Zoning Insurance

What is zoning insurance?

Zoning insurance is a product designed to protect a mortgage lender or a real estate owner from risks associated with property that has been rezoned and is currently classified as a non-conforming use. Typically, these properties are grandfathered so that they may continue to be used as they were prior to the rezoning. However, the grandfathering usually is negated if the property is substantially damaged by casualty. In such a case, the property must be rebuilt/repaired in accordance with current zoning or, in drastic cases, may not be rebuilt at all. In either event, a lender’s collateral will be impaired and remaining revenue generating square footage may be inadequate to service the debt. In addition, the owner’s equity can be reduced or wiped out. Zoning insurance is used to mitigate these risks.

How does it work?

Let’s look at the case of a lender who has a loan on the books for a property that has been rezoned to non-conforming use, and that the following assumptions apply:


Loan Amount $30,000,000
Replacement Cost $20,000,000
50% Fire Damage $10,000,000


If the property cannot be restored to the same size as prior to the casualty damage, then the policy will pay the lender the difference between fire insurance proceeds received and the unamortized loan amount which, in this case, is $20,000,000. Not to be ignored is the owner who, because of the inability to rebuild to prior specification, will suffer a loss of equity. His loss can be insured as well and will be determined by appraisal.

Who provides this type of insurance?

Presently, Lexington Insurance Company is the sole provider of this coverage. Lexington is a member of the American International Group (AIG) and is rated A XV by Best’s and A by S&P.

How much does it cost?

Because the underwriting variables of each risk will vary substantially, it’s not possible to give pricing guidelines on a web page. Please contact us and we’ll help you work through the steps to obtaining coverage terms.


Casualty and Condemnation Insurance  
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