15 yr loan, annual payments on a house and 300 acres, customer is on the 9th year of note.

She received a replacement value check from the insurance company after a storage building was destroyed. Her Bank told her she had to replace the building or put the proceeds on the end of the note, she could not use the proceeds for anything else and could not make this year's payment with it or the insurance company could come back on the Bank.

I have no knowledge of any reg/rule/law that allows an insurance company to come back on the financial institution because of the way proceeds were used.

Anyone know of anything like this?

It makes sense to me. The building was part of the collateral of the loan and should be listed as loss payee. If the building is gone and money (the insurance check) is substituted, the bank has the legal right to the money if she's not replacing the collateral.

I'm not sure why the insurance company could come back on the bank or how.

I can understand the Bank wanting the money applied to the note if she wasn't replacing it too. Considering she was that far into the note, no late payments etc, our Bank would have let her apply it as a payment and quite possibly use the money for something else but that's an individual decision.

I just don't understand the reference to the insurance company and them 'coming back on the bank.' I thought maybe I had missed something.