Get cover back on the property at once. With no insurance, a fire or storm can destroy the building that secures your note and leave you with a lien on a damaged lot. Ask the borrower in writing for proof of a new policy. If none arrives, check whether your loan documents let you buy coverage yourself and add the cost to the debt.
What you stand to lose
Your note is backed by the property, and with a house a large part of the value is in the structure. If it burns down uninsured, the borrower still owes you the money on paper. In practice, someone who has lost their home and has no payout to rebuild it has little reason to keep paying, and the land alone may not cover the balance.
Insurance is what turns that loss into a check, but only if the policy exists and names you.
Check how you are named on the policy
A lender, the mortgagee in insurance language, should appear on the borrower’s policy under a mortgagee clause, sometimes called a lender’s loss payable clause. It means the insurer pays you, or you and the borrower jointly, if the property is damaged. It also generally means the insurer has to tell you before the policy is cancelled, so if you were named, a cancellation notice may be how you found out.
What to do, in order
- Call the insurer or agent. Confirm the cancellation date and the reason. Ask whether the policy can be reinstated if the overdue premium is paid, which saves the borrower applying for a new one.
- Read the insurance section of your documents. It should say what coverage the borrower must carry, that you must be named, and what you may do if they fail.
- Write to the borrower. State that the policy has lapsed, quote the requirement, and give a short deadline to send proof of coverage showing you as mortgagee. Keep a copy.
- Find out why. A missed bill is one thing. An insurer that has withdrawn from the area, or refused to renew because of the roof or the wiring, is telling you something about the property.
If the borrower does nothing
A mortgage or deed of trust commonly allows the holder to buy insurance and charge it to the borrower. This is called lender-placed or force-placed insurance, and it differs from the policy it replaces. It can cost more than an ordinary homeowner’s policy. It is written to protect the building and your interest, so the borrower’s belongings and liability may be left out. And the premium can be added to what the borrower owes only if your documents say so. Your state may also have rules on the notices you must send first.
Tell the borrower in writing what you bought and what it cost. An uninsured property is commonly a default under the loan documents even when the monthly payments are current. Since what counts as default on a note turns on the wording, check yours and take an attorney’s advice before you act on that.
Stop it happening twice
Ask the insurer to send renewal and cancellation notices to your current address. Put the renewal date in your calendar and request the new declarations page each year. If the borrower struggles with a yearly premium, suggest an escrow, in which they add a monthly amount to the payment and the premium is paid from that account.
The same escrow can hold money for property taxes, the other bill a borrower in difficulty may let slide. Look up the county record while you are dealing with the insurer, and if taxes are owed, follow the steps in what to do when the borrower has not paid the property taxes.
Insurance and selling the note
Proof of insurance is part of what a buyer checks before funding, so a lapse holds a sale up until coverage is in place, and a buyer may ask why the property was hard to insure. A lapse on its own is a reason to fix the policy, though, and the circumstances that do point toward selling are in when selling a note makes sense.
Once coverage is back
File the new declarations page with your note, along with your letter to the borrower and any reply. If you go on to ask us what the note would sell for, mention the lapse and send the file, since a buyer’s checks will turn it up anyway.
Related questions
How would I know if the borrower's policy was cancelled?
If you are named on the policy under a mortgagee clause, the insurer generally sends you notice. If you are not named, you may never hear. Ask for the declarations page every year and check that your name and address are on it.
Does the land contract or note have to mention insurance for me to require it?
Your right to demand coverage comes from the loan documents. If they are silent, you may have little power to insist. Have an attorney read them, and consider asking the borrower to sign an amendment.
What if the property was damaged while it was uninsured?
Speak to an attorney promptly. The borrower still owes the note, and your documents may require them to repair the property. Photograph the damage and get a current estimate of value before you decide what to do.