A Non-Exclusive Checklist of Post-Harvey Items For Lenders and Servicers to Remember
From Harvey’s Ancestors – Katrina, Rita and Ike
By Tom Alleman, Member, Dykema Cox Smith
The sudden arrival of Hurricane Harvey is an unfortunate reminder to lenders and servicers of the issues that arise after catastrophes. This checklist provides guidance about immediate issues lenders, servicers and special servicers must address now. It is non-exclusive, of course; a lesson from prior disasters is that they have a tendency to generate unforeseen problems.
These problems will arise again and likely in other unexpected parts of the country.
Now is the time to attend to the following critical issues and protect your rights with the assistance of experienced professionals. Even if you escaped Harvey (or Katrina, or Rita or Ike), you cannot relax. Hurricane season doesn’t “end” until November and the next storm may strike in your area — and it is time to start preparing for fallout with experienced professionals.
1. Do you have copies of the policies, binders or other documents providing effective proof of coverage?
- Locate and review them with experienced professionals immediately!
- Was the property on a binder at the time of loss? It is important to ensure that you know what coverage terms are applicable.
2. FEMA flood policies (if the borrower has one)
- It is possible, even probable, that FEMA will extend the deadline for reporting Harvey claims as it has for other hurricanes and river flooding incidents. But until that extension is granted, there is a hard 60-day deadline from the date of loss in which the insured may report FEMA flood insurance claims. Failure to comply means a loss of coverage.
- FEMA flood policies contain requirements as to what must be included in the insured’s proof of loss. Strict compliance is an absolute must. The standard FEMA policy requires the insured to provide current contact information on all mortgagees/lienholders. Has your borrower done so?
- Are you listed as a loss payee? A lender loss payee? What do your loan documents say about who makes/controls the claim?
3. Business interruption policies
- Business interruption policies are highly manuscripted forms that vary widely from insurance company to insurance company. Do you have a copy of the relevant policy?
- Who is responsible for making the claim? Have they done so? Have the policy provisions been complied with? This is important because most business interruption coverage includes a “waiting period” before coverage/benefits begin.
- Does the policy require the insured property itself to have suffered physical damage before there is coverage? Many basic forms of business interruption coverage provide no coverage unless this is the case.
- Are you listed as a loss payee? Lender loss payee? What do your loan documents say about who makes/controls the claim?
- How are damages being computed for covered losses? Whose responsibility is it to do this? Are the documents available to make/support the claim?
4. Property/builders’ risk policies
- Do you have a copy of the policy? Are you listed as a loss payee? Lender loss payee? What do your loan documents say about who makes/controls the claim?
- Who is responsible for making the claim? Have they done so? Have the policy provisions been complied with?
- Co-insurance: is the valuation adequate to avoid a co-insurance or underinsurance penalty?
- How will losses be valued? Are there special issues involved? What support does the insured have for its claims?
- Does your borrower’s policy have a Named Storm Deductible or other percentage deductible? Does it apply? How is it computed? What is the borrower doing to comply?
- Does the business interruption policy require direct physical damage to the structure? Are there delays or waiting periods for business interruption coverages? Is there contingent business interruption or civil authority coverage?
- a. What is the borrower doing to collect/preserve evidence to prove the amount and cause of loss? If the policy does not provide coverage for flooding, there may be coverage only for wind-driven water or wind. Proving what happened to a particular structure requires prompt action.
6. What ifs — real situations from prior disasters
- What if the property is at some point in foreclosure proceedings? Who handles the claim? What must the lender/servicer/special servicer do?
- What if the borrower is unable or unwilling to proceed with a claim? What does the lender/servicer/special servicer do?
- What if there are multiple properties each with a different lender on a single policy?
- What if the insurer denies coverage and the borrower is unwilling or unable to proceed with a claim?
All of these questions can be addressed, but experience teaches that now, rather than later, is the time to do so. Starting today, begin triage of possible issues, reach out to affected borrowers and consult with and assemble experienced professionals to assist in earlier and easier resolutions.