Legal Question in Real Estate Law in Illinois

Usually, insurance offered through a lender is credit life insurance, which can pay off the loan if the borrower dies. I have never heard of a lender allowing a borrower not to have property insurance. What may have happened is that the insurance company made the check payable to both your brother and the lender, which is common. It really does not make sense that he will get insurance money "once the loan goes through," since if he is getting the insurance check, why does he need the loan? He really needs to discuss his situation with an attorney, so the attorney can review the relevant documents.

99.999999% of lenders require hazard insurance (fire, casualty) on improved property that I know of, so something's missing and your brother has to give you more information. It is possible that because your brother didn't carry the insurance he violated the loan but instead of foreclosing the lender instead opted to buy the insurance itself and tack on the premiums to the loan amount. As such your brother may have lost control of the policy but even if it was his the lender is usually named as "loss payee" and it's usually the lender's option to allow the rebuild with the proceeds OR to use the proceeds to pay off the existing loan (excess balance to the borrower) and then walk away.