My mortgage company is identified as an additional insured on my homeowners insurance policy. How does this affect my sinkhole claim?

Your mortgage requires you to insure the mortgaged property. Therefore, most homeowners insurance policies identify the mortgage company or mortgagee as an additional insured. Most standard homeowners insurance policies provide that if a mortgagee is named in the policy, any loss payable under the real property coverage of the policy shall be paid to the mortgagee and the policy holder “as interests appear.” This means that your mortgage company has an interest in the proceeds of the insurance policy up to the balance of the mortgage. Your insurance company is therefore contractually obligated to protect the interest of the mortgage company when it pays your claim.

For example, let’s say the balance of your mortgage is $60,000 and your mortgage company is listed as an additional insured/mortgagee on your policy. Eventually, you and your insurance company agree to settle the claim for $100,000. In this case, the insurance company would then most likely issue two checks; the first check would be payable to you and your mortgage company in the amount of $60,000, and the second check would be made payable to you (and your attorney, if one is involved) in the amount of $40,000

Frankly, many mortgage documents (the mortgage itself or the promissory note) do not deal with this issue well. Many of these documents were drafted by out-of-state lawyers who would never have anticipated situations such as this. The language in these agreements frequently deals with less complicated repair issues (e.g. fire, flood). Sinkholes, because of their repair nature, involve a lot of other issues.

Bottom line: do not permit a loan officer to tell you what to do, unless they have a basis to do so. If you want to repair the home and not pay down the mortgage, you should be able to do so. If you want to pay down the loan and not repair, you should be able to do that as well. But do not allow the bank/lender to tell you that you have to do something because “it’s our policy!”

Read our tips on filing a sinkhole claim.

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