IBA – May 11, 2021 – Mortgage impairment insurance is an essential product for mortgage lenders, particularly regional banks, credit unions, and community banks.
It is primarily designed to provide coverage needed in the event an uninsured or underinsured damages a mortgaged property and that borrower (a homeowner or a commercial property owner) failed to maintain the required property insurance, and subsequently defaults on their loan as a direct result of the loss or damage to the property.
“All mortgage lenders, originators, and servicers should carry mortgage impairment insurance,” said Paul Zubrowski, assistant vice president of underwriting at OSC, an established lender-placed insurance and tracking technology company of Breckenridge Group. “It’s an inexpensive product that can cover a wide range of exposures related to mortgage lending.”
A comprehensive policy, like OSC’s mortgage impairment coverage, will contain both first-party coverage for property damage and third-party liability coverage. The first-party element will cover a loss when there’s a lapse in property insurance at a mortgaged property. A typical claim example might include a homeowner that cancels their homeowner’s insurance policy due to financial difficulties, and, for whatever reason, notice of that cancellation fails to make it to the lender. The lender is unaware the coverage has lapsed, there’s a fire at the property which causes a total loss, and, as a result, the borrower defaults.
On the third-party side, there are a wide range of liability coverages. Most are related to errors and omissions, for example if a lender escrows the insurance premium and property taxes, and through an error in their system or procedures, they fail to make an insurance payment and the property owner’s coverage lapses. If that property owner suffers a loss that would have been covered by their policy, the lender may be held legally liable due to their error.
“Mortgage impairment insurance provides coverage when there’s an unknown exposure,” said Zubrowski, “but there are other steps that lenders can take to mitigate their risks, such as using tracking technology to verify the required insurance is in force. At closing, a lender will verify that the appropriate property insurance coverage has been purchased – usually they will require an all-risks policy – and then they’ll track it on an annual basis to confirm the required insurance is still in force. The period before they’re aware of any lapse in coverage is when mortgage impairment insurance will protect them.”
