WHOSE EARTHQUAKE INSURANCE IS IT ANYWAY?
by Earl R. Wallace, Esq.
Martin v. World Savings and Loan Association
(October 2, 2001) 92 Cal.App.4th 803, 112 Cal.Rptr.2d 225
It has been a while since the last major earthquake in California and the weather is getting warmer... (Although I have no scientific proof that warm weather is a precursor to earthquakes, I swear there is a correlation.) So I thought it would be a good time to discuss the latest court case involving lenders and earthquake insurance. Only the future will tell how timely this article is.
The Second Appellate District has held that a lender may direct and control earthquake insurance proceeds when the deed of trust provides that, if the borrower obtains (although is not required to obtain) such insurance, the borrower must name the lender as loss payee and allow the lender to control the proceeds.
A homeowner purchased his residence with a loan from World Savings and Loan Association. The loan was secured by a deed of trust containing a provision that required the homeowner to maintain insurance, but did not require the purchase of earthquake insurance. The provision specifically allowed the homeowner to purchase earthquake insurance at his or her discretion, but stated that if such insurance were obtained, the lender (World Savings) would be designated the loss payee and would have the right to direct or control the loss proceeds.
After the 1994 Northridge earthquake caused $60,000 in damage to the homeowner's residence, World Savings took control of the insurance proceeds. The homeowner filed a complaint alleging that the lender's control of the earthquake insurance proceeds contravened California law and lacked separate consideration (i.e. something of value - a requirement for an enforceable contract). The pertinent deed of trust provision did not require the owner to purchase the insurance, did not assign the proceeds to the lender, and did not give the lender the right to share, control, or direct the proceeds. The trial court sustained World Savings' demurrer (objection) to the complaint.
The Court of Appeal affirmed, holding that the loan agreement gave World Savings a secured interest in the earthquake insurance proceeds. Although the owner did not give any consideration specifically for the lender's right to control the proceeds, the court found that the contract as a whole was supported by consideration. The earthquake insurance provision was part of the overall bargain struck by the owner and the lender.
* Earl R. Wallace is a partner with the law firm of Ruzicka & Wallace, LLP, which serves as legal counsel to REOMAC and specializes in representing lenders with regard to California foreclosures, evictions, receiverships, litigation and motions for relief from the automatic stay.
