My mortgage company requires me to have $ worth of insurance on my home. Is that true?

I face this question every day here in Arizona and here is my answer.

Most mortgage companies require you to have replacement cost coverage on your home. Replacement cost means if your home is totally destroyed, do you have enough coverage to replace the premises. When an insurance company insures your home, they run a cost estimator (sometimes called a RCT) to determine the replacement cost for your home. That includes, but not limited to, type of kitchen and bath rooms (basic, average, semi custom, custom or designer and how many), basement or cement slab, shingle or tile roof, type and quantity of windows and doors, and if you have a one/two/or three car garage or carport. The RCT system then tells your agent how much it would cost to replace your home.

At our agency, we go a step farther. We take that number and view your home via the internet to determine if that number is correct. Most of the time, we add between 2-5% more just to be safe. We also have something called Building Structure Extended Limits, which allows us to increase your replacement cost coverage by 120% or 140%, at very low additional cost.

Now to the real answer to this coverage question. Here is AZ State Law 44-1208:

44-120844-1208.  Loans secured by real estate; prohibited practices; insurance

Except for consumer lender loans regulated pursuant to section 6-636, for any loan that is secured by real property, a person shall not require as a condition of the loan that the borrower obtain property insurance coverage in an amount that exceeds the replacement cost of the improvements as established by the property insurer. 44-1208

This law simply states that no matter what the loan amount is on your home, in AZ, you cannot be required to carry more insurance than the replacement cost, as determined by your insurer.  

Hope this answer helps.