There are a few realms outside the insurance industry that tend to cross into the realm of the insurance industry. Of course this all depends on the circumstances of those involved but when it comes to dealing with a property insurance claim and your mortgage lender, the crossover is anything but benign.
If you’ve dealt with the rigors of buying a home, the last thing you want to worry about is dealing with damage to a newly bought property, but because anything can happen, it’s something you will always end up worrying about, which is why something like property insurance exists.
Of course insuring a piece of property you don’t own can put you into a precarious position.
Take for instance the example outlined here by Kevin Pollack over at the Property Insurance Coverage Law blog.
In it Kevin outlines a potential issue for new homebuyers who find themselves in one of the following situations with their newly purchased and newly damaged property:
– an insured’s deed of trust requires the insured to name the lender as a loss payee on their property insurance policy;
– a loss occurs;
– the insurance company issues claim payments naming the lender and insured as co-payees; and
– the lender refuses to release the insurance proceeds to the insured in a timely manner.
So according to the aforementioned list, an insurance payout can be essentially kept by a mortgage lender, even if the policy holder needs the money to commence repairs on their property.
Fortunately, there are things in place to help combat issues like this that arise.
Pollack digs a bit deeper into this saying:
Like insurance policies, deeds of trust are contracts that contain an implied covenant of good faith and fair dealing. Although most deeds of trust give lenders the right to be named on insurance checks earmarked for property damage, a lender’s right “to apply insurance proceeds to the balance of a note secured by a deed of trust must be performed in good faith and with fair dealing. . . .”
Courts have found that where the security is not impaired, the lender must release the insurance proceeds to the insured so that the insured may repair/rebuild their property…
Although the concept of a contract in the insurance industry is at times not worth the paper it’s written on, it’s still bound by good faith actions int he eyes of the court. The same goes for home loans.
While it’s a good deterrent to the otherwise greedy insurance companies or mortgage lenders, I imagine the legal process of firing back after a mortgage lender commits a bad faith action involving property insurance claim money can be as arduous as the typical insurance claim case.
What do you think?