Friday, 23 June 2017

Insurance Proceeds May Not Go To The Homeowner If Disaster Occurs

Written by Posted On Wednesday, 06 August 2014 15:54

Question: Last year my wife and I purchased a new home. A couple of weeks later, the town where we live was heavily damaged by a tornado, along with strong straight-line winds. Our neighborhood was particularly hard hit with at least two homes totally destroyed. Our house sustained damage as well and we received a fair insurance settlement to make necessary repairs.

We have a mortgage, and the insurance check was made out to us and to the mortgage company. We were informed that the lender would only distribute the insurance proceeds after they receive estimates from contractors and itemized lists of the cost of materials and labor.

Do I have any rights in this matter or does the mortgage company have the legal right to hold the check and only distribute it as it deems necessary? It's a little difficult to get contractors to do repairs when they know they will have to wait on an inspector and then also wait till the lender agrees to send money.

Answer: You have to read your mortgage document carefully. When you went to settlement, you signed two important legal documents: a promissory note and a deed of trust (also called a mortgage). The latter document contains all of the rights and obligations that you, the borrower have to follow.

For example, if you are late with your monthly payments, you are in default. There are sections in the deed of trust spelling out what your lender can do to you, including calling the entire loan due after proper notice to you or ultimately starting the foreclosure process.

Most consumers when they go to the settlement table do not bother to read the deed of trust. It is lengthy (usually 14 or 15 pages), and legalistic. More importantly, since it is a standard form used by the lender, it is almost impossible to change any of the terms. The lender's position is usually: "you want my loan, then sign my legal documents".

One section of the deed of trust is entitled "Property Insurance". Here is a portion of that long section:

Borrower shall keep the improvements now existing or hereafter erected on the Property insured against loss by fire, hazards...not limited to earthquakes and floods... What Lender requires... can change during the term of the Loan...

In the event of loss, Borrower shall give prompt notice to the insurance carrier and Lender... Unless Lender and Borrower otherwise agree in writing, any insurance proceeds ... shall be applied to restoration or repair of the Property, if the restoration or repair is economically feasible and Lender's security is not lessened. During such repair and restoration period, Lender shall have the right to hold such insurance proceeds until Lender has had an opportunity to inspect such Property... Lender may disburse proceeds for the repairs and restoration in a single payment or in a series of progress payments as the work is completed.

Assuming that your deed of trust contains similar language, there is nothing you can do at this point in time. In fact, I have been involved in situations where the lender flatly refused to pay any contractor, and instead credited the entire insurance check against the outstanding balance of the loan.

I am surprised, however, that contractors are reluctant to go forward with your job. There are a lot of good, licensed contractors who are looking for work, and in your case, the money is literally "in the bank".

Your contractor should talk with the lender, so as to be satisfied that payment will be made. While it is true that the payments may be disbursed pursuant to a draw schedule (i.e. when the dry wall is done, you will get XX dollars, and another XX dollars when you complete the electrical work), this is not unusual in home improvement contracts. Indeed, I always recommend that homeowners work out a draw schedule, so that the contractor will only get paid as the work outlined in the schedule is completed.

You were fortunate that you had adequate insurance coverage. Unfortunately, not everyone does. And even if you have coverage (which is required by your lender), have you properly prepared for the next disaster.

According to the National Association of Insurance Commissioners, there are several steps you should take immediately:

  • inventory everything in your house; with video or digital cameras, this is quite easy to do;
  • store copies of your insurance policy with your inventory, but remember to keep them in a safe place, preferably outside of your house.
  • does your policy include replacement cost or actual cash value for losses?
  • are you in a flood hazard area? Do you have coverage for floods?
  • have you discussed your coverage with your insurance agent to make sure that you are not over or under-insured?

For more information, visit:

According to the National Severe Storms Laboratory, "About 1,200 tornadoes hit the U.S. yearly. Since official tornado records only date back to 1950, we do not know the actual average number of tornadoes that occur each year. Plus, tornado spotting and reporting methods have changed a lot over the last several decades." And it appears 2014 may exceed that number.

You must make sure that you are adequate covered -- and prepared.

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Benny L. Kass

Author of the weekly Housing Counsel column with The Washington Post for nearly 30 years, Benny Kass is the senior partner with the Washington, DC law firm of Kass, Mitek & Kass, PLLC and a specialist in such real estate legal areas as commercial and residential financing, closings, foreclosures and workouts.

Mr. Kass is a Charter Member of the College of Community Association Attorneys, and has written extensively about community association issues. In addition, he is a life member of the National Conference of Commissioners on Uniform State Laws. In this capacity, he has been involved in the development of almost all of the Commission’s real estate laws, including the Uniform Common Interest Ownership Act which has been adopted in many states.


  • Comment Link Leahnor Soliven Thursday, 07 August 2014 16:59 posted by Leahnor Soliven

    Well said Benjamin Dona. Completing the repairs on your home may seem straight forward but the reason insurance checks are written out to both legal homeowner and lender is so that the lender can hold all parties accountable for the work expected to be done on the subject property. What homeowners need to understand is if you bought your home with cash or paid off your mortgage prior to this insurance claim, you as the sole homeowner would be on your own in navigating and supervising the repairs of your home and ensuring there will not be any title deficiencies that could threaten your ownership rights to your home in the future. Most homeowners don’t know what they are looking for in this situation. When you DO have a mortgage against your home, your lender has ownership interest in the property as well. It is in the best interest of the homeowner and lender to protect the subject property from poor/unfinished/not-up-to-code workmanship and to maintain a clear title from any mechanics liens that might pop up from a builder not paying their bills to subcontractors. Each financial institution may have a slightly different protocol on how to handle insurance claim checks but you must understand there is a process in place to protect you as the homeowner and the subject property.

  • Comment Link Benjamin Dona Thursday, 07 August 2014 15:11 posted by Benjamin Dona

    Typically, any damage over $2,500 the lender wants the check to be in both names - every lender is different, but that has been my experience (as a former lender). There are several ways that the disbursements can be handled - as above where the lender does everything OR setting it up with a title insurance company's escrow account similar to a construction loan. The builder gives an estimate to replace, it goes to title and the lender, the builder completes the repair, both title and typically an appraiser and/or any code compliance person checks the repair, then the money is disbursed and a partial lien waiver is issued by the builder for the material and labor. IMPORTANT - this protects YOU from any unscrupulous builder who doesn't pay his subs or doesn't pay for the materials he used in your home. And, title guarantees to both you and the lender that there are no outstanding liens to cloud your title OR cause a foreclosure for unpaid bills to a lumber yard - as an example. You may think this is unfair when it actuality it is the only way you should WANT it handled to protect you from shoddy workmanship and loss of the entire home because of unpaid bills. Good luck!

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