I say these things not to exaggerate or to frustrate you, but to help you think about what you’re willing to compromise in order to pursue your goals.

In looking at the roof (I'm not a roofing expert) I know it will need new shingles, but there is also some wood rotting that I is visible from the outside, so I am hesitant that the frame under the shingles are also compromised. 

Are you able to find a compromise with them in writing a contract for payment and paying an interest rate to them?  

It is not that difficult for a lender to review this set-up and ask a few questions of the insurance company and be completely satisfied that their claim to first position lien holder and being fully insured is not compromised at all by the policy.   

@Bob Mueller Jr.Stinks you got put in a compromised position.

No skinny contract is going to have a 3. automatic release provision that could be followed with certainty under the circumstances... so that leaves 4. a court order.Time for everybody to compromise a bit to resolve this and/or start paying more legal bills.

@Ali Radhi If you are so desperate to start investing then you have to weight your options and compromise.

We decided a few years ago that buying anything in our market just was not going to provide an adequate return so instead we focused on sprucing up the portfolio, raising rents and improving tenants wherever possible.It is hard to stop buying, we still look but are not willing to compromise.

Might better define "undiserable" RE is like a sailboat, each requires compromises to manage.

You get the jest of what I am implying.It behooves you to try to work out a mutually agreeable compromise.