Mortgagor Beware: Prying money from your homeowner’s insurance company is not the only battle homeowners face if they have a mortgage on their home
It seems like there is no longer a comfortable medium when it comes to weather. It is either one extreme or the next: either you go weeks and weeks without seeing a drop of rain or you get inundated with inches and inches of rain over the course of a few hours. The unpredictability and all the extreme weather events recently has caused a significant rise in the number of claims for property damages that homeowners and business owners are making against their property insurance companies. As I have discussed in previous blogs, the claims process can be long and daunting. Insurance companies routinely undervalue the cost of repair and replacement of damages or they will deny coverage of damages that are clearly covered under the terms of the policy. Even if a public adjuster or lawyer gets involved, the process to hold the insurance company accountable for the covered damages to property can take months and sometimes years. Most homeowners and business owners think the battle is over once they receive a fair settlement from the insurance company for their damages; however, if they have a mortgage on the property, just receiving the check from the insurance company can prove to be only half of the battle.
If you have a mortgage on your home and you receive a payment from your insurance company for damages to your property as a result of a covered loss, the check will be issued to both the homeowner and the mortgage company. This requirement is known as a “mortgage clause.” Let me just start out by saying that I do understand why an insurance company would want a mortgagee or lending institution to know that the homeowner, or mortgagor, sustained damages to the property as a result of a covered loss. Truth be told, the mortgage company or lending institution has a financial interest in the property until the last mortgage payment is made. Therefore, the mortgage company would definitely want to make sure that the property is being taking care of, that if there are damages to the property as a result of some weather event and the homeowner is paid for those damages, I can understand why the mortgage company would want to make sure that the damages are fixed to prevent further damage to the property and to maintain the mortgage value of the property.
Though I can understand the necessity of putting the mortgage company on notice of a claim for damages and a subsequent payment for those damages by the insurance company, the process of having to send an insurance claim settlement check to the mortgage company for endorsement can be a frustrating, grueling and time consuming task. Furthermore, the requirement seems counterproductive if the purpose of such is to make sure the damage to the property gets repaired in a reasonable amount of time before other damages can occur. For example, let’s say that ABC Bank holds the mortgage note on your home. You receive a claim settlement check from your insurance company for the damages to your property as a result of a covered loss. Most homeowners would assume that he or she could walk into any ABC Bank branch, take the check to the proper authorities to have it endorsed and be out of there in 5 minutes, endorsed check in hand. WRONG. Most times, you have to mail the mortgage check off to the place from which you receive correspondence regarding your mortgage loan, so this further delays when a homeowner or business owner can start the repair work on their property.
Most would think that as soon as the mortgage company receives the insurance claim settlement check, they endorse it immediately and send the entire amount back to the homeowner or business owner as soon as possible to protect its investment. This is also wrong. Some mortgage companies will actually only tender a percentage of the funds back to the homeowner or business owner to “initiate” the repairs process. The remaining funds can be held by the mortgage company and either released in stages as the repairs are made or the entire amount will be held in escrow until the homeowner or business owner can prove all the repairs have been made on the property. Some contractors are willing to do the work based on this payment schedule but some are not. If the homeowner and/or business owner cannot find a contractor who is willing to accept payments in installments, the homeowner or business owner is forced to come out of pocket to make the necessary repairs to their home or business. And just because a homeowner makes the repairs does not mean that the lending company will send them the check immediately when the repairs are completed. Some mortgagees want a final invoice, pictures and on some occasions, an inspection of the property to confirm the repairs have been completed.
As I stated earlier in this blog, I do feel it is necessary for the mortgage company to be given notice of a claim for damages as the mortgage company does have a lien interest in the property until the mortgage loan is paid off. However, allowing a mortgage company to hold the funds captive until the homeowner satisfies their arbitrary requirements is counterproductive to the goal of maintaining the property to upkeep the value of the home or commercial building. If the damages do not get immediately addressed because the mortgage company only releases a small percentage of the settlement proceeds and/or the homeowner cannot find a contractor to start the work for that amount and does not have the money to come out of pocket, if additional damages result during this time, the insurance company is absolved from paying for those damages under the argument that the homeowner or small business owner failed to mitigate the property damages. The mortgage company will surely not cover these additional damages which means more of the financial burden falls on the homeowner or business owner.
I wish I had some magical advice as to how to navigate these waters. I have suggested to some of our clients to contact the mortgage company before you receive a claim settlement payment and discuss the protocol for getting the check endorsed and what measures, if any, need to be taken for the mortgage company to release the funds immediately. This should be done even if you do not have a current property damage claim against your homeowner’s insurance policy. If your mortgage company requires proof that the repairs have been completed before releasing the remaining funds, try to find a contractor would be willing to do the work for an upfront deposit and a guarantee that the rest of the claim settlement funds, once released by the mortgage company, will be sent directly to them. Another option would be to try to look for a mortgage company who does not have such extreme requirements and see if that company would be interested in purchasing your loan.
For those who have been affected by the recent flooding, our thoughts and prayers go out to you and your loved ones. And best of luck to those of you who settled your property claim and are in the process of trying to pry your settlement money from your mortgage company.