Texans wanted the drought to end… but not this way. For lenders with mortgaged property—real or personal—in the flooded area, the recent floods impose immediate and ongoing responsibilities. Here is a list of responsibilities and the implications lenders should bear in mind in response to property affected by the floods:
1. The National Flood Insurance Program (NFIP) Proof of Loss filing deadline. Affected borrowers generally will have NFIP flood insurance. Lenders should contact all affected borrowers promptly to ensure that they have started the NFIP claim process. On May 28, 2015, the Federal Emergency Management Agency (FEMA) issued a formal memorandum extending the deadline for filing a proof of loss from the May 2015 flooding to January 11, 2016. This is good news, but borrowers and lenders should be aware that failure to file a proof of loss before the deadline will result in denial of a claim. If this were a non-NFIP claim, the insurer would have to show prejudice from the late filing. Not so for an NFIPpolicy. Failure to file a complete proof of loss within the deadline established by FEMA results in a loss of coverage. Period.
2. Proof of loss content requirements. Proof of loss requirements under the NFIP policy are highly specific and there must be strict compliance. Among the more difficult conditions are the following:
“Prepare an inventory of damaged property showing the quantity, description, actual cash value, and amount of loss. Attach all bills, receipts, and related documents;”
“Specifications of damaged buildings and detailed repair estimates.”
Again, the requirements are exacting, and while they are not enforced with quite the stringency of the deadline for filing a proof of claim, failure to comply can result in claim denial. The borrower likely will not be paying attention to these requirements; to protect collateral, lenders must intervene.
3. How is the lender listed on the policy? The FEMA standard NFIP contains a generous standard union mortgage clause, but to obtain its benefits, the lender must be specifically named on the policy. If the lender is not named, they will have to show the NFIP insurer that they are “legally entitled to receive payment.” This means getting proof of the lender’s mortgage interest (or rights as servicer) to the insurer. This should be done even if the lender is not clear on the borrower’s progress in filing a claim.
4. How are payments made? Even if the lender is named as a mortgagee or lienholder in the policy, the standard NFIP policy states that the NFIP insurer will adjust all losses with the insured, who may not be interested in maximizing a recovery. Lenders should pay attention to—and possibly participate in—the claim process to ensure that there is a full settlement.
5. To whom are payments made? Even if the lender is listed as a mortgagee on the policy, the standard FEMA policy states:
“Any loss payable under Coverage A—Building Property will be paid to any mortgagee of whom we have actual notice, as well as any other mortgagee or loss payee determined to exist at the time of loss, and you, as interests appear.”
“You” signifies the borrower/insured. What this means is that the NFIP insurer will issue one check to the borrower and any mortgagees. Such a situation can generate all kinds of problems, ranging from getting everyone to endorse the check to an insured taking the check and absconding with it (It happens. See ViewPoint Bank v. Allied Prop. & Cas. Co., 439 S.W.3d 626 (Tex. App. – Dallas 2014, pet. denied)). Some commercial loan documents allow lenders to adjust claims; these should be checked promptly.
6. Private flood coverage—primary or excess. Some borrowers may have non-NFIP primary flood insurance or excess policies covering flood losses from non-NFIP insurers. Care should be taken to comply with conditions in these policies.
7. Do not forget Chapter 557 of the Insurance Code. That section requires a lender holding funds from an insurance claim to give the borrower notice within 10 days after receipt of the funds of “each requirement with which the insured must comply for the lender to release the insurance proceeds.” Failure to give notice or failure to release funds after compliance requires the lender to pay interest at the rate of 10 percent per year until the lender complies with the Chapter.
The bottom line is that compliance with the NFIP claim process is a sad but necessary task in the aftermath of a disaster. Borrowers may not want to do it, but lenders must be prepared to firmly, but diplomatically, ensure compliance. If lenders have any questions, they should contact professionals immediately for assistance. The claim clock is ticking.