That single-page form called an Evidence of Property Insurance (EPI) has generated more email in the past six months than any of the other 16 years I’ve been with the Florida Association of Insurance Agents. The reason is that agents are being barraged with lender requests/demands for wording such as:
“Full Replacement Cost”
“100 percent replacement cost”
“Guaranteed replacement cost”
“100 percent guaranteed replacement cost”
At a recent E&O class an agent told me, and in front of about five managers, that “I put ‘guaranteed replacement cost up to policy limits’ on the evidence of insurance.” I immediately reached for the valium!
It should be an invariable practice of an agency to insure structures for 100 percent of the estimated replacement cost. Doing that, however, is NOT THE SAME as stating “100 percent replacement cost.” The problem, to sum it up, is that the policy does not support that statement, nor does it support any of the other lender request statements above.
It’s key to understand what the policy DOES say about the loss-settlement provisions after a loss. This wording, in part, is from the standard ISO homeowners policy:
1. Property of the following types:
a. Personal property;
b. Awnings, carpeting, household appliances, outdoor antennas and outdoor equipment, whether or not attached to buildings;
c. Structures that are not buildings; and
d. Grave markers, including mausoleums; at actual cash value at the time of loss but not more than the amount required to repair or replace.
2. Buildings covered under Coverage A or B at replacement cost without deduction for depreciation, subject to the following:
a. If, at the time of loss, the amount of insurance in this policy on the damaged building is 80 percent or more of the full replacement cost of the building immediately before the loss, we will pay the cost to repair or replace, after application of any deductible and without deduction for depreciation, but not more than the least of the following amounts:
(1) The limit of liability under this policy that applies to the building;
(2) The replacement cost of that part of the building damaged with material of like kind and quality and for like use; or
(3) The necessary amount actually spent to repair or replace the damaged building.
b. We will pay no more than the actual cash value of the damage until actual repair or replacement is complete.
Some examples will illustrate how the insured could suffer a loss to the building item, but be paid on an ACV-basis and not on a replacement-costs basis.
In a misguided move to save money, the insured removes “replacement cost on contents” coverage from the policy. A fire damages the house to include wall-to-wall carpet and built-in appliances. While these two items are clearly building items, the unendorsed policy states that losses to these items are ACV. Had the “replacement cost on contents” endorsement been added, the loss would be settled on a replacement cost basis. ACV applies, not replacement-cost loss settlement.
After a loss that destroyed an attached carport and attached screened-in patio, the insured decides not to replace those parts of the dwelling and just pocket the money. The policy states that for replacement-cost loss settlement to apply, the insured must make the replacement. Since that was not done, ACV loss settlement applies, and there is no replacement-cost settlement.
The insured makes a significant addition to the house and fails to advise the agent. After the loss, it’s determined that the house is not insured to 80 percent of the replacement cost. Therefore, replacement-cost loss settlement does not apply and the insured is paid the greater of the ACV or the amount due after the application of a coinsurance penalty.
A windstorm severely damages the house and totally destroys the insured’s $8,000 wooden fence. The policy states that other structures that are not buildings are settled on an ACV basis. Replacement-cost loss settlement does not apply.
Imagine the insured, lender or worse yet the insured’s attorney presenting an EPI that stated, “Replacement cost up to policy limit.”
Putting any wording on an Evidence of Property Insurance (or any other document) that is not supported violates Florida Statute 626.9541 [EDITOR’s NOTE: In SC, this practice would also be considered a misrepresentation of the policy provisions, which is a violation of the SC Unfair Trade Practices]. Any insurance professional using such wording runs the risk of disciplinary action to include possible loss of license and/or significant fines.
If the lender requests/demands such wording, prepare the EPI exactly as per the ACORD Forms Instruction Guide and send it along with a copy of the homeowners policy to let the lender read the policy on their own.
An agency should not provide the Replacement Cost Estimator to a lender. A reply such as, “On the advice of our professional liability insurance company and on the advice of our legal counsel, we are unable to provide the document(s) that you have requested.” SwissRe, (FAIA’s and IIABSC’s lead E&O carrier) recently stated that:
In addition, taking on a (voluntary) role advising the lender is ill-advised. Valuation issues regarding the adequacy of limits in place drive a lot of our commercial exposures. Most, if not all, lenders confirm property valuation before agreeing to loan money, so the lender is in a much better position to evaluate property value than an insurance broker. It sounds like the lenders have recently been to some seminar where the advice was given to obtain the RCEs from the agents/brokers.
An additional thought: every time the issue of limits/replacement cost is raised, that probably is a moment where the agent/broker should respond with a comment to the effect that,
Our office is not able to evaluate, and has not evaluated, the actual cash value or replacement cost of this property. The property owner and lender are in the best position to evaluate the value of real estate. We urge you to have the property (re)appraised by a licensed appraiser on a regular basis to ensure that the limits in place are, and remain, adequate.
Remember, most importantly, that the Replacement Cost Estimator is only what the name says, an estimate. Calculating the replacement cost of a structure is not an exact science, and if you were to use three different RCE vendors on the same structure, you’d get three different figures. Likewise, if you asked three different builders to prepare an estimate to build a structure, you’d get three different figures.
Additionally, while some lenders may say their guidelines require them to get a copy of the Replacement Cost Estimator, there is no such requirement in the Fannie Mae guidelines, which a majority of lenders fall back on. Furthermore, there is no obligation of an insurance agency to comply with guidelines drafted by a lender.
It’s well established today that many appraisers no longer provide an estimated replacement cost on their appraisal. I personally spoke with one appraiser who said, “I know a lot about the market value of a house but, I’m not a contractor and I know next to nothing about rebuilding costs. I’m not putting my license and career at stake by guessing at the replacement cost of a house.” The same approach is taken by many insurance agents. If the lender wants to determine the replacement cost of a structure, they have resources available to do that. Resources to get an appraisal that includes the replacement cost by contracting with a firm that specializes in replacement cost estimates or to use a service such as e2Value, which provides replacement-cost software.
While an agency certainly does not want to stand between the customer and a loan closing, the agency must also take steps to protect themselves. Providing the Replacement Cost Estimator to anyone outside the agency increases the E&O exposures of the agency. Requests to provide the Replacement Cost Estimator coupled with a request on the Evidence of Property Insurance for wording such as “100 percent/guaranteed/full replacement cost,” can’t be honored. Placing such wording on an Evidence of Property Insurance forms misrepresents the policy.