Insurance companies have to recognize your mortgage lender's ownership rights.
To protect your home and yourself against losses due to theft, vandalism, accidents or other disasters like floods, you should have homeowner's insurance. If you file an insurance claim and you have paid for your house in full, your insurance company will issue the check solely to you. If you're still paying on your mortgage, however, the insurance company writes the check to both you and the mortgage lender. The insurance company is being legally responsible in doing this.
About Homeownership and Mortgage Lenders
When you mortgage a property, unfortunately, you technically do not own the entirety of the home. Instead, you own whatever percentage of the home equates to the percentage you've paid on the mortgage loan. For example, if you've only paid 50 percent of your mortgage off, you own half the house, not all of it. Your mortgage lender is the owner of the remaining percentage of the home.
The Lender's Investment
When you have a mortgage, your home stands as collateral. Should you default on the mortgage, the lender can foreclose on the property. The lender has a monetary interest in your home and any repairs you may do to it. Most lenders require you to have a homeowner's insurance policy so that it gets back a property that is in the same or better condition as when you took out the loan, should it need to foreclose.
Putting It Together
Because your lender technically still owns a portion of your home, and because you truly cannot identify which portion you own brick by brick, the insurance company assumes that it is not possible to distinguish who owns the damaged portion of the home. In issuing the check to both parties, they thus protect your investment, as well as the right of the lender to reclaim total ownership of the property if you default. They are not concerned with who the policy owner is, but rather who the beneficiary legally needs to be given property rights.
How Can Insurance Companies Do This?
When you take out a homeowner's insurance policy on a mortgage property, the policy has a loss payee clause. This basically indicates who has a right to the benefits. The loss payee clause stipulates that the insurance company has a legal obligation to protect the interests of the mortgage company. The way the insurance company fulfills that obligation is to include the company as a payee on the insurance check. As a homeowner, you agree to these terms and conditions when you sign the insurance policy and pay the premiums. There is absolutely nothing illegal about the practice, although some less-than-ethical mortgage lenders use their inclusion on insurance checks to try to cheat homeowners out of the insurance benefits.
Tags: insurance company, mortgage lender, your home, homeowner insurance, insurance policy, check both
