Claire-ification

Are you an IA&B member with a question? Contact IA&B Vice President - Advocacy Claire Pantaloni, CIC, CISR to find the answer at 717-918-9202 or ClaireP@IABforME.com.

QUESTION:

We’re receiving requests again from banks to provide a Replacement Cost Estimator (RCE) for homes when clients apply for a loan. Can we refuse to share the RCE?

ANSWER:

After a short reprieve, many lenders are back to asking for the full Replacement Cost Estimator (RCE) from agencies. Let’s go over what transpired and where we are today.

First, are agencies required to provide the RCE to the lender? The short answer is no, we are not aware of any law or regulation requiring agents to supply a replacement cost estimator to banks. However, much of the issue likely stems from confusion over Fannie Mae and Freddie Mac guidance to lenders.

In early 2024, Fannie and Freddie announced that they planned to update guidance regarding property insurance requirements to become effective June 1, 2024. Among other things, the new guidance would have:

▲ Required Replacement Cost for all aspects of the property insurance (without allowing any components, including roofs, to be settled on an ACV basis)

▲ Expected a verification of the RC value by having agents or insurers provide a copy of the RC estimator or otherwise making the determination of the property’s replacement value

This guidance posed many practical issues and E&O exposures for agents. It clearly did not account for recent market conditions that have seen many carriers implement ACV for the wind peril on roofs. In addition, agents are not construction experts and should not be expected to make any determination of a property’s replacement value.

The industry pushed back on a number of items and on May 8, 2024, Fannie and Freddie each published an industry letter regarding RESPONSIBILITIES TO INSURE THE MORTGAGED PREMISES that stated: "effective immediately and until further notice, we will not cite findings [...] for noncompliance related to a Servicer obtaining RCVs during their review of hazard insurance for the purposes of determining coverage amount sufficiency."

Their guidelines still reference full replacement cost, but both agreed not to enforce this as a condition of loan purchase. They also agreed to work with all stakeholders to develop more appropriate guidance. Bottom line: while the lenders may prefer to have a copy of the RC estimator, they are not required to obtain it to satisfy Fannie or Freddie. Sharing the language provided by Fannie and Freddie with the lender may help assuage their concerns and resolve the situation.

Are you allowed to share the RCE? Not necessarily. If your agency uses a third-par ty tool (e.g., CoreLogic, 360Value), you will probably want to check your license agreement. Many replacement cost vendors prohibit the redistribution of their output — including to outside third parties like lenders — without written permission.

If the replacement cost estimate was provided by a carrier’s proprietary system, you may need carrier approval before releasing it.

And in all cases, you should get consent from the insured before sharing any personally identifiable information that relates to their policy or underwriting with the lender. The lender does not yet hold any legal or beneficial interest in the policy since the loan has not yet been extended.

What if you decide to share it? If you’ve received proper permissions — from the customer, the vendor, and/or carrier (as applicable) — and you’re comfortable sharing, you may want to include a disclaimer to the effect that it was prepared using underwriting tools for insurance purposes only, is not a property appraisal or construction estimate, and that you make no guarantee that the estimated amount reflects the actual cost to rebuild the property. Two sample disclaimers are available on our website for agents to review (IABforME.com/eo-prevention). This kind of disclaimer can help limit your E&O exposure and clarify that you’re not holding yourself out as a construction expert.

This document is not a legal opinion and should not be relied upon as such. The intent of this document is to provide a general background regarding the topic or topics discussed, not to provide legal advice. Producers and agencies should consult an attorney regarding specific situations and specific questions with respect to the topic or topics covered in this document. Neither the Insurance Agents & Brokers nor any of its employees shall be responsible for any errors or omissions regarding any statements made in this document, nor any errors or omissions regarding any statutes, regulations, court rules, and/or any other government documents cited in this document.