Author: VU Faculty

An agency has had several requests from mortgage brokers and lawyers asking for binders showing the new mortgagee without having set closing dates on new loans. They insist that the binder and not an Evidence of Property Insurance form be provided before they will set a closing date. Do they have an insurable interest in the property and is a binder appropriate prior to closing??

"Recently we have had several requests from mortgage brokers and lawyers asking that we produce a binder showing the new mortgagee without having a set closing date on a new loan. They insist that we provide a binder before they will set a closing date. As we see it, the new mortgagee has no insurable interest until they close on the loan so we do not want to change the insured’s policy in order to produce the binder. However, they are insistent that they will not accept an Evidence of Property Insurance form and want the binder. Is there any document we can refer to that will hold weight with them when we refuse to issue a Binder instead of the Evidence of Property?"

It sounds like the mortgage company is fishing for insurability. They understandably want to know if the prospective buyer will be able to secure coverage before they incur closing expenses. One must be careful in trying to be helpful to make sure that proper procedures and laws are followed.

How about asking the underwriter's permission first. Technically, a binder reflects what the policy is suppose to cover and the mortgagee should not be reflected until the loan has been consummated or at least in the process. But having said that, the insurance company has no obligation to pay unless the person or entity listed as a mortgagee or lienholder has an insurable interest and has sustained a loss. Listing someone as a mortgagee or lienholder before the deal has been executed does not appear to hurt anything. But it is recommended that something like this not be done without the underwriter's blessing.

The agent should stand his/her ground. It would be almost an automatic E&O to issue a binder with no inception/expiration date.

Perfect example of bankers and mortgage companies not understanding the insurance contracts.

If an agent is concerned about binding coverage prior to an actual closing date, they might want to put language on the binder indicating that the effective date is the later of the date shown or the date of purchase. Mortgage companies are probably requesting binders earlier as a way to be sure that the property is insurable so that they don’t have surprises as closing gets closer and they’ve spent money drawing up closing documents.

I'd never issue a binder or EPI without a closing date. Let the bank ask all day long, I issue the binder and they will get it when I am satisfied that all my "ducks are in a row."

I can understand the mortgage company's position. Increasingly, homeowners are getting declined for coverage because, for example, of historical water damage or claims involving the property. The mortgage company wants to make sure the home is insurable before they agree to offer a mortgage.

Unfortunately, that's a risk of their business. The insurer has no obligation to put coverage in force before the prospect even has an insurable interest. Surely the mortgagee has a force-placed market to back them up. Coverage can't be bound until the date of ownership is known.

Do you have an opinion? If so, feel free to email us at Bill.Wilson@iiaba.net and we'll post your comments here.

Great article on binding coverage before establishing closing date! My “opinion” is that I should be able to issue a binder showing that an insured’s home is PRESENTLY insured, but I disagree with putting the new mortgagee name and address on the binder because they are NOT officially the mortgagee of record until the closing occurs. If I had my way, I’d like to provide insurance information that does not bind a period of coverage: after all, the mortgage company only needs assurance the property is insured. Once the closing occurs, then I would expect to provide a binder and/or a DEC showing the mortgagee listed. Since I don’t have my way (employee only), I send a binder with a 30 day period on it showing present coverages and listing the mortgagee requesting the binder. However, I don’t actually change the policy until I’ve verified with our customer that the closing completed successfully. What do you think?

Depending upon the form used, a certificate would be preferable to a binder, as a binder is evidence of coverage. Neither a certificate nor a binder change the policy. Perhaps the mortgage company's interest would best be shown on an ATIMA basis.

I certainly understand your reasoning and at first blush, your concern, but I don't know if having the mortgage company's name on the binder before closing creates any serious problems that wouldn't be overcome quickly by the adjuster. For example, suppose the house burns the day before closing, neither the named insured or the mortgagee could successfully make claim for the property loss given the lack of insurable interest for both of them. They have no property claim (assuming the insured didn't already have their own personal property there). The named insured could make a loss of use claim given they have nowhere to live however. I think it would be a non-issue as far as the insurance policy is concerned. That doesn't mean that it wouldn't be a problem contractually with the seller.

I agree that an agent can bind coverage any time they want to. Whether they should or not is a different issue. I suppose if an agent bound coverage on a house and it never really went to closing, there wouldn’t be any need for the coverage since there was never an insurable interest due to no ownership…and perhaps no money being put down.

I think the mortgagee wants more than assurance that the property is insured…it wants to know that ITS interests are directly protected via the standard mortgage clause. This gives THEM coverage in case the insured violates a policy condition (e.g., arson) and certain rights, including notice of cancellation. As long as the policy includes an insurable interest provision and standard mortgage clause, if the loan falls through, no one is entitled to coverage since there’s been no loss.

1.  Showing that the home is "presently" insured does not guarantee that any insurer will insure the NEW owner. Insurers underwrite both the home and the homeowner.
 
2.  Not comfortable with "I’d like to provide insurance information that does not bind a period of coverage." Not sure that that means; hopefully, he doesn't suggest issuing a binder with no inception/expiration date!
 
3.  Don't quite understand this: "I send a binder with a 30 day period on it showing present coverages and listing the mortgagee requesting the binder. However, I don’t actually change the policy until I’ve verified with our customer that the closing completed successfully." Does this mean he issues a 30-day binder showing the new owner and new mortgagee? If so, I suppose that's no harm, no foul. As one of the VU faculty stated in the article, listing a prospective owner and their mortgagee on a binder or policy does not give them coverage if they have no insurable interest in the property.
 
4.  If the mortgagee's concern is insurability of the home and the homeowner, two suggestions:
 
A.  The closing is contingent on the new purchaser providing acceptable proof of insurance at the time of closing, so I don't know what the mortgagee is so concerned about. They hold all the cards in the transaction.
 
B.  The mortgagee might accept evidence of a valid insurance quote from an insurer, which would indicate that insurance was available.