State Says Quake Co-Payments Illegal : Damage: Warning issued after homeowners say they have to have mortgage lenders sign off on their checks.

Responding to homeowner complaints, state insurance regulators Friday said they would move against insurers who continue to name mortgage lenders as co-payees in earthquake claim payments.

But at least one major insurance company--Farmers Insurance Group--said it has received few complaints and will continue to name lenders as co-payees.

The State Department of Insurance said it has received scores of complaints from homeowners whose lenders have been named co-payees on insurance claim payments related to January’s Northridge earthquake.

Many homeowners have faced delays in rebuilding as they seek their mortgage lender’s signature on the two-party claim checks sent out by insurance companies, the department said. In one homeowner’s case, the mortgage lender was insolvent, and another resident’s lender threatened to keep the insurance payment to pay off the mortgage.

“Some homeowners who’ve started construction now find they can’t get their hands on the money,” said Insurance Commissioner John Garamendi. “This is outrageous.”

Garamendi said lenders have no right to be named co-payees since earthquake insurance is purchased voluntarily to protect the homeowner’s interest in the property. As a result, the department plans to issue a bulletin to all insurance companies by April 11 to advise them that such co-payments are illegal and subject to sanctions.

Insurance companies are concerned that they might end up making two payments--one to the lender as well as the policyholder--if, for example, the homeowner runs off with the claim payment. But Garamendi said those concerns would be addressed in the state’s bulletin.