Mortgage protection insurance is insurance that the 
borrower takes out and pays for directly to protect from default on their loan repayments or if they fall ill or die. It is very often confused with Lenders Mortgage Insurance that the borrower pays to cover the Lenders risk. The reason for the confusion is also because the premium is subtly added to the loan and often called Mortgage Insurance which can fool the borrower into thinking it covers the borrowers for the risk of the loan going bad.
In this case when our client, who had paid $10,000 insurance premium, defaulted, we negotiated with the bank to write off the debt in full. But then the bank assigned the debt to the Insurance Company which paid the claim (which the bank itself owned 100%). Then the insurance company sought to recover the debt from our client the borrower.
If the insurance company had been allowed to succeed, our clients the borrowers would have paid the 10,000 insurance premium and the bank would have received the claim money, which would have been demonstratively unfair. So we undertook serious negotiations with the insurance company. In the end they conceded that they would not make any claim against the home owners.
What the bank was trying to do with its wholly owned insurance company was to have its financial cake and eat it too. Beware of banks and remember they are only interested in making profits.
Lesson: If you want protection to cover the risk of defaulting on your loan, ensure you take the Borrowers mortgage insurance which the insurance company will pay to you if you cannot make repayments and then you can pay to the bank to clear your debt. You may also have to take Lenders Mortgage Insurance if the bank considers you a high risk borrower.