Loss Payable in the Time of Foreclosures

April 2009

Through March 2009, foreclosures in the United States have exceeded 250,000 each month according to Realtytrac.com. With this financial climate, determining how an insured loss will be payable can require some effort on the part of the adjuster. In this article, we will be examining the issues relative to loss payable issues, focusing on those issues arising from foreclosures.

by Elise Farnham
Illumine Consulting

In many instances, the homeowner/insureds are simply walking away from the insured residence property leaving the keys in the mailbox, with or without notice to the mortgagee. In other cases, mortgagees are actively foreclosing on property in accordance with statutes, then following up with an inspection of the property, often finding the residence damaged. In either scenario, additional investigation is required to determine the cause of the damage and when it occurred.

The adjuster must determine whether the damage was a result of an insured cause of loss, a maintenance issue, or intentional damage. Besides physical inspection, statements from the absent insured and neighbors may be required to place the date and time of loss and to determine the number of loss events that may have occurred.

There are four kinds of payees for property losses:

• The payee designated or named in the policy
• The person who has a lien on the proceeds of the policy
• The assignee of the claim
• The garnishee or judgment creditor

Policies may designate payees in one of two ways. First is through the use of a mortgagee clause in which the payee is afforded certain rights to independent treatment and payment. The other is through a loss payable clause, in which the payee is entitled to payment only to the extent that the insurer is liable to the insured, except in those states which by statute or in which printed conditions of the standard policy excuse the mortgagee from acts or omissions of the mortgagor, including increase of hazard not known to the mortgagee. When the policy includes a mortgagee clause, a separate contract is created with the mortgagee, which, in most cases, responds similarly to the insured’s contract.

When the insured mortgagor "walks away" from the insured residence, the mortgagee is not always notified of this occurrence, and the residence may be vacant for a period of time. It can be anticipated that utilities have been disconnected, with the resulting increase in weather-related hazards. The vacancy alone will increase the hazard of theft and vandalism. Some mortgagees are just awakening to the increased hazards and are trying to catch up, but many homes are vacant for weeks before an inspection is completed and the insurer notified of a potential loss.

Conducting an Investigation

The first step for the adjuster is a thorough investigation by obtaining statements from the neighbors and, if possible, from the named insured. These statements will help in documenting cause of the loss and date/time of the loss. Under normal circumstances, adjusters usually have little or no contact with the mortgagee; in the case of foreclosure, the mortgagee becomes a key player, and sometimes the only player, if the insured has abandoned the residence and moved from the area.

Key information and documentation to obtain from the mortgagee is the date of foreclosure, dates of inspection, and efforts taken to mitigate the damages and protect the property. This information will be used to confirm coverage under the policy to determine ownership at the time of the loss, to determine the amount of insured loss, and to assist with application of sublimits and deductibles.

The adjuster will also use this information to make a determination as to whether the named insured has met all requirements under the policy or whether coverage to the named insured should be denied.

Determining Insurable Interest

The adjuster must carefully document and estimate the loss and damage as well as obtain complete loan information in order to establish insurable interest in the residence at the time of the loss. This may not be easy to do as mortgagees are hard-pressed keeping up with financial transactions in the current climate and may not be applying appropriate resources to assist the adjuster in disposition of an insured loss. In some communities, mortgagees are overwhelmed with a flood of foreclosures making it even more difficult to move losses toward resolution.

A review of public records is also recommended to ensure that the insurer is aware of all liens against the property in order to make a decision as to whom the loss should be payable, or even pro-rated. This should include a review of prior losses through the insurer’s own records, or a CLUE report. It’s possible that prior losses were never repaired and should be excluded from current consideration.

The adjuster may find that the insurer is liable to the mortgagee only and not the named insured or any other lien holder. In this instance, there are several options depending on the wording of the policy and statutes. The insurer may elect to pay the loss directly to the mortgagee based on the amount of the damage or the limit of liability under the policy. In which case, the insurer may require that the adjuster obtain from the mortgagee executed articles of subrogation and assignment. Or, the insurer may elect to pay the mortgagee the full amount of the mortgage debt and take an assignment of the mortgage. The latter is unlikely under a foreclosure or abandonment situation, but possible nevertheless.

What about other named payees, such as retailers of personal property on installment payment plans who have required the insured to take out insurance on the property? For the most part, these types of loss payees do not have a separate contract such as the mortgage clause gives banks or mortgage lending institutions. Rather, their rights are limited to any amounts that may be payable to the insured under the policy, not in excess of the amount the insured owes on the debt. But what if the original purchase of the residence by the insured included financing of furnishings in the mortgage? Information the adjuster must develop through investigation to determine how losses to personal property should be resolved and paid.

The adjuster may find that the insured had an obligation to include a person or organization as a loss payee but failed to notify the agent of the obligation. The entity has a right to file an equity action, outlining the terms of the agreement with the insured and the extent of interest in the damaged property and subsequent insurance settlement.

For the most part, the courts have held that an insurance policy is a personal contract payable in the case of loss only to the insured and the payees named in it. It is safe to assume, however, that in times of foreclosure, the courts will find equitable solutions to protect all interested parties.

Conclusion

The adjuster can expect to be hampered in efforts to complete loss investigation and claim resolution activities, resulting in additional time and cost to the insurers represented. The pitfalls of not being diligent and careful in uncovering all relevant information to make an equitable determination of coverage and loss payment could lead to additional payments being required of the insurer. This is something no adjuster wants to see happen in this "time of foreclosure."

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