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After The Storm, Part Two

hands with nail polish and a ring writing out a paper check

Yesterday, I wrote in this space about how it took seven months, one lawsuit and a platoon of field adjusters to extract a settlement from our insurance carrier for the damage our Florida vacation home suffered last year from Hurricane Irma.

Even after that battle was over, my wife and I did not get to cash the check for another four months – meaning it took 11 months from when I first filed a claim until we were finally paid. You must be wondering why it took so long to get our money once we settled our case.

Funny you should ask. The problem we encountered – which is one that untold thousands of other claimants likewise experience after every disaster – is that even when the insurance company gave us our money, it wasn’t actually our money until our mortgage lender agreed to let us have it.

It was merely an annoyance in my situation, because if anyone who suffers a hurricane loss can be called “lucky,” the description applies to me. The home that Irma damaged in 2017 (and that Matthew damaged in 2016, making me doubly lucky) is not our primary residence. Even the damaged property was perfectly habitable. More important, I did not need to wait for insurance money to make repairs. I could afford to hire contractors on my own dime while awaiting reimbursement. This put me at the head of the line to secure labor and materials that were at a premium after hurricanes Harvey, Irma and Maria created havoc from Puerto Rico to Texas, and across most of my home state of Florida.

Hurricane Florence was trekking toward the Carolinas as I wrote this post a couple of days ago. If the dire forecasts pan out (and there is little reason to believe that they won’t), a combination of high wind, phenomenal rainfall and saltwater storm surge will spread destruction from the beaches to the Appalachian mountaintops, and possibly beyond. Florence will likely rank high on the list of most expensive natural disasters in the country’s history.

Once the storm subsides, tens or hundreds of thousands of people will need to begin restoring their lives and property. Insurance adjusters and agents will flood the disaster zone, eager to help ease the dislocation and to take the liability off their corporate books. They will be ready to write checks, in some cases on the spot. But as my experience after Irma showed, getting a check from an insurance company is not always the same as getting money you can spend on repairs or emergency living expenses.

Why not? Because if you have a mortgage on the damaged property, the insurance check will most likely be made payable jointly to you and to your lender. Most mortgages require that the lender be named an “additional insured,” and in many cases the bank monitors the insurance policy to make sure it remains in force while the mortgage is outstanding. Banks often pay the premiums themselves from the borrower’s escrow account.

There are good reasons for this, but only up to a point. Your bank wants to ensure that its financial interest is protected by restoring damaged property to its original condition. Bankers fear that, left to your own devices, you might take the insurance proceeds and relocate to North Dakota, where hurricanes don’t happen. By naming themselves as insured parties under the policy that you pay for, banks can get between you and your money. Without some exonerating provision in state law, the insurance company would be in breach its contract if it made the settlement check payable only to you.

If the settlement is small, your lender may just endorse the check and send it back to you, which is not a big problem in most cases. But if the amount is fairly large – I have seen the cutoff range from $5,000 to $20,000 or so – the bank may turn the tables. It may demand that you endorse the check to the bank, which will hold the money until it is satisfied with your repair arrangements. It might even force you to borrow funds to pay for the repairs before it releases the cash your insurer has already paid to cover those expenses.

In my case, the repairs were already complete by the time I settled my dispute with my insurer. My mortgage lender, U.S. Bank, had even inspected the property to verify that it was restored. But when I received my settlement check, the bank still told me to endorse it and send it in – so it could return my money to me whenever it felt ready. I told the ever-changing cast of representatives on the bank’s phone lines that this would never happen. Eventually the bank agreed to simply endorse the check and send it back to me.

So I sent the check with a return FedEx envelope to allow for tracking. U.S. Bank did not use the FedEx envelope. Instead, it mailed the check back to me, and the check got lost in the mail. I had to go back to my lawyers to have them get a replacement check from the carrier. As you can imagine, that took considerable time. There were several other twists and turns along the way. By the time everything was settled and the money landed in our bank account, it was mid-August. That was 11 months after the storm and four months after the settlement.

Things would have been much worse for me if I had needed access to the insurance money to make repairs, or if the damaged home was my only available dwelling. For untold numbers of other storm victims, both of these conditions are true.

I want to see legislators in Florida and elsewhere establish a default rule under which insurance companies may, or perhaps must, pay homeowners directly without regard to “additional insured” status of lenders. Lenders should be given control over funds only when it is reasonably necessary to protect the lender’s interest.

It could work like this: Suppose you buy a house for $100,000, borrowing $80,000 from a bank. A month later, a windstorm causes $10,000 in damage, thereby reducing the value of the property to $90,000. This is still more than the amount you owe the bank; it is really you, not the lender, who has suffered the insured loss.

Generally, mortgages obtained with less than 20 percent down payments are covered by mortgage insurance, so the lender is already protected from a default. The state legislature could mandate that if an insurance claim is less than 25 percent of the value of the original mortgage, the insurance company may (or must) pay the homeowner without involving the lender. In our example, 25 percent of $80,000 is $20,000, which is the equity you contributed when you bought the home. Any claim up to $20,000 ought to be payable directly to you.

Every major storm produces an outpouring of sympathy for its victims. Everyone wants to relieve the suffering and stress of those who lose their possessions or livelihood. Here is something elected officials can do to make life easier for those who are rebuilding. It would scarcely cost anyone anything. As policymaking goes, it’s as close to a slam-dunk as things get.

Property owners pay insurance premiums to protect themselves first, and their lenders only incidentally. They deserve to get what they paid for without undue hassle or delay.

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