May 3, 2013
by Steve Meyer
Assistant VP, High Risk and Hazard Claims
USFN Associate Member
When Hurricane Sandy hit the Northeast Coast in October 2012, the mortgage servicing industry felt a sense of déjà vu. Less than eight years before Sandy, the U.S. was starting to rebuild from Hurricane Katrina, arguably one of the most devastating natural disasters in the country’s recent history. In 2005, Hurricane Katrina left $81 billion in damage, 1.2 million evacuees, and 1,833 storm-related deaths according to The Weather Channel. Early estimates show that Sandy caused 147 deaths and $50 billion in damage to 650,000 properties.
Because the majority of properties damaged and destroyed by Hurricane Sandy have mortgage loans, the mortgage industry has a vested interest in assisting homeowners to mitigate losses. Applying lessons learned from Hurricane Katrina can help both homeowners and mortgage servicers understand and address insurance and property preservation issues.
A big challenge servicers face after major disasters like Hurricanes Katrina and Sandy is that most homeowners do not fully understand their insurance policies and often find that they have insufficient policies to cover the damage. They also fall prey to unscrupulous contractors and adjusters.
• Flood vs. Wind-driven Rain Damage — Determining the cause of the damage establishes whether it is covered under a standard homeowner’s policy or under a separate flood policy. Many homeowners do not have flood insurance policies because they are not required unless properties are located near a flood plain. Flood damage typically is not covered under a standard policy, although wind-driven rain damage is covered, and establishing the cause of the damage is usually dependent on the discretion of adjusters.
• Adjuster and contractor fraud — Predatory practices by insurance adjusters and contractors were so prevalent after Hurricane Katrina that it spawned legislation requiring adjusters to become licensed or obtain temporary catastrophe licenses that are valid for up to 180 days. Even with such legislation, vulnerable homeowners fall prey to unscrupulous insurance adjusters and repair contractors who receive insurance money and then fail to complete repairs or assessments or perform shoddy work. The risk for mortgage servicers is that the value and condition of the property may be negatively impacted as a result.
• Limited coverage — Insurance policies may not fully cover the costs of repairs and clean-up after a storm or hurricane. For example, a policy might cover the cost to remove a downed tree that has fallen onto a home, but it may not cover the cost to remove sticks and limbs from the yard.
• State rulings — After major storms, states make declarations to categorize the event. This is important to servicers because specific insurance policies must be used to cover damage costs depending on what type of storm has been declared. For example, if the storm is declared a hurricane, the amount of money homeowners must pay out of pocket for deductibles differs from what they would pay using a standard homeowner’s policy. Hurricane insurance policies carry “percentage deductibles.” When a homeowner purchases a hurricane policy, the carrier determines the deductible based on a percentage of the total appraised value of the home. As an example, a homeowner with a home appraised at $250,000 and a policy that carries a five percent deductible for hurricane damage would have to pay $12,500 out of pocket.
• Servicers omitted from claim checks — On current loans, insurance carriers issue two-party checks that need to be endorsed by both the servicer and the borrower. In an effort to expedite payment for minor damage or cost-of-living expenses, some insurance companies set up temporary locations and write checks directly to the homeowners. As an additional insured on the policy, the carrier has an obligation to include the servicer on any payment for damage to the dwelling regardless of the amount.
• Recoverable depreciation — Understanding the policy requirements related to recoverable depreciation is important to ensure full reimbursement. Policies will only make full reimbursement for damage once repairs are completed. Until then, reimbursements are made based on the depreciated value of the property. The typical time frame for recoverable depreciation is 180 days after the date of loss. Insurers may extend the timeline to 24 months after major storms or disasters.
Property Preservation Issues
Major storms and disasters present new challenges for servicers and their field service partners in assessing damage and making repairs. Some of those challenges include increased materials costs, accessibility of properties, mitigating further damage, and identifying vacancies.
• Increased cost of materials — Increased demand and short supplies of building materials often cause a spike in costs after major storms. As a result, the cost-estimating software that the industry uses to determine the cost of repairs may not be accurate under the circumstances. It is important to review current material costs and pursue supplemental claims with the insurance carriers when necessary.
• Property accessibility — Inspectors often have difficulty reaching properties in severely impacted areas, and shortages of fuel may limit the number of properties they can inspect. Inspection delays can hinder damage reporting, property securing, as well as emergency work needed to mitigate the damage.
• Mitigating further damage — Servicers must take action to mitigate existing damage to prevent further damage. It is a requirement of investors and insurance companies. If servicers fail to properly mitigate losses, investors will not reimburse for the additional damage, and insurance companies will not reimburse to remediate resulting mold damage.
• Identifying vacancies — After a severe storm, it is difficult for field servicers’ inspectors to determine vacancy when homeowners are forced to evacuate. Reporting a property as vacant when it is not can result in the denial of a homeowner’s insurance claims if force-placed coverage has been initiated by the servicer. Further, when borrowers evacuate, field service companies must decide whether to secure a property as well as determine other preservation measures that must be taken to protect the servicer’s collateral interests.
The aftermath of a storm is a chaotic time for borrowers whose homes have been damaged or destroyed. Servicers must take immediate action to communicate to homeowners and offer assistance through the rebuilding process.
Utilizing field service contractors, servicers can reach out to borrowers and provide contact information when borrowers have questions or need help to address issues. Servicers also should train customer service personnel to assure that borrowers receive accurate and timely responses and information regarding insurance coverage and other storm-related updates.
Additionally, servicers must emphasize to borrowers the importance of documenting all property damage before filing an insurance claim. Homeowners should take multiple photos and videos that are time-stamped. Some homeowners have used the daily newspaper to verify dates in their damage photos and videos.
Often homeowners do not know what to do or where to turn for help after a major storm event. By identifying key issues from previous storms and applying the lessons learned, servicers can better manage issues, reduce potential losses, and offer much-needed relief to homeowners impacted by the devastation.
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Spring USFN Report