Safeguarding Mortgage Banks’ Insurance Rights with Excel Adjusters

I got a call from a homeowner recently explaining about the damage he suffered because of a broken water pipe in the water purifier. The damage caused him to remove the entire wooden floor from his first floor. After onsite inspection from the insurance company, check was issued. However, the check was written out not only to the homeowner, but included the mortgage company as well. So the homeowner contacted the mortgage bank. The bank informed the owner to deposit the check into their bank, and they will then decide how to pay out the compensation.

Home owner received enough compensation to replace both first and second floor with the same flooring. However, he wanted to only replace the first floor and use the remaining several thousand dollars for other purposes. However, since the bank wanted him to deposit the entire amount into the bank first, he called to know what he can do.

Below are the policies that all insurers should know:

(1) Department of Insurance requires the compensation check to be written to both the owner and the mortgage bank. Although the bank is not technically a joint owner, it uses the house as collateral to loan the money. Therefore, until the mortgage is fully paid off, bank has the right to demand that the owner repair any damages and return the house to pre-accident condition.

(2) The bank has the right to inspect the house during or after the repair. Most banks will hire a third party company to inspect the house to make sure that the house is restored in full. Mortgage Bank will return the full compensation amount only after the inspection approves the repair.

(3) Some banks may want to control how the compensation is spent. However, banks cannot do this as long as there is a clause on the loan agreement. Make sure to check your loan agreement.

This particular homeowner wanted to save 30~40% of the compensation. Whether this is fair or legal has not yet been determined. The home owners simply need to do only the repair that the bank requires them to do.

Loan agreement does not have any clause that indicates the owner must use all the money toward repair. Moreover, it is unreasonable to add that type of condition. Mortgage bank’s right goes only so far to require the owners to restore the house to pre-accident condition. You only need to understand what that means.

Let’s suppose that you managed to save 60% of the compensation by installing a carpet instead of wooden floor on the first floor. This doesn’t mean that the value of your house is now lower than it was before. In fact, you could say you increased the value of your house because you installed a new carpet and repainted. It is very dangerous for the bank to pay you partially for not installing the same type of floor throughout the house.

Instead, bank should be assessing the repair from a point of view that the rebuild has been done to maintain the value of the house.

I would like to share with you a new law that was made as a result of Northridge earthquake. While negotiating the compensation amount, the homeowner was undergoing a foreclosure process. When the settlement was issued, the bank claimed that it had the right to take all of the money because the homeowner was no longer the owner of the house. A lawsuit was filed and court made its ruling.

The court ruled that, since there was no condition in the loan agreement that the homeowner must have earthquake insurance, bank did not have the right to claim the payment that was paid for earthquake damage. Therefore, all of the compensation was given to the owner.

I suggested to the homeowner to call the bank when the first floor repair was. The bank will do a simple inspection and release the money. I’m sure he was thinking about where he would spend the money.

Jung Park, PA

Excel Public Adjuster