The following is a typical situation I have faced:
An individual purchases a defunct gas station, paying $300,000 for the plot. He spends another $100,000 getting the site ready for a structure and then erects an inexpensive structure for $200,000. His total investment is $600,000.
He obtains a mortgage for $400,000, and the lender insists on a perils policy for $400,000. Since there is no way the insurance company will pay more than $200,000, the lender is forcing the insured to pay double the premium.
As of Jan. 1, this scenario can no longer take place in California. An amendment to the Civil Code Section 2955.5 reads:
(a) No lender shall require a borrower under a loan secured by real property to provide hazard insurance coverage on that property in an amount exceeding the replacement value of the improvements on the property established by the property insurer as selected by the borrower.
(b) Any person harmed by a violation of this section shall be entitled to obtain injunctive relief and may recover damages and reasonable attorney's fees and costs.
(c) A violation of this section does not affect the validity of the loan or the mortgage or deed of trust.
HERMANN P. SCHLANDER
Schlander is an insurance broker.