REQUIRED READING: High volumes of foreclosed homes and shadow inventories, coupled with prolonged foreclosure timelines, mean that more defaulted and foreclosed properties will sit vacant for longer periods. As a result, these properties will be exposed to greater risks of severe damage from theft, vandalism, storms, natural disasters and other perils.
To recover more costs associated with these damages, servicers and investors, in turn, have significantly increased their hazard-claims activities.
Hazard claims filed on behalf of our clients between Jan. 1 and Sept. 1 increased almost 29% compared with the same period in 2010. In the past, servicers and investors assumed the cost of moderate damages, selling properties ‘as is,’ factoring in the damages to justify a discounted sale price and still recovering their collateral interests.
As home values continue to decline and more properties incur higher-cost damages, however, servicers and investors have increased their insurance-claims filings as a way to offset losses by recovering the costs for repairs and protecting the collateral value of properties in their portfolios.Â
In response to higher volumes of claims, hazard-insurance providers have taken more aggressive steps to investigate, adjust and deny higher percentages of claims. Especially when a property goes through foreclosure sale, more retail carriers have begun to deny claims on the basis that they no longer have insurable interests in the change of ownership. Many retail carriers also have established special units to handle hazard claims and are taking a harder line against lenders, forcing larger numbers of lenders to sue for recovery of damages.
Again, comparing year-to-date experience on clients' claims, our data showed that 25% of initial claims were denied between January and September, compared with 15% for the same period in 2010.Â
To assure that properties have proper hazard-insurance coverage to cover damages, it is imperative that servicers and lenders have adequate coverage and establish effective procedures to manage the entire hazard claims process.
The first and most important challenge is to establish whether coverage exists on a property. Often, this is not as easy as it seems, as homeowners' policies can lapse, and coverage information quickly becomes outdated. For every property in their portfolio, lenders must have a procedure to collect the most recent and updated insurance policy information. This will ensure that when a property does sustain damage, a valid policy is in force and claims can be filed quickly with the proper insurance carrier.
Homeowners purchase retail or voluntary policies on their properties from standard line insurance carriers. Retail policies are usually required as part of the mortgage contract to protect the lender's collateral interests if a property sustains damages.Â
Lenders purchase force-placed coverage from specialty carriers to add a level of protection when the borrower fails to maintain coverage. Force-placed coverage can provide automatic coverage binding a property for a certain period when a retail policy lapses, after notice of cancellation or non-renewal of the homeowner's retail policy, or when a property goes through foreclosure sale and becomes real estate owned (REO).Â
In many cases, lenders are not aware of retail policy exclusions that may result in claims denials. Common exclusions include theft and vandalism coverage after a property has been vacant for 30 days and coverage for freeze damage if a property has not been properly winterized.
Additionally, a standard requirement in retail policies is that the carrier receives notification of a change in ownership or occupancy, or a substantial change in the original risk. Typically, this means notifying the carrier when a property is reported as first-time vacant or goes to foreclosure sale. Failure to notify the carrier may result in a denial of coverage.
From Jan. 1 to Sept. 1, 2011, the top three reasons for claims denials among our clients were property neglect, 37%; vacancy exclusions (theft and freeze damage), 15%; and failure to comply with policy provisions (change in risk), 15%.
Inspecting and preserving properties
Even with coverage in place, lenders often incur claims denials or lengthy and costly disputes because they cannot prove when damages occurred, or they fail to mitigate damages in a timely manner. To avoid denials or disputes, lenders and servicers must ensure that properties – both presale and REO – receive regular inspections and preservation services.Â
When a property is in delinquency, routine inspections help to assure that damages are discovered, documented and reported in a timely manner. Once a property has been reported vacant, taking prompt action to secure the property, inspect it both inside and out, and document the property's condition significantly improves the servicer's position to prove when damages occurred and reduces the rate of denials or disputes.Â
The ability to establish the date of loss is critical when properties transition from delinquency to foreclosure sale so that any hazard claims can be filed with the correct carrier. Failure to establish the date of loss may result in denials by both the retail and force-placed carriers. In these instances, the documentation process becomes lengthy and complicated, requiring lenders, servicers or their field service companies to obtain police or fire reports, canvas neighborhoods and take other actions to identify a date of loss.Â
When natural disasters occur, it is critical that servicers have a process in place to act quickly to inspect properties, document damages and file appropriate claims.Â The closer to the event that claims are filed, and the more thorough the documentation, the more likely servicers will be to collect their rightful insurance proceeds for damages.Â
In fact, in areas hard-hit by natural disasters, more loan servicers are reaching out to their lender and investor clients to assure that they are initiating inspections on their entire loan portfolios – both current and delinquent properties. This process allows lenders to protect their insurable interests in the event of a future default by notifying carriers of their interest in any insurance settlement funds and to protect the collateral value of the property.
Steve Meyer is director of hazard claims for Safeguard Properties, the largest privately held mortgage field service company in the U.S. He can be reached at email@example.com or (800) 852-8306.