MORTGAGES OR TRUST DEED HOLDERS

If you live in the eastern states, you recognize the former concept—mortgage. If you live in the western states, where there is a different legal usage, you recognize that the lender on your home is a holder of your trust deed as the security interest on your home loan. Either way, the fundamental concept is the same. You, the named insured under your homeowners policy, have a home loan. You want to insure your interest in your home. Your home loan lender, which holds a security interest in your home to the extent of the unpaid loan balance, wants you to assure that you insure your home so as to protect its security interest. Not only that, your lender requires that you do so and that you cause it to be named an additional insured in the loan documents of your home loan. It is very important for you to make sure that your homeowners insurer: ◆ is always timely and promptly informed of who your home loan lender is, what their appropriate address is, and what your loan number is; ◆ shows your home loan lender on your policy as an additional insured to the extent of its interest in your property; and, ◆ supplies your home loan lender with evidence that they are an insured every year at the time your homeowners policy is renewed. Most homeowners insurers are pretty good about assuring that your home loan lender receives evidence of insurance on renewal each year. That does not, however, mean that you do not need to make sure that they do. It is possible for your insurer to become confused as to who your current mortgage lenders are that need to be shown as additional insured interests on your policy, particularly when many individuals are refinancing their home loans at frequent intervals or are taking out second mortgages or home equity lines of credit. There can be potential adverse consequences to you if your home loan lender does not receive evidence of insurance each year at your policy’s renewal. These potential adverse consequences to you make your attention to assuring that this detail is attended to each year necessary. 28 The Complete Book of Insurance If your lender does not receive timely evidence that its security interest is not insured, your loan documents permit your lender to place insurance— solely to protect its interests at your expense—through its own master insurance program. It can also charge the costs—not just the premiums, but also the administrative costs—to your loan. This is something you do not want to happen. First, you are only digging yourself in deeper with respect to the amount of your outstanding loan balance. Second, the insurer with which your home loan lender places such forced coverage is often an affiliate or a subsidiary of the lender. Do you think that the premiums charged by such an insurer are going to be competitive with the premiums you could obtain in the marketplace with respect to your own policy? Think again. They have an inherent profit motive and conflict of interest, but one that your contract with your lender—and the law—supports. They have no reason to charge a competitive premium for such force-placed coverage. Third, the terms of coverage are limited and favor only the lender. You get something only if they have managed to insure for a sum greater than the amount of the outstanding loan balance—something that rarely happens. Your home loan lender does not have an insurable interest in your property in an amount greater than the amount of its outstanding loan balance. Fourth, these forced placement policies do not cover your personal property (i.e., your contents). In the event of a loss, you are on your own. Fifth, defaulting on your obligation to insure your property and failure to have your home loan lender named an additional insured on your homeowners policy to the extent of its interest can be reported as a breach of your obligation under your home loan. This can result in a negative (and serious) credit report that can affect your ability to obtain other credit. If you are a homeowner, and have a first, second, or third home loan, mortgage, home equity line of credit, or any other credit facility that is secured by your house, condominium, or farm, you need to make certain that your lenders’ security interests are protected by appropriate endorsements to your policy. You need to make sure that your insurer knows of the existence of all Insuring Other Interests 29 of these interests, the address of each of the lenders in question, the loan number, and the need to make sure that all secured parties receive annual evidence: ◆ of the fact that you continue to maintain property insurance on the property in which they have an interest; ◆ that the amount of the insurance you maintain is sufficient to protect its interests (i.e., the total amount of outstanding loans); and, ◆ that each such secured party is an insured under your policy.

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