Mortgage lenders are requiring agents to supply a replacement cost estimate (RCE) for refinance closings. Is this something the agents should be doing?
Q: Mortgage lenders are requiring agents to supply a replacement cost estimate (RCE) for refinance closings. Is this something the agents should be doing? Is it an errors & omissions issue?
Response 1: First of all, in my opinion, an agent should never refer to any document generated by the agency as an RCE. If you are using a service to determine the amount of insurance required for eligibility by an insurer, you should refer to it in those terms.
If the insured wants to know the replacement cost at a point in time or if a lender wants to know replacement cost at a point in time, they should hire the appropriate professionals who purchase professional liability insurance for that purpose.
You must understand the potential liability in telling someone who is depending on your advice that something is true when it may or may not be.
Response 2: I wouldn't do it. There are many reasons, but the first among them is that it's private between you and your client. I'd tell the bank that such items are private. If the client prefers to provide them, that's between the bank and the client. Talk to your companies and E&O carrier to clarify your internal rules for RCEs.
Response 3: It certainly could be an E&O issue in certain circumstances. The lenders need to use their own method to verify replacement cost, which, by the way, is not directly related to property and real estate values. The best practice is not to share this information.
If you calculate the RCE using software you purchase, it may also be a violation of the licensing agreement, so check with the vendor. If you calculate the RCE using the carrier's software, check with the carrier to see if you have permission to release it. They may not want you to and it may be a violation of their software licensing agreement.
Response 4: Here is an E&O Guardian article that, although it's a bit old, is still on point: “The Price is Right—Considerations for Avoiding E&O Claims from Property Valuations." It is a very bad idea to furnish RCEs to third parties. The value is up to your insured.
Response 5: The agent must supply relevant insurance information. Providing a cost estimate is not within the responsibility of the agent. The homeowner must seek an appraisal from a licensed person in this field of expertise. Be cautious about involving a bank appraiser's valuation. The bank will only be concerned with an amount necessary to cover the amount of the mortgage, not a replacement value.
Response 6: Ask your E&O carrier if you or the insurer are required to provide an RCE estimate when selling homeowners insurance. These days it is a common request by homeowners' lenders, which is funny because they appraise the property during the loan underwriting process but do that based on sale values without regard to RCE and shift that burden to others.
In my experience, the agents typically use the insurer RCE tools to satisfy the lender. Those estimates have disclosures that the homeowners carriers use as the minimum limit they will accept for homeowners coverage. It doesn't mean that is the true replacement cost of the property. When there is an extended replacement cost provision in the homeowners policy, it gives them some comfort of a buffer limit.
Response 7: You are correct in thinking your provision of an RCE might give rise to an E&O exposure, given that the choice of limits is ultimately the insured's to make. Your role does not include being an estimator. Perhaps the carrier will be prepared to provide one to the insured, given their direct relationship, which your client can choose to accept.
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