Question from a Big I NY member: We have been receiving requests from the banks to provide a replacement cost estimator to them for re-finance and new loans. Are you aware of any new law or regulation changes regarding this?
Answer: This all apparently stems from actions proposed by Fannie Mae and Freddie Mac last winter. However, at the behest of the national Big I and the National Association of Mutual Insurance Companies, they put an indefinite hold on the actions last June. That hold has evidently not stopped some lenders from trying to enforce them.
Here is my thought process on the matter:
- The borrower is your client. The lender is not.
- You have obligations to your clients. You do not have obligations to parties who are not clients (with obvious exceptions such as the state insurance regulator and law enforcement authorities.)
- The replacement cost estimate is your work. You are not obligated to share your work with anyone who does not have a contractual or law enforcement right to it.
- You can always share your work with whomever you please, subject to the constraints of privacy laws and regulations such as the federal Fair Credit Reporting Act.
- If you wish to share it, obtain the carrier’s approval first. They might not want you to release it, and your contract may bind you to their instructions. If they have no objection, you may share a copy of the replacement cost calculation with your client.
- If the client has a copy of the calculation, they may share it with the lender as they see fit. Sharing of information should happen between the lender and the borrower, not between the insurance agency and the lender. Again, the lender is not your client.
A couple of caveats:
1. If you share the calculation with the client, include a disclaimer stating that
- The figure you arrived at is merely an estimate determined using the tools at your disposal.
- You have no expertise in building construction.
- You make no warranty as to the accuracy of the figure.
- As the subject property belongs to the client, and the client knows their insurance needs best, they should consult with an expert in construction on the replacement cost value.
2. Be aware that both providing the calculation and not providing it increase your errors and omissions liability risk. If you provide it and the figure later turns out to be an inadequate amount of insurance, it is possible that the client and/or the lender may sue your agency for alleged negligent misrepresentation. If you decline to provide it and the lender subsequently refuses to grant the loan, the client may sue the agency for allegedly costing them the loan. Thus, there are risks either way.
It is ultimately up to the borrower to satisfy a lender’s requests. While your agency naturally wants to assist its client, it is not the agency’s responsibility to make the lender happy.