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MortgagePoint » Your Trusted Source for Mortgage Banking and Servicing News 54 May 2025 F E A T U R E increase your coverage every year to account for the increased value of your home? Probably not and neither do your borrowers. As a result, over time, coverage often lags the cost to rebuild or replace the home. If the damage has already occurred, there is nothing a lender can do to recover from the lack of sufficient coverage. But, to avoid this risk going forward, Lenders should review the coverage under their Bor- rowers' policy annually. Force-Placed Insurance W hen borrowers fail to maintain their own insurance, lenders will generally step in by force-placing insurance on the property. The cost of the force-placed policy is usually passed on to the borrower, which gives both the borrower and lender an interest in the policy (and the proceeds). Additional Lender Insurance N othing prohibits Lenders from add- ing coverage at their own expense. Whether it makes sense to do so is a business decision for the lender. The proceeds of this type of policy should belong exclusively to the insured lender and arguably do not have to be applied to the underlying loan. REO Insurance C overage under most borrower poli- cies terminates upon transfer of title via the foreclosure sale. Therefore, its es- sential for lenders to plan in advance to have their own post-foreclosure policy (REO Policy) kick in immediately on the day of the foreclosure sale. Because the borrower no longer has an interest in the property and the insured under the policy is the lender, the borrower has no interest in the insurance proceeds from the REO Policy. Master Insurance S ome lenders have master insurance policies that cover all sorts of situa- tions, including damage to properties securing the lenders' loans. To deter- mine if the lender has that coverage, we suggest contacting your insurance broker in advance. Assuming there is coverage, the lender is likely to be exclu- sively entitled to any proceeds from the master policy. While there may be other forms of insurance that could apply following the loss of the borrower's property, these are the most likely types of policies. Whoev- er is entitled to any insurance proceeds will depend on the type of policy and the language in the Deed of Trust. Who Is Entitled to the Insurance Proceeds Following a Loss? A s mentioned above, the Lender is exclusively entitled to the insurance proceeds from an REO, Extra, or Master Policy. The deed of trust will control who is entitled to insurance proceeds from a Borrower or Force-Placed Policy. Broad Provisions Favor the Lender M any courts have held that when insurance provisions under the deed of trust broadly assign all insurance pro- ceeds to the lender, despite whether or not the lender requires the borrower to obtain a specific type of insurance coverage, the lender will be named as a loss payee and can collect the proceeds. Broad provisions typically take the form of "all sums due or payable … for injury or damage to such property." As one court held: "The deed of trust did not require the borrower to maintain earthquake insurance but stated that if the borrower obtained in- surance not required under the deed of trust, the lender must be named as loss payee, and the lender could apply the funds to the secured debt or to repair the property. The court held that the lender was entitled to re- ceive and control the proceeds accordingly." Specific Coverage Provisions Favor the Borrower Typically, neither party has an interest in the insurance policy obtained by the other party that is not specified in the deed of trust. If a deed of trust that Regardless of who is entitled to the insurance proceeds, whether the borrower intends to rebuild or if the loan is in default, open communication with the borrower is key to efficiently resolving insurance issues and avoiding future disputes over the proceeds."