August 6th, 2014 10:02 AM by Jackie A. Graves, President
Question: Last year my wife and I
purchased a new home. A couple of weeks later, the town where we live was
heavily damaged by a tornado, along with strong straight-line winds. Our
neighborhood was particularly hard hit with at least two homes totally
destroyed. Our house sustained damage as well and we received a fair insurance
settlement to make necessary repairs.
We have a mortgage, and the
insurance check was made out to us and to the mortgage company. We were
informed that the lender would only distribute the insurance proceeds after
they receive estimates from contractors and itemized lists of the cost of materials
Do I have any rights in this
matter or does the mortgage company have the legal right to hold the check and
only distribute it as it deems necessary? It's a little difficult to get
contractors to do repairs when they know they will have to wait on an inspector
and then also wait till the lender agrees to send money.
Answer: You have to read your mortgage
document carefully. When you went to settlement, you signed two important legal
documents: a promissory note and a deed of trust (also called a mortgage). The
latter document contains all of the rights and obligations that you, the
borrower have to follow.
For example, if you are late with
your monthly payments, you are in default. There are sections in the deed of
trust spelling out what your lender can do to you, including calling the entire
loan due after proper notice to you or ultimately starting the foreclosure
Most consumers when they go to
the settlement table do not bother to read the deed of trust. It is lengthy
(usually 14 or 15 pages), and legalistic. More importantly, since it is a
standard form used by the lender, it is almost impossible to change any of the
terms. The lender's position is usually: "you want my loan, then sign my
One section of the deed of trust
is entitled "Property Insurance". Here is a portion of that long
shall keep the improvements now existing or hereafter erected on the Property
insured against loss by fire, hazards...not limited to earthquakes and
floods... What Lender requires... can change during the term of the Loan...
the event of loss, Borrower shall give prompt notice to the insurance carrier
and Lender... Unless Lender and Borrower otherwise agree in writing, any
insurance proceeds ... shall be applied to restoration or repair of the
Property, if the restoration or repair is economically feasible and Lender's
security is not lessened. During such repair and restoration period, Lender
shall have the right to hold such insurance proceeds until Lender has had an
opportunity to inspect such Property... Lender may disburse proceeds for the
repairs and restoration in a single payment or in a series of progress payments
as the work is completed.
Assuming that your deed of trust
contains similar language, there is nothing you can do at this point in time.
In fact, I have been involved in situations where the lender flatly refused to
pay any contractor, and instead credited the entire insurance check against the
outstanding balance of the loan.
I am surprised, however, that
contractors are reluctant to go forward with your job. There are a lot of good,
licensed contractors who are looking for work, and in your case, the money is
literally "in the bank".
Your contractor should talk with
the lender, so as to be satisfied that payment will be made. While it is true
that the payments may be disbursed pursuant to a draw schedule (i.e. when the
dry wall is done, you will get XX dollars, and another XX dollars when you
complete the electrical work), this is not unusual in home improvement
contracts. Indeed, I always recommend that homeowners work out a draw schedule,
so that the contractor will only get paid as the work outlined in the schedule
You were fortunate that you had
adequate insurance coverage. Unfortunately, not everyone does. And even if you
have coverage (which is required by your lender), have you properly prepared
for the next disaster.
According to the National Association of Insurance
Commissioners, there are several steps you should take immediately:
everything in your house; with video or digital cameras, this is quite easy to
copies of your insurance policy with your inventory, but remember to keep them
in a safe place, preferably outside of your house.
policy include replacement cost or actual cash value for losses?
in a flood hazard area? Do you have coverage for floods?
discussed your coverage with your insurance agent to make sure that you are not
over or under-insured?
For more information, visit: www.naic.org
According to the National Severe
Storms Laboratory, "About 1,200 tornadoes hit the U.S. yearly. Since
official tornado records only date back to 1950, we do not know the actual
average number of tornadoes that occur each year. Plus, tornado spotting and
reporting methods have changed a lot over the last several decades." And
it appears 2014 may exceed that number.
You must make sure that you are
adequate covered -- and prepared.
Written by Benny L. Kass | To view the original article