REDUCE REO INSURANCE COSTS by Dave Duffy

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With today’s growing REO portfolios, it is critical that  lenders and investors become familiar with the dynamics of REO insurance and how to reduce the premium costs.  

REO is a different topic of insurance than lender-placed or forced order insurance.  Forced order insurance applies to properties where the borrower still retains title but has allowed his insurance to lapse or cancel.   The lender force places Fire insurance to make sure it’s loan balance is insured.   However, REO insurance transfers the risk directly to the lender, who becomes the owner of the property.  Here’s a quick checklist:

REO Insurance Check Up

Monthly Reporting Form:  A Monthly Reporting Form conserves cash flow by dividing annual premium into monthly installments.   The investor adds new REO and deletes sold REO as they go along.  The monthly billing reflects all the changes made during the month.   Simplicity of administration and accuracy of the billings can be just as important as the rates or coverage. 

Insure to Replacement Cost: The former loan balance, market value, or what was paid for the property have nothing to do with insurance.   Insurance focuses on repairing or replacing the building with like materials and construction.  Insurance does not include land.  The lender now owns the building and needs to insure it much like it would its own office building. Some REO policies retain Coinsurance and Replacement Cost provisions.  If the property is insured to less than 80% of replacement cost, it’s a good bet that the lender will only receive an Actual Cash Value (Cost to repair minus depreciation) or coinsurance adjusted settlement.  This could be far less than needed to make the repairs or rebuild the property.  Make sure coinsurance is deleted and insure near to replacement cost.

Be aware of exclusions: Most lender-placed/REO master policies provide Special Form coverage on dwellings and delete the vacancy clause that relates to the peril of Vandalism.  Fire policies limit coverage in four areas if a home is vacant.   

1. Vandalism, Theft of Building Parts, and Glass Breakage are not covered after 30 days of vacancy.  If the policy extends coverage for Theft, this applies to building parts only, not contents in the structure.  If you were to turn a building on its side, anything permanently attached that wouldn’t fall out, is usually classified as building coverage.  Theft is excluded in some REO policies so confirm this coverage.  Glass coverage can also be purchased but seldom is. 

1. Water Damage caused by frozen pipes or sudden bursting pipes is excluded if:
   1. the heat is not left on in the building
   2. water is not turned off and pipes drained.   

If the property is vacant and water left on, this can be a huge exposure to uninsured loss.   

A Dwelling Basic Form DP1 provides no Water Damage coverage.  This is only what used to be called Fire, ECE, and V&MM.  Water Damage is a covered peril under DP2 Broad Form or DP3 Special Form.   

Regarding Commercial properties, Basic Perils do not provide coverage for Water Damage either.  Broad Form or Special Form is needed to cover Water Damage. Commercial properties also may require more extensive coverage such as Equipment (Boiler and Machinery), Signs, Ordinance or Law, Pollution Cleanup, or Builders Risk that lender-placed programs generally don’t contemplate.  These perils may be added to many REO master polices.

Deductibles:   As a general rule, a minimum $1000 deductible should apply to REO.  Most insurers offer $2,500 and $5,000 or higher deductibles, which are usually good trade-offs in savings.  Also, consider a higher Vandalism Only deductible.  Frequency of small, nuisance claims will eventually lead to rate increases.

Limits:  Master policy lmits of $1,000,0000-$5,000,000 are readily available.  If a lender services CMBS or commercial REO, some insurers can provide limits up to $20,000,000.  It is critical that the REO insurer have the capacity and reinsurance to match the REO portfolio. 

Portfolio Distribution:  Generally, Western & Midwestern portfolios enjoy lower rates.   Be aware of buying REO in Florida and all Gulf states in the first tier counties will be a cost factor from an insurance standpoint.  Insurance rates are considerably higher if the REO is in these areas.   

Liability:  REO is what underwriters classify as an “attractive nuisance.”  Vacant property entices children to play on the premise as well as attracts vandals and vagrants to beat the security. Even though they are trespassing, most likely the lender will be held liable if they get injured.  Another common source of liability claims is from real estate agents and prospective buyers getting hurt when viewing the property.  Severity of claims involving death or serious injury can be catastrophic and easily in exceed of $1,000,000 so an umbrella should be considered.   

If the REO is commercial, only a handful of specialty carriers will provide primary liability coverage on the premises and even fewer if there is an operating business.  The programs usually provide $1,000,000 per occurrence/ $2,000,000 aggregate. The primary liability limit should be coordinated with the lender’s insurance agent to make sure it meets the underlying requirement of the corporate umbrella.   This avoids the aggravation and costs of filling gap layers.

Flood insurance: This exposure is often overlooked by private lenders and investors.  If a property is in a Special Flood Hazard Area, Zones (A or V pre-fixes), flood insurance is required if the lender is federally regulated.  Floods can occur just about anywhere but these are high-risk flood zones.  A National Flood Insurance Plan Flood Policy (NFIP) or private insurer flood products designed for loan servicers are readily available.    

Monthly inspections:  It is important the investor is aware of the condition of the property at all times. Regular inspection may even be a condition of coverage in some policies.  Failure to regularly inspect and take corrective measures may negate a claim payment by some insurers.  An experienced REO real estate agent communicating with a proactive lender can go a long way in mitigating losses. 

Dave Duffy is Senior Vice President for Seattle Specialty Insurance Service.  Dave has specialized in REO and Lender-Placed Insurance since 1978. He may be reached at (800) 597-1866 or Dave.Duffy@SeattleSpecialtyInsurance.com

Flood Insurance Program - Back On!

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Congress has approved another temporary extension of the National Flood Insurance Program, this time authorizing the program through September 30th. Many are hoping that the temporary fix will be the last of the short term solutions and that government will seek a permanent decision on the status of the program.

For more information on National Flood Insurance Program's Re-Authorization and to Read Comments from the "Big I" click here: Insurance Journal

Flood Program Set to Expire Again

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The National Flood Insurance Program is set to expire on May 31st. For the fourth time this year, indecision on legislature has allowed the program to lapse. As stated in the earlier lapses: no new NFIP policies or NFIP policy renewals will be issued until the program is re-authorized.

If you are in need of Flood Insurance, Floodplus has access to Flood Insurance through Private Insurance Providers. 

Click here to get a Quote or contact a Flood Specialist at 800-597-1866

UPDATE: Read FEMA's Bulletin about the lapse 

Simple facts Lenders should know about REO & Lender Placed Insurance

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More guest bloggers... Hooray!  

Mike Flaherty, Vice President - Marketing, highlights for us details that can help Lenders better protect their REO properties. 

1. If a property is vacant for more than 30 days, most policies suspend Vandalism and Malicious Mischief. Make sure your policy adds this coverage back in.

2. Any material change in ownership allows the insurance company to cancel a policy. If the property becomes a Real Estate Owned, and you are using the borrower's homeowner's policy, make sure the insurance carrier is aware of the change of ownership and occupancy.

3. Actual Cash Value means replacement cost minus depreciation.

4. There are 3 common forms of Fire Insurance policies that may apply to residential or commercial properties: Basic Form, Broad Form, and Special Form. Usually forced order policies provide Special Form on residential and Basic Form on commercial. The perils insured are broader on Special Form and Broad Form. These cover all the Basic Perils plus Water Damage, Collapse, Weight of ice and snow, Falling Objects, Volcanic action, and Sprinkler Leakage.

5. If a property is vacant, it is important you maintain operating heat in the building or drain the pipes and shut off the water. Otherwise, if pipes freeze and cause a Water Damage loss under Broad or Special Form, the claim may be denied. Basic Perils doesn't cover Water Damage.

6. If you have obtained a foreclosed property, make sure you get a property inspection or a property condition report, make sure this is done prior to the placement of the policy.

7. Obtain a loss payee endorsement. This extends a lender's rights in regards to claims.

Do you want to reach out to Mike to discuss details about the items above? Find him on Twitter @MikeFla and LinkedIn

Interested in Learning More about Private Flood Insurance?

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With the lapse of the National Flood Insurance Program there have been lots of questions arising about Private Flood Insurance - What is it? How does it work? Will it work for my requirements

If you are looking to learn more about Private Flood Insurance and how it can benefit you; please join Seattle Specialty Insurance Service's President, Rick Pedack, as he presents at the National Flood Conference in San Diego. The session description and location details can be found below.

Sheraton San Diego Hotel and Marina
1380 Harbor Island Drive, San Diego, CA 92101
Phone: (619) 291-2900

W6- Regulatory Perspective on Private Flood Insurance

Join a panel of private flood insurance experts, including a Federal Regulatory Agency member, in discussing compliance issues for lenders applicable to private flood insurance. In addition, two State Departments of Insurance will discuss regulation of private companies and private flood insurance products.  

Moderator: Larry Palmer

Presenters: James J. Donelon, Louisiana Commissioner of Insurance; Thomas Alger, Communication Director, Iowa Department of Insurance; Mark Mellon, Attorney from the FDIC; and Richard E. Pedack, Chairman Mountain Pacific Bank of Everett, WA and President Seattle Specialty Insurance Services, Inc. 

New Seattle Specialty Website is Coming!

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Greetings all! It has been a few months in the making, but we are just days away from launching the newly redesigned Seattle Specialty website. Here's a sneak peak of the re-design - What do you think?

If you want to be in the know about Seattle Specialty and Floodplus, find us on Twitter @seattlespecialT or become a Fan of Seattle Specialty and Floodplus on Facebook

"I thought my flood insurance policy covered everything..." - 11 Questions You Need to Ask Your Flood Insurance Agent to Avoid This Statement

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Too many times our Claims Manager hears "But I thought our policy covered everything"

Don't let this happen to you. At the time of a loss is not the time to think about the coverage in your policy.

11 Questions You Need to Ask Your Flood Insurance Agent:

1.       Is my policy a National Flood Insurance Policy?

2.       Who do I contact if I have a loss?

3.       What amount does the policy cover?

4.       Does the policy cover the interior and exterior of the building?

5.       Do I need an excess flood insurance policy?

6.       When does the policy start and how long is it in effect?

7.       What is my deductible?

8.       Does my flood policy coverage include additional living expenses?

9.       Does the policy cover damage to a basement?

10.     What is the appropriate amount of dwelling and contents coverage?

11.     Does my policy pay for replacement cost?

Knowing this information at the time of policy placement is an important part of being Flood Ready. Also, make sure to keep all of your Flood Insurance information and documentation in one safe place so you will know where to find it in case of a flood emergency. 

You can also visit http://www.fema.gov/business/nfip/sfip.shtm for information about your NFIP policy.

Common Questions about Flood Insurance

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Its rainy season here in Seattle and with local concerns related to the Howard Hanson Dam & Green River Valley, we have been talking about flood insurance quite a bit. In speaking with our network of agents we have noticed that there are some common questions we hear nearly every day. Listed below are some of the most commonly heard questions about Flood Insurance, the Howard Hansen Dam and the Green River, and some simple answers to those questions in laymen's terms.

What happens if the Howard Hansen Dam on the Green River releases too much water and causes flooding? Am I covered?
If you have a NFIP Policy - YES!

What happens if the Howard Hansen Dam collapses? Am I covered?
Yes, but we would recommend heading for the hills as the damage would be huge.

What is the difference between the National Flood Insurance Program (NFIP) and Federal Flood Insurance?
Both program names reference the federally backed flood insurance program administered by FEMA - NFIP and Federal Flood Insurance are the same thing.

What is Write Your Own Flood Insurance?
The "Write Your Own" (WYO) Program of the NFIP allows regular insurance companies to issue and service NFIP policies with federal government backing. WYO carriers procure, produce, and handle NFIP claims on behalf of the insurer.

What is the difference between a basement, a crawl space and an enclosure?
A. Basement: below grade on all 4 sides (You could live down there)
B. Crawl Space: below the lowest habitable floor (You can't live down there)
C. Enclosure: Non habitable area attached to the building, i.e. a non-habitable garage (You can't live down there either)

Can a National Flood Insurance Policy be paid monthly?
No, policies are annual. The only exception to this would be if you arranged for your bank to pay for your policy through an escrow account. Another option would be to pay on a credit card and then make the monthly payments to your credit card company.

Federal Flood Insurance Program Granted Temporary Extension

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Thursday, October 1st - Just hours before the program was set to expire, the U.S. Senate passed a temporary extension of the National Flood Insurance Program (NFIP) extending the program through Oct. 31, 2009.

In a recent Insurance Journal article Robert Rusbuldt, Big "I" president and CEO states, "It is alarming that the NFIP, which was set to expire..., came within a few hours of leaving millions of homeowners and small businesses unprotected." He goes on to say, "Had the program been allowed to expire, it would have resulted in no more new or renewed flood insurance policies and millions of consumers would have been left without flood insurance coverage."

A full story about the Big I's reaction to the extension and thoughts on potential outcome can be found on the Insurance Journal website.

FEMA’s Top 10 Things a Lender Should Know about the NFIP

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In The Top 10 Things Every Lender Should Know about the NFIP FEMA addresses a lender's "must-know" items about the National Flood Insurance Program and Regulatory Compliance

The short list can be seen below and a detailed list can be found on FEMA's website

1. Flood insurance is mandatory for buildings in FEMA-identified high-risk flood areas, which are called Special Flood Hazard Areas (SFHAs).
2. Ensure that flood insurance coverage is maintained for the term of the loan.
3. Flood zone determinations are required to establish whether a building is located in a SFHA.
4. Know the amount of flood insurance coverage to require.
5. Notify borrowers in writing of the requirement to buy flood insurance for new and existing loans.
6. Escrow flood insurance premiums.
7. There is no waiting period for flood insurance to go into effect when it is purchased in connection with the making, increasing, renewing, or extending a loan.
8. Notify the insurance company or agent when the lender or servicer of a loan changes.
9. For more information about the mandatory purchase of flood insurance requirements, and other related topics, read The Mandatory Purchase of Flood Insurance Guidelines.
10. Flood insurance and the mandatory purchase laws help protect your investments as well as your borrowers' against uninsured flood losses.