How Does a Hazard Insurance Carrier Verify the Lien Holder?
A hazard insurance carrier verifies the lien holder of a loan by sending a written "verification of insurance" request to the lender who is, or who will be, holding the loan. The request does not have to be a pre-printed form and can be typed on any standard word processor. The request for verification of lien-holder information should include all the relevant lender information that will be required on a hazard policy.
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Sending the Verification Request
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When a loan is refinanced, or a new loan is put in place, the lender will require evidence of hazard insurance to cover the security collateral that it has in the property. This is the property itself. On a structure, this includes a fire policy to replace the building in case it is destroyed. As a loan gets closer to funding, the escrow will send an insurance request that will be used by the insurance company to issue a hazard policy with the correct lender references, including the lender name, lender loss payee clause, coverage amount, effective date and premium due.
The Loss Payee Clause
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When a lender makes a secured loan on property, the collateral becomes the property itself. If this were to be destroyed, the lender would lose his collateral. This is why the terms of all property loans stipulate that the borrower will maintain a current hazard policy and that the lender will be named as the loss payee in event of destruction. The loss payee is the person or entity that receives the proceeds from an insurance claim. Once a lender receives the insurance proceeds, it can rebuild the home.
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Insurance Carrier Requirements to a Lien Holder
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A lien holder with a security interest in property will have some minimum requirements for insurance coverage on a property. These are usually the lesser of the actual loan amount or the replacement cost of the dwelling as indicated in the property appraisal. All appraisals of real property include a section indicating the estimated replacement cost of a dwelling. This is the figure used by lien holders to determine what the minimum insurance coverage should be.
Considerations
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Some insurance policies cover less than the loan amount and less than the current value of the structure; however they carry a feature called "guaranteed replacement cost." This endorsement guarantees that the building or structure will be replaced to its current value. Most lenders will accept a faxed request from the insurance carrier for a request for insurance verification.
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