REQUIRED READING: With foreclosures remaining a pressing concern for all financial institutions, mortgage servicers are aggressively seeking new and proactive ways to curb losses. A financial institution that pays attention to the insurance status of its properties through a mandated, regimented program of internal review and external inspection will reap benefits compared to servicers that de-emphasize this aspect of their business.
Wise financial institutions should be aware of the insurance status of all of their properties, so that when their properties appear to be headed for foreclosure, the insurance protection is never in doubt. They should diligently enforce their requirement to be named on any mortgagor's primary (i.e., homeowner) policies. Servicers may utilize an insurance tracking company to outsource this aspect of their protection plan, or they may use their own internal staff. Either way, diligence is the most important factor in protection.Â
Protection may come in various forms. Most borrowers provide protection to the servicer through their personal homeowner or commercial hazard policy that names the financial institution as the mortgagee. Requiring and maintaining this protection is essential for the servicer, as it is typically the least-expensive avenue for insurance coverage.
Other solutions available include for the servicer to directly purchase hazard insurance or blanket hazard insurance to protect its interest. These policies are placed once it is discovered that the servicer's interest in the property is exposed through the expiration or cancellation of a borrower's coverage. Since primary outside insurance typically offers more coverage than the average lender-directed insurance policy and usually has a lower deductible, maintaining the borrower's coverage is recommended whenever possible.
When a servicer suspects that a particular property may be moving toward foreclosure, the servicer should begin to take some preventative – yet unobtrusive – steps to build its file for any future potential insurance claim and simultaneously document the condition of the property. Many outside investors require this, but even in those instances where it is not required, the servicer should be proactive in protecting any future claim.
If the servicer has qualified personnel to visit the property and provide a regular inspection, then the servicer should handle the inspections. If the servicer does not feel it has qualified individuals, then an independent broker, property manager, or inspection or property-preservation company should be utilized to conduct these inspections.
The representative should document any visible exterior damage and photograph the property to illustrate its general condition. Clear photos of any damage found, including photos that may document the cause of the damage, rather than just the result, are helpful in supporting a future claim. A written report should be generated so the servicer can document its efforts and show that it was exercising due diligence. These reports may be extremely important in the event the servicer needs to proceed with an insurance claim for damages against the borrower's insurance provider.
Default and foreclosure timelines vary from state to state but are often protracted – especially in today's environment and particularly in redemption states. In states where foreclosure processes are particularly lengthy, inspections may be halted, but if a property is known to be vacant, it is imperative to conduct property inspections at least once a month.
After a property has gone into foreclosure and is within a servicer's control, quick action should be taken to verify if the property has suffered any damage that may be covered by the borrower's insurance policy. Most policies in the U.S. follow the Insurance Services Office form, so they typically have a mortgagee clause in the conditions section of the policy. This clause offers certain protections for a financial institution named as the mortgagee that may not be afforded to the mortgagor. To take advantage of this clause, the mortgagee has certain obligations.
To preserve its rights to pursue any claim, the mortgagee must immediately notify the carrier of the change in ownership or risk, alert the carrier that the property is vacant, pay any due premium and submit a signed, sworn statement of loss within 60 days after giving the carrier notice of this change in risk. If the carrier is using a manuscript (non-ISO) form, then the servicer should still notify the insurance carrier of the change of risk and ask for a copy of the policy so it can be better informed of all of the rights, coverages, benefits, conditions and exclusions associated with the insurance contract.
Because a signed, sworn statement of loss must be submitted within 60 days, due to typical ISO policy language, the servicer should use an experienced estimator to document all damages associated with the property and provide a full report with a scope of repair that will prove the cost of repairs for the risk. That report should be the main component of a claims submission from the servicer in order to protect the rights of the financial institution and secure a claim submission to the insurance carrier.
The servicer should also protect the property and take steps to secure it from any additional damage. Damages, such as those caused by a failure to winterize a property, commonly lead to a claim denial.
If insurable damage is found prior to a foreclosure sale, the servicer must bid less than the full debt at the foreclosure if it wants to preserve its interest in the loss. Bidding full debt – known as a full-credit bid – nullifies any potential insurance proceeds that may be claimed. In essence, a full-credit bid indicates the damaged property's value is comparable to the full amount of the debt on the date of foreclosure sale and is interpreted to mean that the servicer has been made whole. It is better to settle with the insurance carrier first or to bid less than the full debt if the claim is still in process or has yet to be pursued.
While pursuing the claim, servicers should be sure to get all pertinent information from the carrier, including the claim number, the policy number, and the adjuster's name and direct telephone number. All of this information may become important while pursuing the settlement.
It is also highly recommended that servicers request a copy of the full insurance contract with all of the endorsements. With the physical policy in hand, servicers are able to peruse the contract and familiarize themselves with the coverages, definitions, exclusions and conditions. Because a potential claim will be adjudicated based upon this policy language, it is good to have a working knowledge of the policy.
Keeping all open claims on a short diary is also wise. Many state legislatures and departments of insurance have adopted a fair-claims practices act that regulates the insurance company adjusters' actions. It is recommended that servicers familiarize themselves with the responsibilities of the insurance company's personnel. Insurance department regulations may include a minimum allowance for response times that dictate carrier actions. A servicer's diary system should coincide with those time frames to ensure files get the required attention they need in a timely manner.
Servicers often receive claim denials that they believe are unfair or represent a misinterpretation by the carrier of its own policy. Reasonable minds may disagree, but just because an insurance carrier denies a claim, that is no reason to automatically accept the decision.
Servicers that believe another set of eyes should review the file can request a review through their insurance carrier personnel management. Inquiries can also be filed with the office of the state insurance commissioner. Servicers may also choose to consult a public adjuster, which is an adjuster authorized to represent the interests of the insured rather than those of the insurance carrier. Furthermore, servicers may decide to have members of their legal staff or a law firm review the file and the applicable contract language to determine if the claim decision is questionable.
It also should be noted that the use of a public adjuster or an outside legal firm may come at a price. Often, the firms that offer these services are paid through a contingency rate based upon the recovery of the settlement. Some states regulate a maximum amount that a public adjuster can charge, and servicers should always check the state where the risk is located to see if that claim falls within that specific jurisdiction.
I am never an advocate of automatically filing lawsuits, but compromise through mediation or appraisal is well within a servicer's rights as a mortgagee under the policy. If the case is strong enough, servicers may have no other remedy but to file a lawsuit and allow the courts to adjudicate. All things considered, servicers will have to make the decision whether the legal costs and time are worth the claim amount that is under dispute.
Money left on the table is an outcome that no servicer should allow. By developing internal procedures that focus on limiting exposure through insurance tracking, property inspections and maximizing the potential insurance proceeds on damaged properties, servicers can rest assured they are properly managing this part of their default-servicing process and bringing more income to the bottom line.
Mark Sarrett is chairman of Precise Adjustments Inc., a claims administration and adjustment company. He can be reached at (626) 463-6429 or firstname.lastname@example.org.