Solving the puzzle of lienholder clauses

November 29, 2021 / 4 min read

Protection for lienholders on insurance policies through the loss payable and mortgagee clauses, often called lienholder clauses, assures coverage for the lender in the event of a loss. Unfortunately, validating the correct lienholder information on the clause can be a long and cumbersome process.

insurance policy lienholder protection

A current and accurate loss payee or mortgagee clause protects both borrower and lender.

Picture this scenario: New homeowners accept an attractive discount offer and switch insurers a month after closing on their house. They obtained the mortgage through their bank, but they’re unsure of the address for mortgage-related matters, so they give the new insurer their local branch address. Unfortunately, that office isn’t responsible for tracking insurance and discards the mail from the new insurer.

Meanwhile at the bank’s mortgage division, the department that tracks insurance coverage never gets the new policy—but sees that the old one is canceled. Outreach to the homeowners is fruitless, as they don’t recognize the email address and hesitate to respond to requests for additional items they’ve received in the mail. Finally, after 45 days following notice, the bank puts lender-placed insurance (LPI) on the property, which, in turn, unexpectedly increases the borrower’s mortgage payment.

Prompted by the unexpected change, the new homeowners contact the bank, provide their insurance information, and demand a refund of the LPI premium. The lender returns the premium, but the damage is done: Unhappy customers and resources wasted by both lender and insurer.

This is a hypothetical but all too common example of the importance of the lender information listed on the insurance policy as part of the loss payable or mortgagee clause.

Complicated but necessary

When a consumer finances a car or home purchase, one critical protection for the consumer and lender is auto or homeowners insurance. A current and accurate loss payee or mortgagee clause on the policy protects both borrower and lender if the insured collateral is damaged or destroyed. It can help ensure, for example, that after a total loss, the lender receives whatever portion of the claim settlement is needed to go toward paying off the loan.

As financial institutions buy and sell loan portfolios or change mailing addresses, maintaining current and accurate lender information in connection with the lienholder clause can be expensive, time-consuming, and error-prone. Failing to manage these clauses creates further complications that add cost and degrade the customer experience.

Most insurers rely on their insureds and agents to provide lender information at point of quote. Unfortunately, this approach is prone to producing wrong addresses, misspellings, or keystroke errors that may require costly follow-up for lenders and insurers throughout the life of a policy.

Traditionally, lenders contact insurers to clarify issues that arise—for example, a renewal notice not received or an incorrect loss-payable or mortgagee. The latter issue isn’t trivial; it can cause payment errors that require reissuance of escrow remittance or claim proceeds, a complicated and manual process. Some insurers report as much as 30 percent of all inbound contact is from lienholders who are attempting to verify coverage or update an incorrect lienholder clause.

If necessary, a lender may contact the borrower to get the insurance information. If an insurer doesn’t respond to contact, possibly because the borrower gave erroneous information, the lienholder may put LPI on the collateral.

Opening new channels

As they seek to avoid customer experiences and outcomes that seem punitive and arbitrary, many lenders and insurers can benefit from digital tools to handle this process:

Some lenders are considering how to deliver correct lienholder information to insurers on demand.
Lender search portals are being built to aggregate active policies from multiple insurers, reducing the need to contact borrowers for this information.
Application programming interfaces (APIs) are being created to integrate these capabilities automatically without human interaction.

Verisk provides and continues to develop such solutions.

Loan Verifier, the power behind Verisk’s CV-VaaS™ solution, is populated by participating lienholders to help insurers determine whether a lien exists on a vehicle or home. It’s searchable by vehicle identification number or property address, and insurers can import the information into quoting or policy systems.

Total Loss Alerts connects the claims adjuster to the lender by monitoring active liens in Loan Verifier compared with total losses received by ISO ClaimSearch.

Coverage Verifier, which drives Verisk’s CV-Exchange^®, is populated by participating insurers, whose data is used to help lienholders determine whether coverage exists on the collateral and whether the lienholder is listed on the policy.

CV-Exchange leverages Verisk’s proprietary decision engine to assess policy and lien information to determine whether the insurer needs send appropriate information to a lienholder. This can include, but is not limited to, New Business, Renewal, Cancel and other applicable endorsements to the policy.

These solutions can help automate a resource-intensive function and give staff more time to focus on work that creates greater value.

Learn more about CV-VaaS and CV-Exchange.