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Group STATE OF CALIFORNIA Bulletin No. 96__ TO: ALL INSURERS; OTHER INTERESTED PARTIES On April 13, 1994, Bulletin No. 94-5 issued, addressing the subject of "Earthquake Insurance Settlement Proceeds." Bulletin No. 96-__ will supersede Bulletin No. 94-5.
EARTHQUAKE INSURANCE PROCEEDS
A. BACKGROUND Lenders generally do not require that their borrowers purchase earthquake insurance; fire and extended coverage policies which exclude the peril of earthquake are accepted by lenders as meeting mortgage agreement requirements. The lender is listed by name as "mortgagee" on the declarations page of the policy and is named as co-payee, along with the insured, on any check or draft for insurance proceeds in the event of loss under a peril covered by the required policy. Since the Northridge earthquake, many insurers have written checks for earthquake insurance proceeds jointly to insureds and their lenders, pursuant to the insurers' interpretation of the loss payable language in their policies and the lenders' claim to rights which they asserted were guaranteed by the underlying loan documents. On April 13, 1994, the Commissioner issued Bulletin No. 94-5. The bulletin set forth the position of the Department that absent provisions in the deed of trust and/or other loan documents creating either an obligation to purchase earthquake insurance or an enforcable assignement of the proceeds from an earthquake insurance policy by the policyholder to the lender, a policyholder is entitled to receive the proceeds from settlement, thus precluding the lender from being named as a co-payee absent a knowing and intelligent waiver of rights by the policyholder. The bulletin noted, however, that some insurers, believing that the language of the insurance policies exposed them to lawsuits from lenders if they gave the proceeds to insureds in single party checks, would deposit the proceeds in court-supervised accounts pending judicial resolution of the controversy, thus slowing down the rebuilding process. The bulletin then offered various suggestions as to how the parties chould proceed: (1) if no check has as yet been issued, the policyholder could ask the lender for a written waiver of its interest, to present to the insurer; (2) in the event a two-party check had already been issued, the policyholder could ask the lender to endorse it to the policyholder; (3) where there was disagreement between lender and policyholder, the policyholder could look for assistance to the government agency regulating the lender.
B. Ziello vs. Superior Court of Los Angeles County On June 29, 1995, the California Court of Appeal for the Second Appellate District filed and published its decision in Ziello v. The Superior Court of Los Angeles County (First Federal Bank of California) . Both parties appealed the decision to the California Supreme Court. On October 19, 1995, the Supreme Court denied review of the case without comment. The rule in Ziello is as follows: The fact that the lender is named as the loss payee of the earthquake insurance does not determine its entitlement to the insurance proceeds. If the lender has not required earthquake insurance in its contract, the insurer's unilateral and erroneous naming of the lender as loss payee of the earthquake insurance does not create either a contractual or an equitable right in the lender to receive or control the proceeds of that insurance. It is the borrower who has an equitable claim to those proceeds. In light of the ruling in Ziello and absent certain conditions, the Department views the practice by insurers of naming a lender as loss payee on earthquake insurance as a violation of California Insurance Code, section 790.03, and, as such, should cease. Those conditions are (1) confirmation that the deed of trust and/or underlying loan documents contain language requiring the purchase of earthquake insurance or requiring that proceeds of all insurance, whether required or not, be applied to repair of the property or to the loan balance; or (2) having the policyholder's knowing intelligent assignment of earthquake insurance proceeds to the lender. It is well within an insurer's capabilities to require copies of loan documents so it may learn, upon sale of an earthquake endorsement or policy and prior to naming the mortgagee as loss-payee, whether a mortgagee has a right to earthquake insurance proceeds. Moreover, it is well within an insurer's knowledge whether its insured knowingly and intelligently assigned those proceeds to his or her mortgagee even in the absence of a requirement. Most important, it is highly unlikely, post-Ziello, that any lender without the necessary language in its documents would sue an insurer for earthquake proceeds which were paid soley to an insured who is contractually and equitably entitled to those proceeds. INQUIRES ABOUT THIS BULLETIN should be directed to: Cindy A Ossias, Compliance Bureau, California Department of Insurance,
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