Are Lenders Entitled to Insurance Proceeds when Foreclosing?

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Are Lenders Entitled to Insurance Proceeds when Foreclosing?

Are Lenders Entitled to Insurance Proceeds when Foreclosing?

National Law Review-

A lender’s right to insurance proceeds after foreclosure depends on the type of loss payable clause contained in the insurance policy and the timing of the loss. Lenders should be mindful of these issues when seeking insurance proceeds in the context of foreclosure and should consider the following:

• Require borrowers to covenant in the mortgage that the lender is entitled to the insurance proceeds.

• Obtain an insurance policy with a loss payable clause, preferably a “standard” clause.

• Collect insurance proceeds prior to foreclosing if the loss occurs prior to foreclosure.

• Remember (a) the lender’s interest in the insurance proceeds is terminated if the full debt amount is satisfied following foreclosure; and (b) the lender’s recovery is limited to the deficiency amount if the foreclosure bid is less than the full debt.

• When the loss occurs after foreclosure, some courts have permitted the lender to recover the insurance proceeds.

• Obtain insurance following a foreclosure sale or confirm with the insurer that the coverage will continue.

[THE NATIONAL LAW REVIEW]

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