Mortgage impairment insurance protects the bank from errors made in the management of collateral or government guarantees that support a mortgage.
There are three parts to most policies:
This section protects your interest in a mortgage from a physical damage loss (fire, lightning, wind, etc.) as a result of “required” perils when your customer has not kept insurance in force or has not properly insured the property.
Example: A mortgage customer allows their homeowner’s insurance to lapse. Your loan department is not aware of the cancellation. The home burns, leveling the structure. Mortgage impairment insurance protects the bank’s loan amount.
Most policies respond to the perils (causes of loss) required of the mortgage customer. If the loan requires “fire, extended coverage, and vandalism,” then the mortgage impairment policy responds only to those perils.
Some policies require that the bank track and check customer insurance policies. Some require regular notice to customers of the mortgage requirement to purchase insurance. Some don’t require any form of tracking customer insurance policies, saving the bank a great deal of effort and administrative expense.
Most policies limit coverage for a set time from the date you are aware of a lapse in the insurance – usually ninety days. This allows you time to place coverage in your “forced placed” property insurance program. (See separate section of this book for forced placed coverage.)
Mortgagee’s Errors and Omissions
Coverage for errors in the administration of escrowed insurance premiums or in the various government guarantee programs – VHA, GNMA, SBA, etc. The policy may include mistakes in determining the flood map location of the property. Failure to properly administer property tax payments for the customer is also a part of many policies.
Extends the coverage beyond the normal “required perils.” Can include earthquake, flood, and other catastrophic losses.
- There is no universal mortgage impairment policy language. Each insurer’s policy is unique, with distinctive terms and conditions.
- Some insurers exclude mobile homes from coverage on the basic policy. You can purchase the coverage for an additional premium.
- Most impairment policies require that you obtain proof that insurance is in place at the time the mortgage is closed. You can do nothing that would lead a mortgage customer to believe they don’t need to buy insurance.
- Some mortgage impairment policies require that you provide a written notice to customers annually that insurance is required as a condition of the mortgage.
- Review you policy to see if you are required to maintain proof of insurance coverage. Most policies now only require action at the time you are notified that coverage has been cancelled.