 may be implicated by banks requesting insurance in excess of the fair market value of the property. This question is a matter for the Division of Insurance to decide, as that statute falls under its jurisdiction.