[Code of Federal Regulations]
[Title 7, Volume 11]
[Revised as of January 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 7CFR1806.3]

[Page 1155-1156]
 
                          TITLE 7--AGRICULTURE
 
    CHAPTER XVIII--RURAL HOUSING SERVICE, RURAL BUSINESS-COOPERATIVE 
SERVICE, RURAL UTILITIES SERVICE, AND FARM SERVICE AGENCY, DEPARTMENT OF 
                               AGRICULTURE
 
PART 1806--INSURANCE--Table of Contents
 
                   Subpart A--Real Property Insurance
 
Sec. 1806.3  Coverage requirements.

    The County Supervisor should encourage the borrower for his own 
protection to insure for their depreciated replacement value (actual 
cash value) all essential buildings. Essential buildings include the 
dwelling and any other buildings that are necessary for the operation of 
the property or that provide income to assure orderly repayment of the 
loan. If insurance is for less than the depreciated replacement value of 
all essential buildings, the County Supervisor will see that the 
coverage is obtained on one or more of the most essential buildings. The 
minimum amount of coverage will be furnished as prescribed below:
    (a) Loans secured by a first lien. (1) When the unpaid balance of 
the FmHA or its successor agency under Public Law 103-354 loan secured 
by a first lien is equal to or greater than the depreciated replacement 
value of the essential buildings, or the cost of adequate essential 
buildings which can be constructed for amounts less than the depreciated 
replacement value of the existing buildings, the essential buildings 
will be insured, to the nearest multiple of insurance that is available, 
for the lesser of (i) their depreciated replacement value, or (ii) the 
cost of constructing adequate essential buildings. For example, if 
insurance is available in only multiples of $1,000, the minimum 
insurance required on an essential building valued at $6,600 would be 
$7,000, and that required on an essential building valued at $6,400 
would be $6,000.
    (2) When the unpaid balance of the loan is less than the sum of the 
depreciated replacement value of the essential buildings to be insured, 
the total amount of insurance must be at least equal to the lesser of 
(i) the unpaid balance of the loan, or (ii) the cost of adequate 
essential buildings which can be constructed for amounts less than the 
depreciated replacement value of the existing buildings to be insured.
    (3) When, by the use of loan funds or otherwise, buildings are 
erected or substantial improvements are made to essential buildings, the 
amount of insurance will be adjusted in accordance with paragraphs 
(a)(1) or (2) of this section, whichever is applicable.
    (b) Loans secured by other than first liens. The amount of insurance 
on buildings in the case of FmHA or its successor agency under Public 
Law 103-354 loans secured by other than a first lien will be the same as 
required in paragraph (a) of this section, with the understanding that 
the unpaid balance of the loan will be deemed for this purpose to be the 
amount of the total real estate mortgage indebtedness owed all prior 
mortgagees named in the mortgage clause, plus the debt to the FmHA or 
its successor agency under Public Law 103-354 which is secured by real 
estate mortgage.
    (c) Exception of buildings from insurance. (1) Insurance will not be 
required on a building:
    (i) That is not essential.
    (ii) In such a state of disrepair that the cost of insurance would 
be prohibitive.
    (iii) Which has a depreciated replacement value of $2,500 or less.
    (iv) Which is being or has been repaired with a section 504 loan of 
$7,500 or less. Families receiving section 504 loans should be 
encouraged but not required to carry insurance on their home.
    (v) On LH security property which was not built or repaired with 
FmHA or its successor agency under Public Law 103-354 loan funds 
provided that the State Director determines that the

[[Page 1156]]

land and other structures adequately secure the FmHA or its successor 
agency under Public Law 103-354 loan and any prior liens.
    (vi) On which the hazards are so slight because of the character and 
construction of the building, or the cost of the insurance is so high in 
comparison with the value of the building that, according to common 
standards of judgment, it should not be insured, including but not 
limited to windmills, silos, and fire-cured tobacco barns.
    (vii) In cases where the unpaid balance of the FmHA or its successor 
agency under Public Law 103-354 loans and any prior liens have been 
reduced to $2,500 or less, property insurance need not be required if 
the borrower wants to discontinue it, provided the County Supervisor 
determines that the value of the land security itself is sufficient to 
protect the FmHA or its successor agency under Public Law 103-354 in its 
collection of the amount of the outstanding indebtedness.
    (viii) If insurance for windstorm and hail to meet all FmHA or its 
successor agency under Public Law 103-354 requirements is not available 
in a hurricane area, the County Supervisor may accept from the borrower 
or applicant the windstorm and hail insurance policy that most nearly 
conforms to FmHA or its successor agency under Public Law 103-354 
requirements. If such an exception is made, the situation should be 
fully documented in the borrower's case file. However, if the best 
insurance policy a borrower or applicant can obtain at the time he 
receives a loan contains a loss deductible clause for windstorm and hail 
damage exceeding $250 or 10 percent of the actual cash value of the 
buildings, whichever amount is greater, the insurance policy, with an 
explanation of the reasons why more adequate insurance is not available 
will be submitted to the State Office for prior approval.
    (2) [Reserved]

[41 FR 34571, Aug. 16, 1976, as amended at 56 FR 6945, Feb. 21, 1991]