Large insurance claims and your lenders involvement in your case

6 Replies

I need help understanding this idea that your lender will help you collect on insurance claims if you have a high outstanding loan balance.

In this scenario, if you have a high loan balance on a property, and your property gets largely destroyed or damaged, you then have to collect on a HUGE insurance claim. I have heard from mainly two popular real estate educators, Robert Kiyosaki and Jason Hartman, that it is to your advantage to have a high loan balance as opposed to a paid off property.

a quote from Jason Hartman:

"if the owner of the income property has a high loan balance, the lender will often go to bat for the owner. When this happens, there's no need to hire an attorney. The insurance company will have to go against the lender, who likely has dozens of attorney's."

"the lender will become your top advocate because they have to protect their collateral."

On the contrary, it has been explained to me by an IRS attorney who has handled related cases before that this is not true, that in reality the lender has no skin in this insurance claim and will simply expect you to pay the mortgage regardless of whether or not your property is intact. This is because the loan is an agreement between owner and lender and they don't care if your property is destroyed, they still expect you to pay that mortgage no matter what.

what is really going on here? in your experience, which one of these interpretations is correct?

Neither one, really.  The lender obviously wants their collateral protected, but they're not really going to "go to battle for you" on say collecting an extra few thousand in insurance claims.  It's up to you in either case....it's certainly no reason for keeping a high loan balance.

In legal terms, the lender has no obligation to help you with your insurance claim; however, in practical terms if it is a large claim, the lender will have a interest in making sure you get paid so  their collateral is protected. I've been quoted as saying, rather offhandedly, that the best insurance is a high loan balance. Again there's a difference between the law and the practice in this area. Remember, there is absolutely no guarantee that the lender will help you with your insurance claim but if the claim is large they will have a real, vested interest in doing so.  I hope this helps clear things up.  Thanks for listening to my podcast, The Creating  Wealth Show, and happy investing! 

I have been an insurance adjuster for over 25 years and have never had a lender take an active role in a large claim.  Lenders don't know a thing about insurance claims and don't want to deal with them.  The insurance company will put the lender on the check and you will have to mail it to them.  You can then chose to apply it towards the payoff, or tell them to escrow it for repairs.  It makes no sense to me to have a high loan balance for this reason.  Good luck!

Hi @Elliott D. ,  

There is a little grey are in your questions that suggest the lender could possibly get involved but it's very unlikely.  The only time I've seen that happen is in the case where the homeowner has vacated the property and the bank has foreclosed. (Usually this is a claim in response the place being gutted while vacant)

In most cases it wouldn't be worth it because the insurance company doesn't insure the loan value. For us in California's we see a lot of Million Dollar homes insured for $500,000 (many times much less). That's because $500,000 of the value is in the location and $500,000 is in the value of the physical property. 

If your property is in Huntington Beach, and you don't have a ton of equity, I'd wager your property isn't insured for anything close the the loan value. You can always ask your agent for the Dwelling amount or look at your policy declaration page to see what the property is actually insured for.

As reference, there are a couple ways insurance companies will insure your property. 

Replacement Cost (RC)- RC is the cost to replace the property on the same premises. You can view this as the cost of ground up construction on the home which may be higher or lower than the loan value. 

Actual Cash Value (ACV) - ACV is the cost to replace the property minus depreciation. (RC - Depreciation = ACV) If you have 10 year old cabinets your going to get the value of those cabinets minus 10 years of depreciation.

Agreed Value (AV) - AV is an endorsement you can get through some carriers that states the insurance company agrees to pay a certain dollar amount in the event of a loss regardless of the replacement cost. 

I hope that helps you understand your insurance a little better.

Thank you very much for you responses, I realize I've assumed things that were never clearly stated about this subject.

The lender wanting you to get your claim payed out is not the same thing as them actually going to court for you.

One additional thought, think back to the events after Hurricane Katrina and how the lenders put moratoriums on mortgage payments, the governments pressuring insurance companies to pay claims and pay them quickly, etc. When disaster strikes, I would much rather have a lender than be on my own with all my equity at stake. The people who owned their properties free-and-clear didn't get any of the benefits that the leveraged owners got. It's not fair but it is reality.  

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