What Policyholders Need to Know about Mortgage Clauses If Their Home Is Damaged

When a homeowner’s living room is flooded because a hot water heater bursts due to a product defect causing $35,000 in property damage and destroying irreplaceable photos and family keepsakes, people rely on their homeowners insurance to ease the financial loss.  Many policyholders are frustrated and harmed by a handful of words in many policies that are intended to benefit mortgage companies.  These provisions referred to as a “Mortgagee Clause” are designed to protect the security interest of lien holders, but the provisions can pose enormous problems for homeowners who desperately need access to insurance checks to pay for urgent repairs.

A recent article in MarketWatch provided some compelling examples of the impact of this type of provision.  When Tony Konos' home was damaged by flooding caused by Hurricane Katrina, the home suffered significant damage forcing him to live without heat or power for eleven days.  When Konos and his wife filed an insurance claim, they quickly received a check for $7,500 to pay contractors for emergency heating and electrical repairs.  When the couple received a subsequent check for $85,000.  When the checks were deposited, the bank refused to cash the checks because the couple’s mortgage company also had to endorse the check.

When the couple sent the checks to the mortgage company, the lender did not endorse and return the check.  The mortgage company insisted that the policyholders provide an estimate of the repair costs.  Once such an estimate was provided, the bank still refused to release more than a third of the funds to start the repairs.  The balance of the funds was placed in an escrow account.  The Konos constantly struggled to get money released.  While the Konos had sufficient savings to overcome these challenges, they had neighbors who suffered far more harm because they lacked the financial resources to pay contractors and other expenses.

Julie Reynolds was placed in a similar predicament when her toilet overflowed causing $42,000 in damage.  While she received an initial $8,000 emergency payment, the balance of her insurance checks were forwarded directly to the bank.  The funds were placed in escrow.  She explained that trying to get the money was like “pulling teeth.”  She was forced to borrow money from savings to pay for the repairs.  She was fortunate enough to have money in the bank to cover the upfront costs of repairing the damage.

As Ms. Reynolds explained, “You could get wiped out financially before you got a dime from the bank.  How do they expect you to pay the mortgage when you are pulling money from your own pocket for the repairs and then hoping to get reimbursed?”

The federal government has started to intervene to balance the interests of homeowners and lien holders.  Fannie Mae recently promulgated guidelines that policyholders receive an initial disbursement up to $40,000 or 10 percent of the unpaid principle from insurance proceeds.  These rules apply provided the loan is not delinquent by 31 days or more. 

These new guidelines also apply to Freddie Mac-backed loans.  The balance of the loans must be disbursed based on “periodic inspections of the repair work.”  In the event the loan is 31 days or more past due, the amount that must be disbursed initially is 25 percent and capped at $10,000.  The regulations also provide that the policyholder is entitled to interest if the funds are placed in escrow.

If your home has been damaged and you are struggling with getting your insurance proceeds released, we might be able to help.  My law firm represents policyholders in property claims disputes in Miami and throughout Florida.  The Law Firm of J.P. Gonzalez-Sirgo, P.A. offers free consultations and case evaluations with an experienced Miami property damage insurance lawyer.  No Recovery, No Lawyer Fees.  Call 305-461-1095 or Toll Free 1-866-71-CLAIM.

Be the first to comment!
Post a Comment