Can a mortgage bank hold insurance money?

I had a claim with my homeowners insurance and they paid $10k, my mortgage Wells Fargo request the check to be sent to then, they never provide me the 1/3 to do the repairs and now after I completed the repairs and they sent an inspector which approve the repairs as 100% fixed they still refuse to return the money or put it toward the mortgage, Wells Fargo now put a foreclosure in the house because late payment even though I send then a fax requesting that the $10K be put into my mortgage and I will pay the difference, even put the foreclosure without sending the 30 day notice of defalut..