Quake Victims Get Their Due : The courts have decided that the insurance proceeds belong to the property owners, not the lenders. Those who were unreasonable now must pay the price.

The recent court decision giving homeowners and other property owners the right to control how they spend earthquake insurance payments amounts to a bill of rights for earthquake victims. Moreover, it will require reimbursement to many homeowners who have been forced by lending institutions to spend insurance money on ways they did not wish.

The ruling by the state Court of Appeal on June 29 said that if a lender has not required earthquake insurance, the lender has no right to receive or control the insurance proceeds.

In the aftermath of the Northridge earthquake, many lenders dictated how the insurance proceeds could be spent. They sometimes required the funds to be put into an escrow account, wanted to approve the choice of contractors, demanded approval of all disbursements and wanted to approve all repairs. These lenders made a difficult situation even worse.

Insurance companies would issue checks payable to the property owners and the lender , because the insurance policies normally named the lender as a loss payee. This was done automatically by the insurance company computers, even though neither the lender nor the property owners requested it.

The effect was to put the lender in control of how the money was spent. Property owners were told by lenders that if they wanted the money they must follow the lenders’ requirements. Many lenders became dictatorial and arbitrary.

Residents and business owners protested that this was unfair and illegal since the lender never requested or required that earthquake insurance be obtained. In many cases, they did not want to spend the money to repair exactly what was damaged. Many were willing to trade having a permanent crack in their driveway for getting a new improvement on the house. Some wanted to replace expensive (and vulnerable) stone work with cheaper material.

The appellate court correctly concluded that it was irrelevant that the lender was named a loss payee in the insurance policy. The insurance proceeds, the court said, belong to the property owner.

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Property owners want the freedom to spend money to fix up the property, but not spend unnecessarily. If they want to remodel their kitchen instead of putting in a new driveway, they now have that right.

Moreover, the case, Ziello vs. First Federal Bank of California, creates liability and responsibility for these lenders. Property owners who were required to spend money for repairs against their wishes will now be able to obtain reimbursement from their lenders.

For instance, if a homeowner was required to spend $8,000 for a new concrete driveway even though the crack was small, the homeowner can now obtain reimbursement of that expenditure.

Property owners who have funds in escrow under strict lender control can get their money free and clear. People who have not settled their earthquake insurance claims can now require that the checks be payable only to them.

Some lenders are complaining that people will take their earthquake insurance proceeds and abandon their property. Such an act is morally wrong but legally permissible.

The lenders drafted the promissory notes and deeds of trust. They failed to provide language permitting them to control earthquake funds. They should not now complain of their failure to protect their own interests.

Most people will not take the funds and abandon the property. A recent study by TRW REDI Property Data indicated that only about 5% of homeowners owe more on their home than it is worth.

Therefore, 95% of homeowners would not default on their mortgage and fail to repair their homes because they now have equity in their property.

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However, they may decide not to make every repair they were paid for. Car owners do not repair every ding or dent on their cars, so not every dollar received needs to be spent. Paying for a child’s education may be better than rebuilding a concrete block wall that can be replaced for less money with a wooden fence.

Northridge earthquake insurance claims have been settled for $11.7 billion so far. Probably 30% of that amount ($3.5 billion) was spent for repairs that the property owners did not want to make. The lenders are now liable to repay that $3.5 billion.

Many lenders recognized that their right to control the insurance funds was limited or nonexistent. Some were compassionate and worked with the property owners to make sure that only necessary repairs were made.

Lenders who were unreasonable will now have to pay the price for their arbitrary and illegal action. The California courts have now decided that the earthquake insurance proceeds belong to the property owners--not the lenders.