When Mortgage Servicers Handle Hazard Insurance Claims In-House: Four Best Practices

by Ronald R. Reitz CPPA

Considering the multitude of issues affecting mortgage servicers, administration of hazard insurance claims may not get much focus.  However, the level of management and expertise allocated to this area can mean the difference between a successful loan payoff and a complete loan charge off.  Being proactive and reporting claims in a timely manner can save thousands of dollars in losses on a damaged asset.   Mortgage servicers have options for managing hazard insurance claims including partnership with an outsource provider, or managing the process internally.  When choosing the latter, a servicer should consider several industry best practices.   

 1) Claim Identification & Reporting:  Are you properly identifying insurable damage? There is a distinction between damage and insurable damage. Insurable damage should be covered under the borrower’s policy or the lender placed policy in effect at the time of the loss. The servicer should only submit claims that are covered under the policy. Filing on non-covered losses places undue burdens on your lender placed carrier. It also can increase the lender placed insurance premiums ultimately absorbed by the investor. Filing unnecessary claims also can cause a drain on the servicer’s valuable and scarce resources.

A note on coverages:  Insurance policies generally cover all risks except those specifically excluded in the homeowner’s policy.  However, some homeowners may not have full coverage and choose to purchase a policy that only covers fire damage.  With this type of coverage, common losses like burst pipes, vandalism and theft would not be covered.  Some homeowners can only obtain coverage from their state’s fair plan. These are state run programs that provide insurance to homeowners unable to obtain a policy due to being in a high-risk area or other high-risk issues.  It is also important to make sure claims are reported to the flood and wind carriers in required states and coastal locations.  Servicers should remain current on changes to FEMA flood maps and states’ requirements for wind policies.

When evaluating damages and determining insurance coverage, a servicer should also pay particular attention to condominiums, Planned Unit Developments, and other Community Associations’ policies.  Homeowner Associations or Community Associations typically cover the condominium’s structure and common areas. Generally these policies do not cover the interior fixtures that can include interior doors, lights, cabinets, appliances, flooring, and other similar items affixed to the home. Most assume the homeowner has coverage for these items but often they do not. Mostly optional, tracking this critical coverage can be extremely challenging. When a loan defaults and a servicer becomes aware of a loss, they may find there is no coverage for the interior of the unit. Or, if coverage does exist the servicer is now challenged with tracking the repairs since the insurance payments go directly to the Homeowner’s Association which chooses the contractor and oversees the repairs.  Considering a total loss to a condo can exceed $100,000, the exposure here is great.

2) The Borrower’s Public Adjuster:  While the servicer’s attention is primarily focused on disbursing insurance proceeds upon completion of repairs, a borrower’s public adjuster should also be taken into consideration at this point in the process.  Once the claim is paid, the borrower is thinking about repairs while their public adjuster, if they hired one, just wants to be paid.  The public adjuster has an equitable lien on those insurance proceeds up to the amount of their fee.  They may take certain actions to protect their fees, such as filing a mechanic’s lien on the property.  Servicers should review their procedures for addressing this situation and ensure that their lost draft department’s staff is properly trained to understand this and to work effectively with these Public Adjusters

3) What happened to the money?   An insurer will typically issue loss drafts that include the borrower’s name. Even if a foreclosure sale has been completed, the former borrower may still be listed on the loss draft. A significant amount of work may be required to remove the name of the borrower. The servicer should be familiar with the various remedies available to quickly resolve these situations. Additionally, a homeowner may have negotiated the insurance check without obtaining the servicer’s endorsement. Cases like this may not be discovered until the borrower defaults and the insurance company advises the servicer that payment for damages has already been issued to the borrower.  Repairs may or may not have been completed.  Attempting reimbursement of these funds can be a lengthy process that includes filing police reports and completing affidavits of non-endorsement or forgery. The opportunity to collect can be time barred if discovered years after the insurance check was cashed.  Servicers should consider professional assistance as these processes require experience and can become very time-consuming.

4) Make every effort to maintain the borrowers policy:  Mortgage servicers should make every effort to maintain the existing retail policy in effect. When the servicer receives notice of policy expiration due to non-payment of premium, the servicer should advance that premium and keep the policy in effect. The benefits are many: It is much less-expensive than a lender placed policy, the deductible may be much lower than the lender placed deductible, and the coverages are generally much broader.  Also important, if the borrower challenges the servicer with placing expensive lender placed coverage, the servicer can demonstrate that they exercised diligence in attempting to maintain their retail policy prior to forcing coverage, and these efforts certainly protect the borrower.  

Focus, vigilance and efficient processes are needed to maximize hazard insurance benefits on your damaged properties.   Insurance case law changes daily and investors are now more focused than ever on reducing losses. Don’t get caught short with out-dated or ineffective processes and procedures.

Author Bio - Ronald R. Reitz, CPPA, President of Quality Claims Management, http://www.qualityclaims.com, pioneered the National Hazard Insurance Claims business of GMAC-RFC (now GMAC-ResCap). After a decade at GMAC-ResCap, Mr. Reitz launched Quality Claims in 2007. He is the past President of the California Association of Public Insurance Adjusters (CAPIA) and is currently an officer on the Board of Directors of the National Association of Public Insurance Adjusters (NAPIA) www.napia.com. Recognized as a leading expert on hazard claims, he serves on many industry panels, and provides consulting and training services industry-wide.

Quality Claims Management Corporation provides hazard claim recovery services to investors, mortgage servicers, homeowners and businesses. All claims are adjusted by licensed insurance professionals for an equitable settlement and accelerated resolution timelines. Contact Quality Claims Management at (866) 450-1183 or http://www.qualityclaims.com.