Bankruptcy court holds that bank can apply insurance proceeds to outstanding loan of borrower in default on loan

Nadler & Darwish, a company that was in bankruptcy proceedings, was in default on mortgages on property it owned.  After a fire its insurer issued a check for $165,000.  Following standard procedure, the insurer issued the check jointly to Nadler & Darwish, the insurance adjuster (probably a public adjuster, who advocates for an insured in property loss cases and is entitled to a percentage of the loss paid) and Mechanics Cooperative Bank, the bank that held the mortgages on the property.

The bank endorsed the check on Nadler & Darwish's behalf, deposited it, paid the adjuster's commission, and then used the rest to reduce Nadler & Darwish's outstanding loan obligations to the bank.

Nadler & Darwish moved that the bank be ordered to repay the amount of the check except the adjuster's commission.  In In re Nadler & Darwish, LLC, 2016 WL 5396652 (D. Mass.) (unpublished), the Bankruptcy Court ruled in favor of the bank.  It held that under Massachusetts statute and case law, when a mortgage is in default and  a fire destroys the property, the mortgage bank can assert its rights with respect to the proceeds of the insurance policy as the intended third-party beneficiary of the policy.  Although a check made out to more than one party can only be cashed if all the parties endorse it, under the mortgage documents the bank was given power of attorney that allowed it to sign on behalf of Nadler & Darwish. 

United States District Court for the District of Massachusetts holds that two year period for replacing property under replacement cost and ordinance and law coverage is not tolled by ACV payment delays caused by insured

Policies insuring property damage to buildings owned by the insured typically divide payment of loss into three coverages.  The insurer will initially pay the actual cash value (the "ACV") of the loss, which means the value of the damaged property at the time of the loss.  Then, once the property is actually repaired or replaced, insureds who have replacement cost coverage will receive the difference between the actual cash value and the reasonable amount they paid to repair or replace the property.

In a fire loss, for example, the insurer will first pay the actual cash value of the beat up, cat scratched armchairs (not that I'm projecting).  It will pay the difference between that and the cost of the new, not yet (but doubtless soon to be) scratched armchairs when the insured submits receipts that the new armchairs were purchased.  Insurance policies typically provide that replacement cost coverage will only be paid on repairs or replacements made within two years of the loss.

A third type of coverage, "Ordinance or Law" coverage, applies to the cost of bringing a building up to current codes.  Older buildings are often not compliant with current safety standards set forth in sanitary and health codes.  The buildings are "grandfathered in," meaning that the owners are usually not required to make changes that bring the buildings up to current standards. 

But once a certain amount of money is spent on a building, they are required to be brought up to current code.  (As a side note, that's why some buildings fall into worse and worse disrepair.  The owners may be able to afford to put a few thousand dollars into an electrical system, but once they do that they have to bring the entire building up to code.  That can cost many times as much as the original repairs.)

Ordinance or Law Coverage, like replacement cost coverage, is often limited to repairs made within two years of the loss.

When there is a dispute over the amount of loss in a property damage case, that amount will often be determined by a specialized type of arbitration called a reference proceeding.

One issue that often arises is whether the two year time limit to repair or replace property for replacement cost coverage and Ordinance or Law coverage to kick in is extended when an insurer's payment of the actual cash value is so untimely that the insured cannot afford to repair or replace the property within two years.

In Shri Gayatri, LLC v. Charter Oak Fire Ins. Co., 206 F. Supp.3d 684 (D. Mass. 2016) the United States District Court for the District of Massachusetts held that the time to repair or replace the damaged property was not tolled by a delay in payment of the actual cash value.  The reason for that holding was that the delay in payment was the a result of the insured's own delays and failures to communicate with the insurer.