As I meet with lenders across the Western United States, there is a strong aversion to talking about insurance in general. Insurance is a product that nobody wants to think about until it is needed, and everybody wants to pay as little as possible for their lender coverage. There is a particular aversion to talking about insurance for lending institutions, and I often joke that we are mixing two of the most boring industries in the world. Due to the dry nature of insurance, I spend nearly all my time talking at a high level about insurance coverages. Those conversations typically reference the benefits of Unitas Financial Services’ innovative approach to blanket insurance coverages for lending institutions. On the rare occasion that I do get to dive into the intricacies of insurance coverages, I often run into a lender that uses a blanket mortgage impairment policy. Blanket mortgage impairment policies provide a similar benefit at a high level (eliminate the need to track and force-place insurance while still protecting collateral). However, they do not compare to a full Unitas Blanket Mortgage policy, especially when it comes to flexibility, getting claims paid fast, and the overall coverage.

It is essential to understand why blanket insurance policies exist in the first place. Financial institutions struggle with remaining properly insured for an affordable price. Uninsured losses for a lender are sporadic, and the cost of manually tracking insurance is relatively high. Instead of spending staff time and lender resources on tracking and force-placing insurance, blanket policies (including Blanket Mortgage, Blanket VSI, and Blanket Equipment) eliminate the need to track and force-place insurance. While this is the main selling point of a blanket insurance policy, a lender carries insurance to protect their collateral via risk transfer to a third party. Even though losses are rare, they can be significant and costly. 

Now that we have identified why blanket insurance exists, let’s discuss the two types of policies out there.

Blanket Mortgage Impairment:

Mortgage Impairment Policies began as E&O policies to cover a lending institution in case of a lapse in an insurance tracking program. Initially, these policies began as a “backup” if a borrower with lapsed private insurance and no force-placed policy suffered a loss to their collateral. As frustrations of tracking and force-placing mounted throughout lending institutions, Mortgage Impairment policies were endorsed (an insurance term for “changed”) to remove tracking and force-placing. While this seemed like a great idea at a high level, Mortgage Impairment policies initially were not written to remove tracking and force-placing. When it comes time for settlement on a mortgage impairment policy, it is significantly more problematic to get a claim paid. In fact, to file a claim on a property, several items need to happen for the lender to be made whole:

• The borrower needs to lapse on their insurance
• There needs to be an uninsured loss
• The lender must repossess the property
• The loss must be greater than the loan amount, less the land value for the property, less the deductible of the policy

With these provisions, the claims process in a mortgage impairment policy can be lengthy and frustrating for a lender. The valid reason for insurance is to transfer the risk of uninsured loss to a third party, and it is frustrating when the settlement of a claim lowers the payout significantly. If the only goal is to remove tracking and force-placing (while providing high-level coverage), this policy will provide a high level of “sleep easy” protection for a lender and appease regulators.

Blanket Mortgage Hazard:

In contrast to Mortgage Impairment policies, Blanket Mortgage Hazard policies specifically eliminate tracking and force-placing insurance. A Blanket Mortgage Hazard policy is much simpler. Whenever an uninsured loss happens, the Blanket Mortgage Hazard policy acts as if the lender had force-placed that property from the date of lapse while allowing the lender to cease tracking and force-placing insurance. These policies are dual-interest: the lender does not need to foreclose on the property to get a claim paid, and land values do not reduce claim amounts on Blanket Mortgage Hazard policies.

The Take-Away

When comparing these policies, the main difference is that one policy requires foreclosure, while the other policy covers the lender without foreclosure. When a lender looks to transfer their risk of uninsured collateral loss to a third party, the speed of claims payment and settlement options are typically the last items discussed. Both policies protect against the uninsured loss, but the difference in the efficiency of payments is significant. Whenever I hear that a lender “already has a blanket policy,” often it is because they have a Blanket Mortgage Impairment policy. If no claims have been filed, that policy can be of great value. However, while claims are rare, community lenders protect their assets efficiently and effectively, and the specifically crafted Unitas Blanket Mortgage policy does just that.