After over two decades of helping banks and mortgage servicers file claims and recover losses from insurance companies, we understand the criticality of having sufficient insurance coverage on collateral properties.
Investors face increased risk of loss when they have insufficient insurance coverage or the wrong kind of insurance coverage on a property that serves as collateral for a mortgage loan. Making sure that the coverage is both sufficient and of the proper type is critical for effective risk mitigation.
Having the Right Kind of Coverage for Your Collateral
Most servicers know that there are many types of insurance and only hazard insurance protects the mortgagee from risk should the property be damaged before the loan is paid off.
But even hazard insurance comes in many varieties and not all risks to the property are covered by every policy. Servicers must ensure that collateral properties are protected from losses due to vandalism, hail damage, bad rain storms, fire damage, and other risks to the property; a good hazard insurance policy will provide that coverage, which benefits both the homeowner and the servicer/investor.
Validating Your Insurance Coverage
Over the years, we have served many companies that failed to carry the right kinds of hazard insurance for the risks they faced. Oftentimes a lender receives a binder from the insurance company without checking the specific coverages on the policy.
For example, “named peril” policies provide limited protection and too often the servicer is unaware of the limitations on coverage until after damage or theft has occurred. The solution to this problem is to check the binders for every property to ensure that insurance coverage exists for the right perils at the time the loan is secured.
This type of insurance validation is a critical step that should not be skipped. Furthermore, it should be performed by someone who understands the kinds of protection required and can be sure the existing policy covers them.
Without validating your coverage, you won’t know if you are covered when it comes time to file a claim. Failure to have the right coverage in place means the insurance company will have a valid reason to deny the claim and the company will not be able to recover those losses.
When the right coverage is in place, it is much easier for a professional insurance claims adjuster to recover insurance proceeds when a loss occurs, so the servicer may protect the collateral underlying the mortgage loan.