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

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

by Ronald R. Reitz CPPA

There are many processes a mortgage servicer should keep an eye on relative to their hazard insurance claims responsibilities. Being proactive and reporting claims in a timely manner can save thousands of dollars in damage to an asset. It can mean the difference between a successful loan payoff and a charge off.


Here are four critical processes to consider:

1) Damage Identification: Are you properly identifying insurable damage? There is a distinction between damage and insurable damage. Insurable damage is or should be covered under the borrower’s policy or the lender placed policy. The servicer should try to only submit claims that are covered under the policy. Filing on non-covered losses burdens your lender placed or REO carrier, and can impact insurance premiums borne by the investor. Additionally, this is a drain on the servicer’s valuable and scarce resources.


Insurance policies generally cover all risks except those specifically excluded in the homeowner’s policy. However, some homeowners may not be able to get full coverage or may want to reduce their insurance premiums. A homeowner may obtain a policy that only covers fire damage. In this instance, common losses like burst water 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 people that are unable to obtain it due to being in a high risk area or have other high risk issues.


It is also important to make sure claims are reported to the correct flood and wind carriers if they are in place in required states and coastal locations. Servicers should be aware of FEMA changes to flood maps and states requirements for wind policies.


Another area of importance are condominium policies. Homeowner Associations typically cover the condo’s structure but Servicers very rarely capture and track this critical coverage. Generally these policies do not cover the interior fixtures of the home which can include interior doors, lights, cabinets, appliances, flooring, etc. A total loss to a condo can exceed $100,000. Servicers assume the homeowner will obtain and maintain coverage for these items. Once a loan defaults and a Servicer becomes aware of a loss, they may find there is no coverage for the interior or have difficulty tracking the structure repair since the insurance payments go directly to the Homeowners Association that chooses the contractor and oversees the repairs.


2) Once the claim is paid, the borrower will be thinking about repairs while their public adjuster wants to be paid immediately. What process do you have for ensuring repairs are completed and the public adjuster is paid? The public adjuster has an equitable lien on those insurance proceeds – up to the amount of their fee. They may take certain action to protect their fees, such as filing a mechanic’s lien on the property. Servicers should review their procedures for addressing this circumstance and ensure that their lost draft department’s staff is adequately trained to handle these situations consistently.


3) Frequently an insurer will issue loss drafts on damaged vacant properties that include the borrower’s name. If the 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 or former borrower. The servicer must be familiar with the various remedies available to them to quickly resolve this. Additionally, a homeowner may have negotiated the insurance check without obtaining the servicer’s endorsement. In many of these instances, once the loan becomes non-performing, it is discovered the homeowner did not do the repairs and pocketed the insurance funds.


If repairs are not completed, servicers must try to obtain these funds from the insurer’s bank. This can be a lengthy process that can include filing police reports and completing affidavits of non-endorsement or forgery. Retrieving these funds can take months. Recovery of these funds can be time barred if discovered years after the insurance check is cashed. Servicers should consider professional assistance as these processes can become laborious and very time-consuming.


4) What resources do you have at your disposal to handle hazard claims? Do you have a sophisticated event-driven system to manage a large number of claims? Can it provide comprehensive reporting? Trending? Does your team have access to the pertinent insurance laws and regulations in all states? Do they have the formal training necessary to adjust hazard claims, including reading and comprehending various insurance policies? Do they have the ability to bring in qualified staff in the event of a catastrophe? Insurance is very complex and understanding insurance specifically as relates to the mortgagee is tantamount to adjusting hazard claims.


These are some of the most common areas that servicers should review on a regular basis. Case law changes daily, regulations change frequently and investors are focusing on reducing losses wherever possible. Don’t get caught short with out-dated procedures, systems and expertise.




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). Mr. Reitz left GMAC-ResCap in January 2007 after ten years of managing the Insurance Services group. 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, as well as 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. Quality Claims is nationally licensed as Public Insurance Adjusters or Insurance Consultants and complies with Department of Insurance Regulations. Contact Quality Claims Management at (866) 450-1183 or http://www.qualityclaims.com.