Lawsuit Planned Over Insurance Payments : Rebuilding: Valley-based group accuses insurers and mortgage lenders of tying up reimbursement money owed for quake damages.
Accusing insurance companies and mortgage lenders of tying up millions of dollars in damage claims owed to quake-battered homeowners, a San Fernando Valley-based consumer group is preparing to take the companies to court.
The issue--the same one that embarrassed Insurance Commissioner John Garamendi this spring when he first sided with angry homeowners but then reversed himself--is whether mortgage lenders can legally control how insurance payments are spent.
Mortgage lenders want quake insurance reimbursement checks made out to them, as well as the policyholder, so the companies can refuse to release the funds unless homeowners and business operators prove that the money will be spent on repairing their property--which is the company’s collateral for its loan. Many homeowners, burdened with big quake-related expenses, want the freedom to decide themselves what to do with the reimbursement payments.
Moving a step closer to legal action, the nonprofit Citizens Against Unfair Treatment by Insurance and Mortgage Companies plans to hold a news conference today to announce that it is sending letters to dozens of insurers and lenders, notifying them they will be named in a lawsuit unless they back down.
The suit would ask the court to award quake victims who have received the dual-payee checks both actual and punitive damages, which would involve large sums of money.
“Well over 100,000 property owners have gotten these checks,” said Richard Close, president of the Sherman Oaks Homeowners Assn. and a director of the Citizens Against consumer group, which also includes small-business owners.
“Insurance companies say they’re eventually going to pay out more than $7 billion in claims” from January’s Northridge temblor, Close said. “If you figure even as little as 25% has been paid out so far, we’re talking close to $2 billion.”
More checks are going out every day, he added, as property owners resolve their disputes with insurers.
“We were hoping the Department of Insurance would do something, but they did nothing,” said Close. “Then we hoped the state Legislature would do something, but it did nothing. There’s no other alternative but to litigate this issue.”
Among those speaking at the news conference will be State Sen. Tom Hayden (D-Santa Monica), who wrote legislation that would have forbidden insurance companies to make checks to quake victims jointly payable to their mortgage holders. The bill, which was opposed by the mortgage lending industry, failed to pass.
Also speaking will be state Sen. Art Torres (D-Los Angeles), chairman of the Senate insurance committee and Democratic nominee for insurance commissioner in the November election.
The news conference will be staged in front of the red-tagged home of a Northridge couple who are fighting with their mortgage holder, Citicorp, over a $120,000 insurance payment from Farmers Group.
The check can’t be cashed without Citicorp’s endorsement, and Citicorp won’t sign unless certain repairs are made, says Howard Simsovits, the couple’s son.
Citicorp told him it would release about a third of the money to get started on the repairs “and give us the rest upon completion,” Simsovits said.
He added that the bank has even threatened foreclosure because the family--which has been renting an apartment since the quake--hasn’t been able to make mortgage payments as well as pay the apartment rent.
If Citicorp released the $120,000 check, “it would be simple to make the mortgage current,” said Simsovits.
New York-based Citicorp did not return phone calls seeking comment.
Garamendi said he flip-flopped on the problem of dual-payee checks because he feared lenders would challenge him in court.
Meanwhile, he warned, insurers might not make any payments to quake victims at all until the issue is resolved.
Lenders contend that they need control over quake payments because some people whose properties were heavily damaged might run off with the money, leaving them with property worth less than the loan they made.
Furious policyholders contend that lenders have no claim to the money, because homeowners bought quake policies on their own initiative, not because it was a condition of the loan--as is the case with fire insurance.
Insurers say they are caught in the middle.
“If we know about a mortgagor’s interest in a property, we’re obligated by law to protect that interest,” said John Millen, a spokesman for Farmers Group, the state’s largest insurer.
Moreover, he added, “The Department of Insurance has not asserted that insurance companies naming mortgagees (on checks) are in any way acting improperly.”
Homeowners who have sent their checks to banks and mortgage companies to have them co-signed have complained that the process takes weeks, especially if their lender’s headquarters is out of state.
