For Your Eyes Only
One of the most routine policyholder servicing tasks that an agent handles is providing proof of coverage to a mortgage lender. Whether this is requested prior to closing on a new purchase transaction or after the policy has been in place for several years, the purpose is the same: the lender wants to make sure that they are listed as a mortgagee on the policy, and they also want to ensure that there is adequate coverage to protect their interest in the property.
Lenders calculate the maximum loan amount based on a number of factors, including, but not limited to, the appraised value of the property. Lenders typically require an insurance policy to feature a Coverage A limit that meets or exceeds the principal balance owed on the loan in order to be considered acceptable.
An insurance agent’s concern when writing a Homeowners policy is the replacement cost value of the dwelling. Even if the lender provides the appraisal to the agent at the time of quoting, AFM still requires a Replacement Cost Estimator to be completed.
This can create friction when the appraised value of a property differs greatly from its replacement cost value. One of the most common reasons for this is site value. Since a Homeowners policy does not insure the land itself, if the property is located on significant acreage or in an extremely desirable area, the appraised value of the property (which does include land), may be well above the replacement cost of the dwelling.
Part of the lender’s request for proof of coverage may involve including a copy of a current Replacement Cost Estimator along with the declaration pages. On the surface, this may appear to be a reasonable ask. However, did you know that as of August 1, 2022, a lender is prohibited by North Carolina general statute from requiring the Replacement Cost Estimator to be shared?
Violations of the statute are subject to investigation and sanction by the NC Department of Insurance. An agent or insurance company would need to report the violation to the NCDOI in order for penalties to be enforced.
The complete statute can be reviewed here: https://www.ncleg.gov/EnactedLegislation/Statutes/PDF/BySection/Chapter_58/GS_58-3-137.pdf
If you have any questions regarding this statute in general or are needing advice on how to respond to a mortgage lender who requests a copy of the Replacement Cost Estimator for their records, please feel free to reach out to our Underwriting Team for further assistance.
