The replacement cost coverage on a residence that we are considering refinancing is less than the amount of our loan. When we quetioned the client, we were told that he has "expanded replacement cost" coverage, which will make up the difference. I googled the term and it appears to ensure the provision of funds in the amount the home's replacement cost exceeds the insured amount. Is this acceptable? Why wouldn't the client just increase the amount covered? I have never seen this situation before and am concerned that it won't fly with the regulators. Any thoughts are appreciated!

Sounds fishy... I think our underwriters would consider that insufficient coverage and would require the borrower to increase their coverage. I've never heard of expanded replacement cost, either, but it sounds a lot like GAP insurance! I think regulators might have a problem with this because the insurance company is going pay out (in the event of catastrophe) based on what it would cost to replace that home which, in their eyes, may or may not be enough to pay off that loan. I'm also always taking the conservative road, though, so others might have different opinions!

What type of insurance coverage are you referring too? Home-owner's insurance? If this is home-owner's insurance, the amount in insurance required is up to the bank's risk assessment and is not normally subject to regulatory criticism. Expanded replacement cost coverage is a common feature of many policies.

"I think regulators might have a problem with this because the insurance company is going pay out (in the event of catastrophe) based on what it would cost to replace that home which, in their eyes, may or may not be enough to pay off that loan."

I don't understand this statement. How can you insure something for more than it is worth?