Tips to Reduce REO Claim Nightmares
By Mel Babtkis & Ed Babtkis, Ross Diversified Insurance Services, Inc.
The times have changed and the slumbering Real Estate Owned, (REO), departments and Scratch and Dent buyers are alive and well. The last six months have seen sub prime giants fall, borrowers not being able to make adjusted payments and foreclosure activity skyrocket. In the insurance world, as with REOs, this is just the tip of the iceberg for claim activity.
As lenders adjust to changing times and implement various processes, the challenge of how to correctly insure and have timely processing of claims can become a major challenge. Every REO manager will have a story to tell about a particular property and the ensuing nightmare that occurred when filing a claim. Many REO managers privately acknowledge that they would rather not file a claim then hold up the sale of a property.
The word “insurance” is generally viewed like a trip to the dentist: got to do it but what a pain.... Many REO managers simply do not have time to put a workable system in place to make the insurance and claims process bearable.
There are many ingredients that go into the decision making when contemplating the insurance component of the REO department. The four criteria below, if done without fail, will aid in expediting the claim and receipt of claim proceeds.
The four criteria are:
1) Document the condition of property the date the property becomes REO or for scratch and dent buyers, the date of acquisition.
2) Review the appraisal in the file to determine the correct amount of insurance
3) Know what your policy covers in the event of a claim.
4) Know your deductible for each peril.
By far the most prevalent problem with REO insurance claims is demonstrating to the insurance company that the claim occurred on their watch. I have heard countless times a manager or V.P. complain “we filed the claim, it’s up to the carrier to tell me when the claim occurred or prove to me it happened before we ordered the insurance”. While this perspective is commonplace, it is counter productive to resolving a claim quickly and moving the property. The claim time line is expedited dramatically by simply documenting the condition of the property and possibly filing an immediate claim with the prior homeowner’s insurance company or lender placed provider should damage be noted when the property is first taken back or acquired.
The second most common problem we have seen is an REO department being given the directive to insure for outstanding balance. Unfortunately this amount may have nothing to do with the value of the improvement and can create a higher premium and over insured property or conversely a lower premium and under insured property. Third, know your coverage, replacement cost coverage or actual cash value coverage will have a major impact on your claim amount!! Most REO departments do not want to rebuild properties in the event of a claim but simply want to get the money and sell the property in an “as is” condition. In this case many lenders will settle for actual cash value coverage, (meaning the amount of loss less depreciation and contractor overhead and profit). Because sub prime or scratch and dent properties are traditionally older properties, actual cash value may result in a very low claim amount after the deduction of depreciation. The decision of how much to insure for and the type of coverage in place are related and should be decided in advance to avoid unnecessary delays in claims processing and frustration in claim recovery. Finally, deductibles on perils covered will effect on your claim recoverable. Usually Vandalism and Malicious Mischief claims are common and carry a higher deductible than other perils. Multiple deductibles are especially frustrating as vandals can repetitively vandalize a property that is not secured. In this case, the multiple deductible issue can prevent a reasonable settlement.
The above represents a few of the areas of REO insurance. There are many other items to consider including flood determinations and flood insurance when applicable. A good knowledge of insurance either through an in house training program or coupled with the utilization of an agent and/or a third party claims administrator are options a lender should consider when dealing with this troublesome area.
Ross Diversified was founded in the early eighties and can aid REO departments and scratch and dent buyers in implementing an insurance program that minimizes delays and results in higher claim recoveries. In addition, Ross is a user of one of the more popular REO systems and is working with an ISO subsidiary to develop an acceptable automated insurance amount coverage tool.
Mel Babtkis or Ed Babtkis can be reached at 800-210-7677.
Ross Diversified Insurance Services, Inc.
2922 E. Chapman Ave. #203
Orange, CA 92869
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