Question

An insured carries a property policy on her home in the amount of $250,000. A bank is shown as the mortgagor in the policy. Last month the insured made her final mortgage payment, but did not remove the bank from the policy. In the event of a covered loss to her home, how much will the bank receive?

1) Standard minimum of 10% that is paid to lenders
2) All of the payment would be made to the mortgagor shown in the policy
3) Nothing
4) Up to the amount of debt that the insured has with the bank

Answer 1

Upon the final mortgage payment, the bank's interest in the home insurance policy ceases, meaning it should not receive any payout in the event of a covered loss. However, if the bank is not removed from the policy, this could lead to confusion, although legally they are not entitled to any funds since the debt is fully paid.

Step-by-step explanation:

If an insured individual carries a property policy on her home for the amount of $250,000 and the policy lists a bank as the mortgagor, but she has recently paid off her mortgage, the situation may seem complex. In the scenario where there is a covered loss to the home, if the bank has not been removed from the policy, the bank would receive money from the insurance claim. However, because the mortgage has been fully paid, the insured no longer has any debt with the bank. Consequently, in the event of a covered loss, the bank should not receive any payment since their financial interest in the property (the mortgage) no longer exists.

It is common practice for the lender to be named in a property insurance policy to safeguard their interest while there is an outstanding loan. Once the loan is paid off, the homeowner should take steps to remove the bank from the policy to avoid any confusion or misdirected insurance payouts after a claim. It's crucial to keep insurance policies updated to reflect current circumstances to prevent potential issues with legacy banking details.