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This content is independent of any content coming from insurance brokers or insurers or law firms. Commercial insurance is rarely taught in schools, and when it is it’s mostly done through the lens of brokers or insurers. There are many misconceptions around Mortgage Impairment, like many other topics in commercial insurance, due to bad habits acquired through over reliance on insurance brokers or insurers or information providers who are lobbied by them. It is also important to note that insurance has both an operational aspect and a legal aspect, on which we put weights of 95% and 5% respectively in terms of importance to protecting a business and its investors (the point is that going to court to enforce coverage defeats the purpose of buying insurance, so you want to make sure that whatever insurance you buy protects your business right and pays out fast on large losses).
Mortgage Impairment Definition
It is the impairment of or default on a mortgage by the borrower or mortgagor. This includes protracted default or a delay in mortgage payments. The risks leading to the borrower defaulting on their mortgage can be financial or physical in nature. An example of a financial risk scenario is that of a borrower losing their job and being unable to pay their mortgage payments. An example of a physical risk scenario is that of a borrower not getting proper insurance on their home that was destroyed by wildfire, and as a result stopped paying their mortgage payments due to the financial burden incurred.
Mortgage Impairment Insurance Definition
It is a form of commercial insurance that can be bought by lenders, or mortgage servicers or holders, offering them protection for two main types of Operational Risk:
(1) a credit loss due to a borrower’s failed or void insurance (ex. mortgagor defaulting on mortgage payments following a physical risk leading to damage to their property);
(2) a physical risk leading to damage to foreclosed property.
The mortgage impairment insurance can also offer ancillary coverage such as general liability, professional liability, extra expense coverage, and/or other forms of coverage depending on negotiations with insurance brokers or companies.
Mortgage Impairment Insurance Market Updates (April 14, 2022)
Insurers have been steadily raising deductibles and/or raising premiums on mortgage impairment insurance policies during the last couple of years despite no apparent large losses adversely impacting the mortgage impairment insurance market specifically. Many of the lenders or mortgage service providers buying the insurance continue claiming small individual losses as opposed to aggregate portfolio losses.
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Mortgage Impairment Coverage
Coverage under mortgage impairment insurance is different from one insurance company to another. Just like with other types of commercial insurance, the coverage must be reworded and triggered by risk experts independent from any insurance broker or company, or else the coverage will have a low payout ratio on large losses. In general, there are two (2) main insuring agreements, which outline what the organization is explicitly covered for, in a mortgage impairment policy:
1. Mortgage Protection
2. Foreclosed Property
Refer to the Mortgage Impairment Insurance Definition section above.
In addition, and just like any other commercial insurance policy, the mortgage impairment policy contains sections around Exclusions, Definitions, General Conditions, Endorsements, and other sections that impact mortgage impairment coverage by virtue of either how the coverage is explicitly outlined within the policy, OR how the coverage is triggered in the event of a loss. Refer to the Mortgage Impairment Policy section below.
Mortgage Impairment Policy
The mortgage impairment insurance policy will typically contain the following sections:
· Insuring Agreements (what the organization is explicitly covered for)
· Exclusions (what the organization is not explicitly covered for)
· Conditions (conditions that the organization has to meet)
· Definitions (various words used within the insurance policy are defined)
· Endorsements (amendments to the base wording of the insurance policy)
All of the above-mentioned sections can be materially different in how they are worded and structured from one insurer to another. Refer to the below sections for an example of a structural difference between insurers Chubb and Lloyd's.
Mortgage Impairment Insurance Chubb
Chubb, the insurance company, is one of the main underwriters of mortgage impairment insurance. Chubb has, till the date of this article, used different forms within a single policy (aka. a modular policy) each of which outline their own insuring agreements, examples of which are:
- Chubb’s Mortgage Protection Insurance Form #80-02-4200 provides base coverage for Mortgage Protection and contains two (2) insuring agreements:
1. Mortgage Holder’s Interest Insurance
2. Mortgage Holder’s Liability Insurance
- Chubb’s Foreclosed Property Form #80-02-4262 provides base coverage for Foreclosed Property and contains only one (1) corresponding insuring agreement.
Mortgage Impairment Insurance Lloyds
Lloyd’s of London, the insurance market representing various insurers, is another principal underwriter of mortgage impairment insurance, under whose umbrella is used by several syndicates (insurers) to provide for a mortgage impairment policy, which can be worded differently from one syndicate to another. Unlike Chubb however, the mortgage impairment insurance policy offered by many Lloyd’s syndicates typically uses one single form to combine all coverages.
Mortgage Impairment Insurance Policy Wording
Just like with any other commercial insurance policy, the wording of the mortgage impairment insurance policy will greatly influence the insurance payout ratio especially on large losses. Particularly important is the analysis of the wording around:
· Coverage for specific natural perils of interest;
· Claims including the valuation methodologies of properties;
· Core definitions and how they impact all sections of the policy;
· Requirements that the mortgagee has to meet to be compliant with policy conditions;
· Other important considerations impacting the payout ratio of the policy.
Mortgage Impairment Insurance Application
Every insurer will ask for an application form to be completed by the organization that wants to buy mortgage impairment insurance coverage. Please note that the application legally forms part of the mortgage impairment policy. It is therefore important for the organization not to fall into the trap of answering all questions as they are presented in the application (an independent risk expert can negotiate on behalf of the organization vis a vis brokers so that certain questions are reworded or not answered at all). Moreover, many insurers will ask for a quarterly report or list of mortgages including those that are delinquent or subject to a foreclosure. Feel free to contact us at any time for assistance.
Mortgage Impairment Insurance Canada
Canada is one of the most advanced countries in the world when it comes to the procurement of mortgage impairment insurance coverage. This is mainly due to the relatively high number of lenders and/or mortgage servicers or holders that purchase the insurance. Most of the time mortgage servicers would be subject to a contractual requirement by their backers to purchase the insurance. Chubb Canada has long been a leader in providing mortgage impairment insurance in Canada, however there are other mortgage impairment insurance providers including Lloyd’s, AIG, AWAC, and Berkshire. As always, it is recommended that an organization seek the assistance of independent risk experts before initiating contact with insurance brokers.
Blanket Mortgage Impairment Insurance
There is no blanket coverage that is provided by a mortgage impairment insurance policy. There is however parametric insurance that can be structured to cover specific incidents and/or natural perils with much less burdensome policy conditions placed on the organization. Parametric does come at a cost however, so a detailed cost/benefit analysis is highly recommended.
Frequently Asked Questions (FAQ)
What Is Mortgage Impairment Insurance?
It is a form of commercial insurance protecting a mortgagee from financial loss due to physical damage to its collateral and/or due to a mortgagor’s default as a result of or subsequent to such damage.
What Does A Mortgage Impairment Policy Cover?
It covers loss to a mortgagee arising from damage or destruction to property of a mortgagor or foreclosed property and resulting from certain natural perils. Natural perils include but are not limited to Earthquakes, Wildfires, Storms, Floods.
How Does Mortgage Impairment Insurance Work?
The insurance pays out the amount of financial loss, over the policy deductible, that the mortgagee sustains upon damage or destruction of property of a mortgagor or foreclosed property. There are various coverage options as well as terms and conditions included in mortgage impairment insurance, which have to be clinically analyzed and triggered by risk experts who are independent of brokers or insurers.