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Katrina Victim Denied Benefits Under Lender-Only Flood Insurance Policy

By the terms of most mortgage agreements, homeowners are required to maintain adequate insurance on their houses. In New Orleans and other coastal areas, this requirement can include both a standard homeowner’s policy as well as flood insurance. Mortgage lenders insist on insurance coverage to help protect their financial interest in the properties for which they issue mortgages. If a borrower fails to purchase or maintain adequate coverage, the lender is permitted to “force-place” a policy–that is, to purchase an insurance policy on the property for its own benefit. A force-placed policy allows the lender to protect its exposure on a home up to the then-owed amount of mortgage on the date of issuance.

When Hurricane Katrina hit New Orleans, the home of Latisha Williams sustained significant flood damage. Williams had purchased the house with a mortgage issued by Homecomings Financial, the terms of which required her to maintain a flood insurance policy on the property. In June of 2005, Williams let the flood policy lapse, at which point Homecomings Financial force-placed a new policy on the property that was issued by Lloyd’s of London. Following the Katrina disaster, a Lloyd’s adjuster inspected the property and issued a loss estimate that Williams believed was below the true amount of loss on the property. Williams sued Lloyd’s seeking to recover for the full amount of flood damage to the house. At trial in the district court, Lloyd’s filed a motion to dismiss Williams’s claim, arguing that she lacked standing to bring the action. Standing is the right to initiate a lawsuit which arises from the plaintiff’s direct connection with or involvement in a legal dispute. The district court granted Lloyd’s motion, and Williams appealed.

The Fifth Circuit of the U.S. Court of Appeals examined the facts to determine whether Williams had standing to sue Lloyd’s. The issue centered around the question of whether the insurance policy, which was an agreement between Lloyd’s and Homecomings Financial, was intended to benefit Williams in any way. Without this intent to benefit Williams, she would have no standing to bring suit. Under Louisiana law, which the federal court applied, a contract for the benefit of a third party is called a “stipulation pour autrui.” See Paul v. Louisiana State Employees’ Group Benefit Program, 762 So.2d 136, 140 (La. App. 1st Cir. 2000). According to the court, “[t]he most basic requirement of a stipulation pour autrui is that the contract manifests a clear intention to benefit the third party; absent such a clear manifestation, a party claiming to be a third party beneficiary cannot meet his burden of proof.” The court found ample evidence that Homecomings Financial and Lloyd’s did not intend to benefit Williams in any way. The court noted that the policy specifically stated that Homecomings Financial was the “sole insured” under the policy, notwithstanding “the insurable interests of the owner,” (Williams). Furthermore, the policy specified that Homecomings was Lloyd’s “sole insured under this policy” and that benefits paid would be “made directly to [Homecomings].” Thus, the court affirmed the district court’s dismissal of Williams’s action.

The lesson from this case is that a homeowner should always maintain the appropriate level of insurance for his or her property. Because a mortgage issuer is able to force-place a policy only up to the value of the outstanding balance on the mortgage, any equity the homeowner may have in the property is left unprotected in the event of a catastrophe. It is no stretch to imagine that a mortgage issuer would be happy to accept a settlement offer that covers its exposure without regard to any equity loss the homeowner may personally sustain.

If your property has suffered damage due to a natural disaster or other event, call the Berniard Law Firm today toll-free at 1-866-574-8005 and speak with an attorney who can help you obtain the recovery you deserve.

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