When one hears the word “insurance,” you automatically think you are “covered” from any and all “qualified” loss that exists under the umbrella of that coverage. Unfortunately, that does not appear to be true as all types of insurance from medical to long term disability have been the subject of movies and articles slamming the insurer’s failure to pay when the insured comes to collect on a valid claim. The same also appears to be true in the mortgage industry. The private mortgage insurance company, Old Republic, was sued last week by Bank of America for failure to pay on purportedly valid claims totaling approximately $160 million dollars. Bank of America should not be alone in their frustration as borrowers, many of whom have paid monthly for private mortgage insurance, are now liable for a greater deficiency on their short sale as a result of the mortgage insurer refusing to cover any of the difference. For example, in the event that someone sells their home with a $200,000 mortgage for $100,000 there is a deficient amount of $100,000. If we assume that the mortgage insurance company covers approximately 30% of the original note, as most cover somewhere between 20%-50%, then the deficiency balance the lender may now pursue the borrower for is only $40,000. The borrower, once liable for $100,000 loss, is only paying the $40,000 due to the mortgage insurance covering $60,000.00. However, when the mortgage insurance company fails to pay on claims, the borrower may now be facing a $100,000 suit from their lender. Considering the aforementioned, it is not only Bank of America and other lenders that are suffering from coverage denial but the borrowers who, unlike Bank of America, don’t have in-house counsel.
Carlos L. McDade, Esq.
Kelle L. Kuebler, Attorney*
*Licensed only in New York and Connecticut