You’ve successfully completed a residential fire claim with your insurance company. They have agreed to compensation that is fair and covers your costs. You get a cheque in the mail, and you see that your mortgagee, i.e., your mortgage lender, has been included as a co-payable on your insurer’s cheque. You endorse the cheque, and then the mortgage company deposits the proceeds into their account. This is a situation that leaves many homeowners confused.
Your mortgagee will often be included as a co-payable on the portion of your insurance claim that covers structural damage. Most mortgages include clauses that make the mortgagee a co-payable on your home insurance policy because the bank or lender relies on the house itself as collateral. If you default on your mortgage, they repossess the house. They have a vested interest in seeing the house rebuilt if it has been damaged.
How Much Can the Mortgagee Hold?
The mortgagee should only be able to hold funds in an amount up to the balance of your mortgage. However, your insurance company is not keeping track of the size of your mortgage, and you may need to engage with the mortgagee to be refunded the difference between the standing balance on your mortgage and your insurance compensation.
How Long Does It Take a Mortgagee to Release Insurance Proceeds?
After suffering the devastating loss of a house fire, most families want to begin the repair and reconstruction process as soon as possible. In addition to wanting the stability of getting your life back together, family’s must also consider that the longer they remain out of the home, the more money they are spending on a short-term rental as well as other additional costs such as food and gas. These are considered “Loss of Use” or “Additional Living” expenses that your insurance policy should cover, but only for so long. Most families hope to be back in their homes before they use up their coverage.
Nevertheless, mortgage companies are often reluctant to release the payment for the same reason they hold it in the first place: they depend on the value of the property as collateral for the loan. They do not want homeowners to walk away with the insurance and default on their mortgage. Some Mortgagees prefer to release periodical payments to the homeowner or directly to the contractor as work is completed on the home.
The good news is that most builders are used to receiving periodic payments, especially if they have experience working on projects involving insurance claims. Contractors with this type of experience will often be suggested by the insurance company.
As the builder makes progress on the repairs, the mortgage company will release subsequent payments. The process may look like this:
- 1/3 of the proceeds at the start of the process
- 1/3 of the proceeds after 50% completion has been verified
- 1/3 of the proceeds after 100% completion has been verified
A newer trend has emerged where mortgagees are simply signing over the funds to the homeowner and the builder as co-payable. This option can make the process flow smoothly without many opportunities for delays.
Why Is the Builder Co-Payable?
When the insurance company makes the builder in charge of reconstructing your home a co-payable it’s another effort to protect the mortgage company’s collateral. They want the builder to receive payment directly so that the work is done and structural damage to your home is repaired.
Keep in mind that your home insurance does not cover the market value of your home; it covers the cost of the damages. If your home is completely destroyed by a fire, your insurance company will pay, up to your coverage limit, for the cost of repairing the damage; they won’t pay out the value of your home.
Are You Entitled to Interest on Insurance Proceeds?
The answer to this may depend on where you live, however, if the mortgagee keeps the insurance proceeds in an interest-generating account, they should likely be paying or crediting you the interest generated. However, you may need to stay in contact with them and insist on payment.
What Happens When Mortgagees Collect their Funds
The worst-case scenario is that your mortgagee collects their funds (up to the balance of your mortgage) to discharge the mortgage instead of releasing the payment to the family and the builder to move the rebuild forward. Rather than see their collateral rebuilt, the mortgagee is choosing to discharge their loan using your insurance coverage.
That can leave you without any money to rebuild your home, and you’ll have to negotiate a brand new mortgage. A mortgagee is likely to do this because they want to offer you disadvantaged current interest rates. This can be particularly problematic with families who have had a change in living situation or employment which might effect the size of the mortgage they qualify for. If the new mortgage isn’t large enough to cover a comparable rebuild, families can be left settling for less even after achieving a fair settlement from the insurer.
Insurance Your Mortgagee Is Not Co-Payable On
Your mortgagee should only be co-payable on the Structure / Dwelling part of your insurance compensation. Other sections should not be included, such as:
Loss of use insurance – Loss of use insurance covers the costs your family incurs because you do not have use of your home. Your mortgagee should not be co-payable on this part of your insurance compensation.
Content insurance – Content insurance covers personal property that you lost in the fire. Your mortgagee should not be co-payable on this portion of the compensation either. However, you may wonder whether another party may be co-payable where the item was not paid off, such as furniture for example. Unlike mortgagees, there is often no clause in your contract with the furniture retailer that would give them a right to be listed as co-payable on your insurance claim.
Handling a Fire Insurance Claim
If you’re worried about your mortgagee being listed as a co-payable, consider getting help with your fire insurance claim from someone who understands the process and can explain how it works. You depend on structural coverage to rebuild your home and get your life back to normal. If you don’t know what to do after a house fire, don’t be afraid to ask for help.
To learn more about the fire insurance claim process as a whole, click here and read about what you should expect when you’re dealing with your insurance company. The more you know about the process, the better prepared you will be to handle your insurance claim.