The Basics

• Coverage may continue for a few months after a missed insurance payment, with warnings of cancellation from the insurance company and letters from the lender reminding the borrower of their obligation to maintain coverage. Because the average foreclosure takes between four to six months to complete, an unpaid policy can lapse before the lender auctions or repossesses the home. The borrower remains responsible for damage or losses as long as they own the home. If the borrower's insurance is not impounded, several months may pass before the lender realizes the home is uninsured.
  
  

Effects

• Once insurance lapses, the homeowner is no longer protected in case of fire or by any other provision of the policy. The insurance company does not pay claims in the event the home is damaged, exposing the delinquent borrower and lender to significant financial losses.
  
  Insurance paid through impounds is generally automatically renewed or purchased by the lender to ensure the home is covered, even during foreclosure. When force-placed, the lender may choose any company, and it adds the costs of the new insurance to the loan amount owed, increasing the payoff amount required to reinstate the mortgage or any foreclosure deficiency judgment. The lender's coverage-of-choice is often more expensive than the borrower's.
  
  

Considerations

• During the foreclosure process, homeowners often abandon the home. Vacant homes attract vandals, thieves and arsonists. Homes without electrical or water utilities may increase the chance of flooding due to sump pump failure or freezing pipes, says the Insurance Services Office. Because of the increased risk, it is in the lender's best interest to make sure the home in foreclosure is insured, whether or not the borrower occupies it. Lenders may request that the delinquent borrower at least keep the insurance current, or establish an impound account, if necessary, and force-place hazard insurance.
  
  

Expert Insight

• Properties in foreclosure are more susceptible to damage than homes with mortgages that are current. Financially distressed borrowers may stop upkeep on a home they know they are eventually going to lose. Some extreme cases have shown borrowers have maliciously damaged their homes prior to foreclosure, and even set them on fire in an attempt to collect from the insurance company, according to the ISO. Generally, the insurance company does not pursue the foreclosed homeowner for any deficiency after the foreclosure, although the lender might. The insurer may, however, send the former homeowner to collections for the amount they failed to pay while the home was covered.