Can a Mortgagee/Lender Withhold Property Insurance Proceeds?

In the course of representing policyholders in first-party property insurance claim disputes, insureds often ask: Why is my mortgage company on the insurance check and/or I have never been late on my mortgage payment, why is my mortgage company withholding insurance carrier’s payment?

Bottom line, the answer to these questions depends on the terms of the mortgage. If your home has suffered severe damage or has been completely destroyed and you have a mortgage, by those terms, the bank, mortgage company, or their assignees are made a payee on the insurance carrier’s check. This occurs because your lender has a financial interest in the property and since its name appears on the insurance policy, the insurance carrier can protect the lender’s interest by being named as a payee on the check. Therefore, the insurance carrier’s payment of loss cannot be negotiated without your lender’s signature or consent.

According to Section 5 of Florida Uniform Mortgage Instrument,¹ the insurance proceeds must be used to either restore or repair the property, provided that such restoration or repair is “economically feasible” and “the lender’s security is not lessened.” This same language was at issue in Alvarez-Mejia v. Bellissimo Properties.²

In Alvarez-Mejia, the insured’s property suffered damages as a result of a fire. The insured filed a claim for her losses with the homeowner’s insurance carrier, which issued insurance benefits due and owing under the insurance policy. The payees on the checks included the insured, the law firm representing her, and the mortgagees. One mortgage, Bellissimo Properties LLC (“Bellissimo”), withheld the insurance proceeds pursuant to sections 5 and 11 of the mortgage and it argued that it was not economically feasible to repair the property based on an appraisal of the exterior of the home which set the home’s value at $90,000 and a repair estimate from a licensed contractor for $98,717.

Operative language of Section 5 of the mortgage read:

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…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.

The insured filed a legal action against Bellissimo alleging that she could not repair the property based on Bellissimo’s refusal to distribute the insurance proceeds. The trial court granted summary judgment for Bellissimo finding that “it was not economically feasible to repair the property because the cost to repair was greater than the value of the property.”³

On appeal, the appellate court reversed the trial court’s summary judgment order and agreed with the insured that a genuine issue of material fact existed with respect to the value of the property after repairs. Alvarez-Mejia’s affidavit indicated “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.”⁴

The term “economically feasible” determined the outcome of this case because the mortgage document did not define the term. Since the standard mortgage does not define “economically feasible,” it is left to the interpretation of the courts. The appellate court found that the term is subject to different interpretations and because the lender “did not provide an estimate of the value of the property after repairs, [it] therefore did not meet its burden of proof that no genuine issue of material fact exists.”⁵

The decision in Alvarez-Mejia highlights a lender’s ability to withhold insurance proceeds based on the cost of repairs, the effect of the damage on lender’s security, and the value of the property before and after the repairs are completed. Standard mortgages also include provisions which provide that during the repair and restoration period the lender has the right to hold the insurance proceeds until it has had an opportunity to inspect the property to ensure the work has been completed to the lender’s satisfaction. When strictly enforced, these clauses exacerbate an insureds’ financial burden when depending on insurance proceeds to return property to a pre-loss condition.
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¹ Standard provision commonly found in mortgages.
² Alvarez-Mejia v. Bellissimo Properties, 208 So.3d 797 (Fla.App.3 DCA. 2016).
³ Id. at 798.
⁴ Id. at 799.
⁵ Id. at 799.