There are many processes a mortgage servicer should keep an eye on relative to their hazard insurance claims responsibilities. Here are four 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.
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.
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 resolve this. Servicers should consider professional assistance as it can become laborious and 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? 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 real estate mortgage servicers should review on a regular basis. Case law changes daily, regulations change frequently and real estate investors are focusing on reducing losses wherever possible. Don't get caught short with out-dated procedures, systems and expertise.