Bill Addresses Quake Insurance Payments

State Sen. Tom Hayden (D-Santa Monica) introduced a bill Tuesday that would require insurance companies to make most checks for earthquake damage payable directly to homeowners, rather than to homeowners and their mortgage holders.

The bill would permit homeowners to cash such checks without obtaining the endorsement of a lender or anyone else with a security interest in the damaged property “unless whoever had the security interest provided proof such coverage was required by the lending agreement,” said Kip Wiley, a Hayden legislative aide.

Lenders often insist that homeowners carry fire insurance, but not earthquake insurance. Since the Jan. 17 temblor, however, many homeowners who bought earthquake insurance on their own have been angry to get claims checks naming their lenders as co-payees anyway.

Mary Crystal, regional manager of Western Insurance Information Service, a Los Angeles group that represents about 125 residential lenders, said the industry’s initial reaction to Hayden’s proposal was negative.

“If it does indeed completely relieve the insurance companies from any potential lawsuit, then we don’t have a real problem with it. However, I don’t know that it does that,” she said.

Crystal added that insurance companies would still worry that “some banks would find a loophole and sue them” if a homeowner didn’t repair the damaged property or defaulted on the loan.

Andrea Austin, spokeswoman for the California Mortgage Bankers Assn., declined to comment on the bill, saying the Sacramento-based trade group had not had a chance to review it.

Hayden decided to introduce the legislation after state Insurance Commissioner John Garamendi dropped a plan earlier this month to take action on the co-payee issue.

Garamendi backed off that plan last week when lenders promised to respond with a lawsuit. Garamendi said such a suit would only continue to hamper the rebuilding effort.

Since Garamendi’s retreat, a committee of the Sherman Oaks Homeowners Assn. has formed to study the possibility of suing insurance companies over the quake payments.

Richard Close, homeowner association president, said Hayden’s proposal wouldn’t affect the group’s decision.

“It would help the next time we have a earthquake, but wouldn’t help people who have damage now,” he said of Hayden’s bill.