Prompted by several comments to one of my earlier posts, I've been thinking about situations where a homeowner files an insurance claim for property damage to her home while she is in default on her mortgage. The general practice, as I understand it, is for insurers to write claim settlement checks out to the mortgagee, rather than the policyholder, in such situations. This practice is based on a clause in most homeowners policies that "If a mortgagee is named in this policy, any loss payable under Coverage A or B will be paid to the mortgagee and you, as interests appear."
All of this makes sense. But, it seems to me that the mortgagee ought to have an obligation to promptly use any insurance proceeds it receives in this manner to fix the underlying property damage. Failing to do so, and holding on to the insurance proceeds as cash collateral, seems to me to potentially constitute a violation of the mortgagee's obligation of good faith. Yet according to the commentators referenced above, this is apparently a common practice (though I would be curious about other readers' experiences).