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The following reprint from the book, Catastrophe Claims: Insurance Coverage for Natural and Man-Made Disasters, is with the permission of Thomson Reuters West, the publisher, and Dennis J. Wall, the author. This selection, Section 2:18 (2018, Thomson Reuters), is reprinted here with permission of Thomson Reuters. Any further reproduction without the consent of the publisher is expressly prohibited.
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Cat Claims: Insurance Coverage for Natural and Man-Made Disasters § 2:18
Catastrophe Claims: Insurance Coverage for Natural and Man-Made Disasters
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November 2018 Update
Chapter 2. Claim Handling Issues
by Dennis J. Wall, Esquire
- 2:18. Claims handling practices issues by mortgagees in catastrophe claims
There is a constant issue in the current handling of catastrophe claims: Whether the loss proceeds paid by a first-party insurance carrier can be deposited by the mortgagee for any reason it deems sufficient, or whether the loss proceeds should be applied to restoration or repair of the property? Resolving this issue depends on whether restoration or repair of the mortgaged property “is economically feasible and Lender's security is not lessened.”
The standard language of the UNIFORM INSTRUMENT approved by Fannie Mae and Freddie Mac for Single-Family homes in Florida is representative of the same standard language found in mortgages across the United States. Paragraph 5 of the Florida uniform mortgage form addresses this issue. The language generally relied on by Lenders to support their right to hold the insurance proceeds for use as they deem appropriate, whether or not the property is restored or repaired, is as follows:
Unless Lender and Borrower otherwise agree in writing, any insurance proceeds, whether or not the underlying insurance was required by Lender, shall be applied to restoration or repair of the Property, if the restoration or repair is economically feasible and Lender's security is not lessened.1
Exactly the same language was at issue in Alvarez-Mejia v. Bellissimo Properties, LLC, a 2016 2-to-1 decision by a panel of Florida's Third District Court of Appeal in an appeal from the entry of summary judgment for Bellissimo, a defendant and a mortgagee.2
The legal issue was whether repair of Ms. Alvarez-Mejia's home was or was not “economically feasible” using the proceeds of her homeowner's policy after a loss from fire. The term, “economically feasible,” is not defined in the Uniform Mortgage Instrument, and of course it was not defined in the mortgage at bar, either. That was the key to the outcome.
The plaintiff homeowner put on evidence through her affidavit “that it is economically feasible to repair the property because the value of the property with repairs will be significantly greater than the outstanding balance of the mortgage.”3 The mortgagee-movant Bellissimo did not put on any proof otherwise at or after it filed its motion for summary judgment. It “did not provide an estimate of the value of the property after repairs, and therefore did not meet its burden of proof that no genuine issue of material fact exists.”4
On this record, where the plaintiff homeowner put on evidence but the defendant did not, it is open to question whether there would have been a different result if the plaintiff had been the one who filed the motion for summary judgment, all other things being equal.5
The Alvarez-Mejia case was seen in a significantly different way by the dissenting judge. He expressed his own opinion on whether it was “economically feasible” to restore or repair Ms. Alvarez-Mejia's home, which was that “I believe it is not ‘economically reasonable’ or ‘practicable’ to do so.”6 To say again, the legal issue was whether the restoration or repair was “economically feasible” under the quoted mortgage provision; the words, “economically reasonable” or “practicable” reflect the interpretation that the dissenting judge substituted for that term.
On the law of what is “economically feasible” as used in paragraph 5 of this standard mortgage, the dissenting judge honestly reported that “[e]lectronically assisted research of all federal and state case law discloses just one case where a court has attempted to define the phrase.” That was the case of Vongohren v. Citimortgage, Inc., an unreported decision by a federal judge in Maryland, also decided in 2016.7 It has been cited by only one judge since then, and that is the dissenting judge in Alvarez-Mejia.8
Both the dissenting state court judge and the federal judge were impressed with the fact that the borrowers before them were in default on their mortgage loans. The dissenting state court judge wrote that he “would find this alone is sufficient, as a matter of law, to make repair economically unfeasible in this case.”9 Although the federal judge observed for his part that being in default may standing alone be sufficient “as a matter of law, to make repair economically infeasible,”10 he ruled instead on the facts in his case. Those facts involved a flood loss “as a result of a recent hurricane” after the borrowers abandoned the Maryland property and moved to Texas, then moved back to Maryland “on the advice of a lawyer litigating class action claims against Citi,” leaving the property unsecured and so susceptible to vandals and squatters (apparently while they were in Texas, but the opinion is not entirely clear on this point), cancelling property insurance on the property, and telling Citimortgage that they were waiting to be foreclosed “so they could ‘sue the company'[.]”11
On the facts in Alvarez-Mejia, the dissenting judge would have held the homeowner's affidavit inadmissible as to the value of her home after repairs.12 The dissenting judge did not address it, but there is long-standing case law in Florida that a homeowner's opinion as to the value of her property is admissible.13
The question of whether the Lender's security is lessened, which is the second element if you will of the above-quoted Uniform Instrument paragraph 5, was not addressed by the majority but it was addressed by the dissent in Alvarez-Mejia. The dissenting judge was of the view that not only was it “economically infeasible” to restore or repair Ms. Alvarez-Mejia's home, but to repair it would also lessen Bellissimo's security. As the dissenting judge put it:
As to the second ground, we only need to acknowledge that the insurance proceeds, when granted by the insurer, become part of the security for the loan. Accordingly, an expenditure for restoration or repair of a property which ends with a property value less than the amount expended constitutes, a fortiori, a “lessening” of the lender's security.14
Assuming that it is legally correct that insurance proceeds become part of the security for the loan,15 the mortgage loan document itself provides what happens when the Lender's security is lessened and when repairs are not economically feasible.
In another part of paragraph 5 of the Uniform Instrument which was quoted both by the majority and the dissent, but which was not addressed by either, the mortgage agreement expressly provides for what is supposed to happen to insurance proceeds after a loss, i.e., how insurance proceeds paid on account of a loss to the mortgage property are to be applied:
If the restoration or repair is not economically feasible or Lender's security would be lessened, the insurance proceeds shall be applied to the sums secured by this Security Instrument, whether or not then due, with the excess, if any, paid to Borrower.16
Under this language found later on in the same paragraph 5, after the previously quoted language from that paragraph that Lenders tend to rely on, whether it is the case that restoration or repair is not economically feasible or that the Lender's security would be lessened, then the insurance proceeds shall be applied to the sums secured by the mortgage, i.e., to the mortgagor's payment obligations under the mortgage. If there is any excess, then by the same express terms of the mortgage any excess is to be paid to the Borrower. This language is not hard to understand.
But to say again, it was not addressed either by the majority or by the dissent in Alvarez-Mejia.
In sum of both decisions, Alvarez-Mejia and Vongohren, there is one issue that divides the decisions in both cases. It is the question of whether restoration or repair that increases the value of a property after a loss, but increases the value to a point that is less than the amount of the repairs, can ever be restoration or repair that is “economically feasible.” In both cases, the courts viewed this as a matter open to summary judgment, as a question of material fact. The difference between the majority opinion in Alvarez-Mejia and the federal judge's opinion in Vongohren, may ultimately turn on whether they would allow juries to decide if it is “economically feasible” to restore or repair property when the costs of the repair exceed the resulting value of the property.
The majority in the state court case was willing to allow the possibility that a jury could determine that repair of the property that increases “the value of the property with repairs will be significantly greater than the outstanding balance of the mortgage.”17
The federal judge, on the other hand, equated the position of the property as the Lender's collateral, as “security” for the mortgage loan, with “Citi's security interest” in the property. Citi won the day because it commissioned a Broker's Price Opinion or “BPO” that “shows that the economic loss of repairs to Citi's collateral” was within a range of several thousand dollars, an estimate which the borrowers did not dispute. “Therefore, forcing Citi to repair the property would lessen the value of Citi's security interest in the property[.]”18
So, there you have it. Is a home collateral to protect a lender's right to be repaid under the terms of the mortgage loan? Or is a home instead a springboard for the lender to be paid amounts that are not set forth in the mortgage contract, like the increase in value of a home after repairs rather than simply the balance remaining on the mortgage? The different answers to those two questions go a long way toward explaining the difference between the Alvarez-Mejia decision and the Vongorhen decision.
Westlaw. © 2018 Thomson Reuters. No Claim to Orig. U.S. Govt. Works.
Footnotes
1
Paragraph 5 of Fannie Mae/Freddie Mac Form 3010 01/01 FLORIDA--Single Family at page 7 (emphasis added).
2
Alvarez-Mejia v. Bellissimo Prop's, LLC, 208 So. 3d 797 (Fla. 3d DCA 2016). Paragraph 5 of Ms. Lily Alvarez-Mejia's mortgage is identical to paragraph 5 of the Uniform Mortgage Instrument quoted in the text. See Alvarez-Mejia, 208 So. 3d at 798.
Belissimo also “withheld the insurance proceeds” pursuant to section 11 of the mortgage. The majority mentioned this once, as a fact, and then never mentioned it again, nor did they ever quote it. Alvarez-Mejia, 208 So. 3d at 798. The dissenting judge neither quoted nor mentioned paragraph 11 of the mortgage, at all.
Paragraph 11 of the UNIFORM INSTRUMENT relates to “Assignment of Miscellaneous Proceeds; Forfeiture.” Paragraph 11 of Fannie Mae/Freddie Mac Form 3010 01/01 FLORIDA--Single Family at page 10 (boldface in original). Paragraph 5 of the UNIFORM INSTRUMENT, titled “Property Insurance,” was the provision which contained the language at issue in the case.
3
Alvarez-Mejia, 208 So. 3d at 799.
4
Alvarez-Mejia, 208 So. 3d at 799.
5
But in this case “a genuine issue of material fact exists as to the cost of repairs to the property.” Alvarez-Mejia,208 So. 3d at 799.
6
Alvarez-Mejia, 208 So. 3d at 800 (Shepherd, J., dissenting).
7
Vongohoren v. Citimortgage, Inc., No. JFM-14-3549, 2016 WL 739070 (D. Md. February 25, 2016).
8
Alvarez-Mejia, 208 So. 3d at 800 (Shepherd, J., dissenting).
9
Alvarez-Mejia, 208 So. 3d at 802 (Shepherd, J., dissenting).
10
Vongohoren v. Citimortgage, Inc., 2016 WL 739070, at *4.
11
Vongohoren v. Citimortgage, Inc., 2016 WL 739070, at *2, *5.
12
Alvarez-Mejia, 208 So. 3d at 801 (Shepherd, J., dissenting).
13
See 1 Dennis J. Wall, Litigation and Prevention of Insurer Bad Faith § 8:17, tiled “Experts in third-party insurance bad faith cases: Specific cases and general rules,” at page 289 of 2018 Supplement (Thomson Reuters 3d edition 2011, 2019 Supplement in progress).
14
Alvarez-Mejia, 208 So. 3d at 802 (Shepherd, J., dissenting).
15
There may be good authority for that proposition. The dissent, however, did not cite any and none has yet been found independently. On the contrary, a part of paragraph 5 of the UNIFORM INSTRUMENT and of Ms. Alvarez-Mejia's mortgage reflects clearly that insurance proceeds never become part of the Lender's “security” if it is not economically feasible to restore or repair the property and the Lender's security is not lessened:
If the restoration or repair is not economically feasible or Lender's security would be lessened, the insurance proceeds shall be applied to the sums secured by this Security Instrument, whether or not then due, with the excess, if any, paid to Borrower. Such insurance proceeds shall be applied in the order provided for in Section 2.
Paragraph 5 of Fannie Mae/Freddie Mac Form 3010 01/01 FLORIDA--Single Family at page 7 (emphasis added).
16
Paragraph 5 of Fannie Mae/Freddie Mac Form 3010 01/01 FLORIDA--Single Family at page 7 (emphasis added).
17
Alvarez-Mejia, 208 So. 3d at 799 (emphasis added).
18
Vongohren, 2016 WL 739070, at *5 (emphasis added).
The above reprint from the book, Catastrophe Claims: Insurance Coverage for Natural and Man-Made Disasters, is with the permission of Thomson Reuters West, the publisher, and Dennis J. Wall, the author. This selection, Section 2:18 (2018, Thomson Reuters), is reprinted here in its entirety with permission of Thomson Reuters. Any further reproduction without the consent of the publisher is expressly prohibited.