22.214.171.124.1 Insurance basics
Most homeowners with mortgages are required to maintain homeowner insurance and, if the property is in a designated flood zone, flood insurance. Homeowners without mortgages generally are not required to maintain any form of insurance. If individuals are insured, they should file insurance claims as soon as possible for home and personal property sustained damage.
Almost all insurance claims for home damage will involve an inspector or appraiser visiting the property and preparing an inspection report for the insurance company. If the insurance company approves the claim and the homeowner has a mortgage, the funds likely will issue to the insured and their mortgage company—the homeowner will need to sign the check and send it to the mortgage servicer, and the mortgage servicer will sign and deposit the check into an escrow account. The homeowner will need to comply with mortgage servicer requirements to get funds disbursed for repairs. Mortgage servicers usually require documented proof of a licensed contractor with W-2 forms and an itemized repair estimate, and they release the funds in thirds with property progress inspections before the second and third disbursals. This process usually frustrates homeowners who have never filed insurance claims before a disaster.75
Most mortgage agreements specifically allow the mortgage company to enforce this procedure; advocates can review mortgage policies to find relevant language. If the homeowner does not have a copy of the mortgage available, usually a copy can be accessed from the county recording office which may be available online, or by requesting it in a RESPA Request for Information.76 If the mortgage agreement lacks the specific language allowing this procedure, then an appeal could be an option. In some cases, the servicer determination letter identifies appeal or dispute methods if the borrower disagrees with the decision. Otherwise, the borrower may file a dispute with the state department of banking and insurance or the Consumer Financial Protection Bureau, or submit a RESPA Notice of Error.77
In many cases, however, the funds remaining in escrow adds a protective layer for the client. Some homeowners who receive full insurance payouts give the entire amount to a contractor up-front who later disappears with the funds, and the homeowner is left without remuneration for the stolen funds.
If the homeowner fails to complete repairs and later defaults on the mortgage, the mortgage company can apply the escrowed funds to the unpaid balance on the loan.78 If the insurance funds exceed the unpaid balance, there may be an argument for automatic disbursement of those funds more than the secured loan amount.79
Other unique issues may arise. Anti-concurrent causation (ACC) clauses may create problems in situations involving multiple forms of insured damage, such as a hurricane with wind-driven rain and ground-up flooding.80 ACCs eliminate coverage for any loss that is even partially caused by an excluded peril. For example, a homeowner could receive an ACC denial for homeowner insurance due to the presence of flood damage and an ACC denial from flood insurance due to the presence of wind-driven rain damage if both insurers believe the covered loss portion of the property was damaged by another peril. Another issue involves named storm deductibles in policies, which requires insureds to pay a percentage portion of the policy limit for any claims under this category. Named storms apply to disasters like Hurricane Katrina, Hurricane Harvey, and events where a specific name is designated.
Insureds who reside in condominium homes often experience unique challenges after a disaster. In some cases, the insured’s specific homeowner policy denies a claim because the condominium insurance is required to cover the repairs. Depending on the condominium board operations, this can lead to extensive delays in obtaining repairs if the condominium insurer denies or reduces the requested claim coverage amount, or if the board is not forthcoming about the status of claims. Often these insureds require involved assistance. In some cases, class representation may be appropriate.
Most clients are unaware of specific exclusions or limitations on their policies until they seek legal assistance for the denial or low payment of a claim. General contract law governs interpretation of insurance policies, along with relevant case law in specific jurisdictions.81 Advocates may need to review and explain these limitations to clients. It is important to review merit for insurance claim appeals on a case-by-case basis, as minor facts and policy language can lead to successful appeals of insurance denials.
75 HUD, FHA Model Forward Mortgage Template (published Sept. 2014), available at https://www.hud.gov.
76 12 C.F.R. § 1024.36; § 3.3, supra.
77 12 C.F.R. § 1024.35(11).
78 Moreno v. Wells Fargo Bank, 2020 WL 362799, at *6 (D. Minn. Jan. 22, 2020) (dispute over disbursement of insurance funds in escrow after property went through foreclosure sale, but homeowner redeemed post-sale for less than outstanding loan balance; Wells Fargo could “apply the insurance proceeds to the amounts left unpaid under the note[, . . . ] to refurbish its headquarters or to throw a lavish holiday party for its employees—its breach of contract would not affect the Morenos in any way, because the Morenos have no liability on the note”).
79 See HUD Handbook 4000.1 III.A.1.l.ii.(E) (requiring Mortgage Insurance Premium funds held in escrow must be timely released to borrower if no claim for insurance benefits will be filed). See also United Policyholders, Getting Your Mortgage Company To Release Insurance Proceeds, available at https://uphelp.org (explaining that under standard California mortgage, mortgage company should not be able to keep insurance proceeds in excess of remaining amount of loan secured by mortgage).
80 See Diesel Barbershop, L.L.C. v. State Farm Lloyds, 2020 WL 4724305 (W.D. Tex. 2020) (discussing both anti-concurrent causation analysis and contractual virus exclusion that prohibited plaintiff from recovering business loss insurance after business was required to close in compliance with state COVID-19 emergency orders); Hartman v. Erie Ins. Co., 85 N.E.3d 454, 465 (Ohio Ct. App. 2017) (“Because there was an anti-concurrent causation clause in the policy before us, we find coverage was excluded when there was more than one cause for the loss and one of the causes was an excluded cause. The backup coverage endorsement did not provide additional protection for property from damage caused by a combination of covered and non-covered causes.”).
81 See, e.g., Hartman v. Erie Ins. Co., 85 N.E.3d 454, 463 (Ohio Ct. App. 2017).