Foreclosure Issues in Property Claims and Mortgagees' Interests - Part III
By: Stephen Smith
Claims involving foreclosures raise special issues both for the property insurer, as well as insureds and lenders. In order to help understand how they work, this is the final part of a three part article which will examine the following issues:
- The nature of a Mortgagee's interest in an insurance policy;
- How the timing of loss and foreclosure can affect coverage;
Basic relevant information in a claim which involves a foreclosure.
RELEVANT INFORMATION IN CLAIMS INVOLVING FORECLOSURE
While handling a claim involving a foreclosure raises many of the same issues as any property damage claim, there are some areas of inquiry that require extra attention. In addition to the date of loss, there needs to be investigation into the date of the foreclosure, property occupancy, and the nature of the foreclosure transaction.
Information to Request from Mortgagee
- When did loss occur?
- How did loss occur?
- How much will it cost to repair or replace the property?
- When did the Insureds vacate the property?
- When was the foreclosure sale?
- Who made the highest bid at the foreclosure sale?
- What was the highest bid at the foreclosure sale?
- When was the deed turned over from the Substitute Trustee to the new Owner?
- What was the Mortgagee's security interest in the home at the time of the foreclosure sale?
- What is the Mortgagee's remaining security interest in the home at the current time?
Documents to Request from Mortgagee
Investigation of a loss where a foreclosure has occurred requires obtaining documents not normally required in the investigation of conventional claims. Some of the documents to request include:
- A copy of the Substitute Trustee's Deed conveying the insured property to the prevailing bidder at the foreclosure sale, or other documents showing the identity of the highest bidder at the foreclosure sale and the amount of the bid;
- A copy of the most recent Account Statement showing the amount of remaining principal owed, and any penalty, interest, or other related expenses at the time of the foreclosure sale;
- A copy of the Insured homeowner's original promissory note to the mortgagee under which the Insured purchased the insured house;
- Copies of any Deeds of Trust, Warranty Deeds, or other documents reflecting the current ownership or mortgage interests of the mortgagee in the Insured property;
- Other documents showing the amount of the lender's security interest at the time of the foreclosure sale, including related ledger entries, demand letters and any other documents referring to the current remaining debt owed by the Insured homeowner to the mortgagee; and
- Because of the potential complexity of this type of claim, a Sworn Proof of Loss should be considered to help document the nature of the claimant’s interest as well as to show the claimed date of the loss.
Reservation of Rights Letter
1. Rights to Reserve if Claimant's Status Remains That of Mortgagee (Loss was Before Foreclosure).
- Whether the mortgagee retains an "insurable interest";
- Whether mortgagee has submitted a sworn proof of loss as requested;
- Whether mortgagee has provided notice to the insurer of any change in ownership, occupancy or substantial change in the risk known to the mortgagee;
- Whether the loss occurred during the policy period.
2. Some Rights to Reserve if the Lender/Claimant Is "Insured" (Loss After Foreclosure).
- Whether the loss occurred during the policy period;
- Whether any exclusions apply (Example: mold, fungus, wet or dry rot);
- Whether the "insured"/ex-mortgagee has given prompt notice of claim;
- Whether the dwelling has been vacant for more than 30 days if the claim is for vandalism.
Statements and Examinations Under Oath
In conjunction with the above referenced documentation requests, at a minimum, a recorded statement should be taken from the mortgagor’s representative. If they can be located, the statement of the mortgagee/insured needs to be taken as well.
If difficult questions of law or of fact need to be resolved, then an examination under oath of the same persons may be necessary.
As noted in the first article, generally this is how it will work:
- If the loss took place preforeclosure, and there is a hundred per cent bid out by the mortgagee, then there is no coverage as to the mortagee;
- If there is not a hundred per cent bid out, there may be money due and owing to the mortgagor to the extent of the difference between the bid out amount and the loss amount on a percentage basis;
- If the loss took place post foreclosure, as long as the mortgagor has been paying premiums and otherwise fulfills the policy conditions, there is probably coverage for the mortgagee as insured.
However, these are general rules and these types of claims are factually intensive.