It can be hard enough for policyholders to get paid by their property insurance companies, but what happens when the mortgage company takes the money and holds the float?
Likely nothing. According to a recent California appellate court ruling, Gray v. Quicken Loans,1 a mortgagor is not liable if they take the insurance money and deposit it into an escrow account that doesn’t bear interest. Most mortgage contracts, also known as Deeds of Trust, require property owners to show proof of repairs after a loss in order for payments to be released from the escrow account. The most common Deeds of Trust usually provide that insurance proceeds be placed in an escrow account and after certain repair milestones are met, the mortgagor will release payments, or a series of payments, to the policyholder.
After William Gray completely lost his home to the Thomas Fire in December 2018, his carrier paid him $1.3 million to rebuild his home. Mr. Gray argued he was entitled to interest on the money while it was held in an escrow account by his mortgagor, Quicken Loans. Mr. Gray argued this situation was the same as amounts held in escrow by Quicken to pay his taxes and insurance premiums. However, the appellate court disagreed. The court found neither California law nor his contract with Quicken required them to deposit insurance proceeds into an interest-bearing account. In his case, Quicken deposited the funds in a non-interest bearing escrow account, so Mr. Gray could not even argue Quicken improperly benefited from this arrangement by keeping the interest for itself.
Even though Mr. Gray’s claim was dismissed, Quicken Loans should have recognized the opportunity to collect interest given the amount of time that money could sit in escrow and should have shared that benefit with Mr. Gray. In California, Deeds of Trust are negotiable contracts, so if it is silent to the issue of interest on insurance policy proceeds, there is neither a statutory or contractual obligation of a mortgagor to share the interest if any exists.
If you are refinancing or buying a new home in an area subject to catastrophic disasters, like a wildfire prone area, it is worth it to ask your lender to change the Deed of Trust to benefit all parties in case of an unfortunate situation. This is becoming a common occurrence in California, so much that California’s legislature and Department of Insurance have recognized that due to shortages of supplies and qualified contractors common across California, insurers needed to extend the time they cover Additional Living Expenses (ALE) incurred – no less than 24 months, but in some cases 36 months – if a policyholder acting in good faith and with reasonable diligence encounters delays in the reconstruction process of their home. When that money is held in escrow for an extended period of time due to construction delays, the interest should benefit the policyholder.
1 Gray v. Quicken Loans, Inc., No. 2D CIV. B304532, 2021 S.O.S. 932, 2021 WL 790650 (Cal. Ct. App. Mar. 2, 2021).