Can Short Sale Bank Pocket Insurance Check ?

[John Grissam]

I am currently waiting on a SSA from a bank.  The home is sold as is and the inspection/appraisals are "n/a" on the dates and deadlines section.  I know the bank has collected the insurance check for a roof and glass replacement.  My intent is to get the bank to apply the insurance funds before the closing for repairs that my buyer will complete.  I will let the bank know I am aware of the funds via the due diligence documents after SSA.  Is it legal for the bank to pocket the insurance checks (insurance fraud?)?  Is there a way to force the bank's hand in applying the funds to the repairs?  If you have been successful please answer with the process and verbiage applied to the situation.  I am aware that the leverage for the funds occurs if the bank accepts my offer.   If they counter then the appraisal came in higher than our offer.