When Insurance Pays Out, But Your Mortgage Lender Locks It Up: California’s Post-Wildfire Payout Crisis

Aaron Bollinger (00:01) Hello everybody and welcome the Speaking of Insurance Podcast. My name is Aaron Bollinger back at it with another insurance video. Who would have thought? So today we're gonna be talking about something that's very controversial. Insurance companies paying out claims and why it's not in your bank account, why it could not be in your bank account, or if you ever have to file a claim, explaining how that process works and why you might not get all the money that you're entitled to up front. So this is an insurance problem that nobody really expects. Imagine losing your home in a wildfire. Aaron Bollinger (00:30) You've gone through one of the most stressful experiences a homeowner or person could possibly face. You've lost your property, maybe even all of your belongings, and in some cases, almost everything that you've spent your life building. So you've got the homeowner's insurance, you file the claim, you meet with the adjusters, you submit the documentation, you go through the entire process of figuring out what your insurance company owes you. And finally, after all of that, the insurance company approves your claim and issues a payment. You might think that's the end of the difficult part. Aaron Bollinger (00:58) You have the money, you hire a contractor, and you can finally start rebuilding your home. Except there's one big problem. The mortgage company the mortgage company may be holding that money. And even though the insurance company has already issued payment, you might not actually have access to the funds you need to begin construction. So this isn't just a hypothetical situation. Today, October 15th, 2026, California announced a new investigation into how mortgage lenders and financial institutions Aaron Bollinger (01:26) Are handling insurance payouts for survivors of the January 2025 Los Angeles wildfires. So that's today, guys, very recent, a new investigation into the way that these institutions are handling insurance payouts. According to California's Department of Financial Protection and Innovation, more than 160 consumer complaints have been received since January 2025, involving delayed insurance disbursements, Aaron Bollinger (01:51) And other problems accessing insurance proceeds. And approximately 800 lenders and mortgage servicers have been asked to provide information about how they've handled these payments. This is a very big and significant development. Talk about making sure that your insurance company is properly set up You don't really think about the mortgage side and the way that they're going to handle the claim and they're going to handle the payments. Because we're talking about insurance claims and we usually focus on whether the insurance company pays. Aaron Bollinger (02:18) But what happens when the insurance company pays, and then there's another financial institution standing between you and your money. And that's what we're going be talking about today in the podcast. So we're going to break down exactly what's happening in California, why mortgage companies have the ability to control certain insurance payments, what the state is investigating exactly, and some very important things homeowners should know before they ever experience a major property loss. Hopefully you never have to, but if you do, it's good to know. Aaron Bollinger (02:45) Later in the episode, we're going talk about a California law that could require your lender to pay you interest on insurance money it's holding, Because when we talk about hundreds of thousands of dollars, even a relatively small interest rate on that money is very substantial and meaningful. So let's get into it. So let's talk about what happened today. Again, California's Business and Consumer Services Agency, along with the Department of Financial Protection and Innovation. Aaron Bollinger (03:08) Announced that financial institutions must report how they've handled insurance proceeds following the Eaton and Palisades fires. The state is investigating several possible problems. One is whether mortgage lenders have unnecessarily delayed releasing insurance funds. another is whether lenders have failed to provide homeowners with a timely process to appeal decisions about those funds. Aaron Bollinger (03:29) And a third issue is whether some financial institutions have continued holding insurance money even after the underlying mortgage loan was fully paid off. So you think about it, the mortgage gets fulfilled from the insurance claim possibly, and still the insurance company is holding on to that money. So I want to emphasize that the existence of a complaint doesn't automatically mean that a lender has violated the law. Regulators are collecting information actively currently to determine what exactly happened. Aaron Bollinger (03:55) whether institutions comply with their obligations, and whether enforcement action is necessary. But the fact that California is requiring this information shows how much of an issue this is. According to the state's announcement, lenders must explain how much insurance money they received, whether the money was distributed, how long the process took, which is a big one, and why funds may have been withheld. Aaron Bollinger (04:15) So a cause and effect situation with how long the process took and them having to explain why some funds may have been withheld. Aaron Bollinger (04:23) The reporting covers funds received for property damage. And the state is also requesting information involving personal property and living expense proceeds. So the mortgage company is not just taking the money potentially for the property side, but also for the personal property, which is your furniture and things like that inside the house. So the deadline for this response is in two weeks' time on October 29th. And according to the reporting from the Los Angeles Times, the requests were sent to approximately 800 lenders and servicers. Think about that. Aaron Bollinger (04:52) We're more than a year and a half removed from the January 2025 wildfires, and homeowners are still dealing with obstacles in the rebuilding process. The Palisades and Eaton fires destroyed more than 16,000 homes and other structures. And those weren't just numbers on an insurance report. Those are people's homes, those are neighborhoods, businesses, communities that were destroyed. And for some survivors, getting insurance settlement hasn't just meant immediately getting the financial resources that they need to go back to their normal life. Aaron Bollinger (05:22) To go potentially acquire another property or a place they're existing, seems like there's been some trouble with that. And so there's a little statistic that I found interesting that comes from California's July 2026 wildfire recovery announcement. The state cited survey findings showing that 39% of survivors identified high out-of-pocket costs as a factor influencing their rebuilding decisions. Another 30% cited delayed or insufficient insurance payouts. Aaron Bollinger (05:50) That's important because it illustrates that the challenge isn't just getting the insurance claim approved, it's also about paying your deductible, accessing the funds when you need them and coordinating the entire reconstruction process with the contractors and the permits. That brings us to the question most homeowners probably have. Why does an insurance company allow the mortgage company to get involved in the claim that you're filing with them in the first place? Aaron Bollinger (06:14) And it's not really the insurance company that we're talking about. It's more just why is the mortgage company there legally? So let's say you own a home in California, you purchased it for $800,000 and you still owe $450 on your mortgage. Then a fire causes $250,000 worth of damage. Your homeowner's insurance company investigates the claim and agrees to pay it, subject to the terms and deductible. You might expect the money to go directly to your checking account, but for significant damage to a mortgage property. Aaron Bollinger (06:42) That isn't always how the process works. Your mortgage lender, of course, has that financial interest in your property. And so when you originally borrowed money to purchase your home, the property became collateral for the mortgage loan. So if the home was ever severely damaged, the lender has an interest in making sure the property is repaired and its value is preserved because again, they took out that risk of giving you the loan on that property. That's why homeowners' insurance policies commonly include a mortgagey clause. Aaron Bollinger (07:07) A mortgage E clause identifies the lender's interest in the insured property and helps establish certain rights and protections for that lender. Depending on the claim and the applicable requirements, the insurance company may issue a payment that includes both the homeowner and the mortgage company as payees. And so when that happens, the homeowner might not be able to simply deposit the check without the lender's involvement. The mortgage servicer may require the funds to go through what is called a loss draft process. Aaron Bollinger (07:35) Basically, the lender receives or controls the insurance proceeds and then releases them as the repair or reconstruction process and progress progress. So as those things continue, they start to give them out. So that is a completely legitimate way to do business. And it's oftentimes how we see it be done. There's good reasons for lenders to verify to confirm that the insurance money intended for rebuilding is actually being used for rebuilding and not just them give it all to you up front. Aaron Bollinger (08:04) But actually, just for an active rebuilding process. But the question is whether the process is reasonable, timely, and consistent with the law and the mortgage agreement, because there's a big difference between making sure repairs are completed properly and unnecessarily preventing homeowners from accessing the money and making the repairs in the first place. And so that's what's kind of causing the investigation. So insurance disbursements work through let's walk through an example. Imagine that your home suffers. Aaron Bollinger (08:32) $300,000 in covered fire damage. Your insurance company completes its adjustment and issues an initial or final payment for the covered building damage. So they just give you your claim pretty much. Depending on your policy, the agreement you have with your mortgage company, and the size of the claim, the mortgage company can be included on that payment. You contact your mortgage servicer and explains that the funds must be handled through the loss draft department that we discussed. That department may require several things. The insurance adjuster's estimate. Aaron Bollinger (09:02) Assigned contract or agreement, permits, construction schedules, additional documentation showing that the repairs are going to be completed, proof of that. And it may also require inspections before releasing certain portions of that money that you think that you would be entitled to. So the lender might release an initial amount to help construction begin, but then withhold the rest. So the exact schedule obviously depends on the lender, mortgage terms, and other agreements and all the legal stuff that I have to say. Aaron Bollinger (09:32) But on paper, that entire arrangement sounds reasonable. But imagine that you're the homeowner and you've already hired a contractor and you have the materials and you have a labor and you're doing the process completely legit. And so you have maybe a demolition process, some engineering or permitting or other expenses that were not in the construction amount that you were given by the mortgage company. And your contractor needs to know when the payments are going to be available. And so if your insurance Aaron Bollinger (09:59) company pays out the money and the mortgage company is holding on to it and they take an excessive amount of time to process your disbursement or give you your money, the entire project can slow down or potentially cancel because your contractor might have to go to a job where they'll actually get paid. Maybe the project schedule has to change based off of the arrangement that you have with the mortgage company. Maybe you literally have to pay it by yourself while you're waiting for the funds to be released by your mortgage company. Aaron Bollinger (10:26) and if you're already displaced from your home, you could still be dealing with the fact that you have to rent a house during that delay. So this section doesn't mean that every lender handles insurance proceeds poorly. It also doesn't mean that every delay is improper. It's just that sometimes there are delays that are excessive and events where homeowners aren't given clear explanations. And it seems like the recent investigation is an indication. Aaron Bollinger (10:52) of the implications that that can have on homeowners in a catastrophic event such as the wildfires. Of course, there are sometimes legitimate documentation requirements and disputes or other circumstances that need to be resolved. But I think that that the state taking a look into this and examining the lender's disbursement practices is a huge development for California homeowners and insurance companies and the mortgage people who we're working with. But there's another side and Aaron Bollinger (11:21) We work with a lot of contractors in California on the workers' comp side, the group health side, liability side, job sites, bonding, everything. And we understand how difficult it is for them. We want to sympathize with them. So let's think about it from the contractor's perspective. Aaron Bollinger (11:34) So contractors also need predictable cash flow, just like all of us, to live day to day and operate their business and to fulfill the reconstruction projects. So if a homeowner has an approved $400,000 building related insurance settlement and you got hired on the job as a contractor, you made the plan for the construction and you got the approval, but the mortgage company is holding most of the insurance money that was paid out, and you submit documentation for a progress payment. Aaron Bollinger (12:04) And the lender is saying that it needs another inspection and they're delaying giving you the money. And then the person who hired you and the coordination with the mortgage company and that person fall through. The contractor who's already purchased the materials or completed work is left unpaid in this theoretical situation. Now there are specific rules governing contractor down payments and progress payments, but this can still be a serious problem. Aaron Bollinger (12:32) For many home improvement contracts, the legal down payment is limited to $1,000 or 10% of the contract price, whichever is less. Of course, there are exceptions, but again, for the home improvement contracts, the legal down payment on the contractor side is limited to $1,000 or 10%, whichever is less for the initial starting of the process. And the progress payments generally must correspond with the work performed and the materials delivered. Aaron Bollinger (13:01) That aligns with California law. So this isn't about contractors being entitled to demand unlimited money from the mortgage company, regardless of the current state of the development. It's about the legitimate construction expenses and lender disbursement procedures that need to properly align, and it seems aren't. And that's something homeowners should understand before signing a reconstruction contract. Ask your mortgage company how the money will be released, ask your contractor how payments are scheduled. Aaron Bollinger (13:31) And make sure that those two are compatible because we don't want you being a part of those 30% of people who maybe feel like they're not getting, access to their insurance money as much as they'd want. And having an understanding before that, before you have to file that claim, before the event, again, can just it's an email out to both of them. And it can stop the process from getting stalled potentially. Because that's the last thing that you want to discover halfway through a rebuilding project, is that your lender and contractor have completely different expectations. Aaron Bollinger (14:01) About when the money should be available and needs to be available. And so this is the most interesting part of the entire story. On August 2025, or my mom's birthday, California Governor Gavin Newsom signed the Assembly Bill 493. Aaron Bollinger (14:14) This law addresses interest on certain insurance proceeds held by mortgage lenders following property damage or loss. So this is supposed to have helped some of these things. So under the provisions, lenders must pay at least 2% annual simple interest on covered insurance proceeds held in escrow, held in escrow. So these rules govern which loans and properties are covered. So this isn't something homeowners should automatically assume applies to every single mortgage, but the principle is important. Aaron Bollinger (14:42) If a lender is holding insurance money while a homeowner waits for reconstruction funds, the homeowner may be entitled to interest under California law. So if a lender is holding $400,000 in insurance proceeds for six months at a 2% annual simple interest, that would equal about $4,000 after the six-month period if the full balance remain held for that entire period. So that's just an illustration. The actual amount obviously depends on all the things that we have to say: the balance being held, how long the funds remain in escrow. Aaron Bollinger (15:10) But $4,000 is not an insignificant amount of money. And you're talking about larger settlements or longer periods, the numbers can become even more substantial. And that's why it's super interesting is that this law recognizes something that homeowners might not have even thought about. Insurance proceeds aren't just numbers on a lender's balance sheet. The money is intended to help people recover from a loss. Who'd have thought insurance helped people recover from a loss? And that's when it's being held. There are legitimate questions about accountability, transparency, and who benefits from any interest earned. Aaron Bollinger (15:41) So for homeowners, this practical takeaway is pretty straightforward. I would advise find out how much money is being held, ask when it was received, when it's been dispersed, and ask whether interest is owed under applicable California law, because if you're dealing with a major insurance claim, those details matter. Well, thank you all for listening to this one. This has been insightful for me, both in the notes that I've written down and the level of Aaron Bollinger (16:09) News that it it brings in the two-week period that we have to process this and and understand and obviously at the end identify the implications of this. But the fact that 800 of these financial institutions have been contacted, that it seems like a very big number. And the statistics are quite frankly shocking. It's just a constant reminder that it's super important to have a full risk management program. Aaron Bollinger (16:33) And if you're ever dealing with a major property loss, make sure you understand the role of your mortgage company, the process for releasing insurance, payments, and the documentation you'll need. If there's an unexplained delay, please ask questions. Get answers in writing. And know that there are regulatory resources available if you believe a financial institution isn't complying with its obligations. At Bull Insure Insurance Services, we believe that understanding your insurance is just as important as having it. That's why we covered these stories. Aaron Bollinger (16:59) Not just to talk about insurance news, but to explain what those developments actually mean for homeowners, businesses, and the people relying on their insurance coverage as they should. I'm Aaron. This has been another episode of Speaking of Insurance. If you found this episode helpful, consider sharing it with someone who owns a home, especially anyone dealing with property damage or reconstruction. If you have any questions about your homeowner's insurance, your coverage limits, or how your policy is structured, feel free to reach out to our team at Bollinsure. You can reach us at Bollinsure, B-O-L-L-I-N-S-U-R-E dot com. Aaron Bollinger (17:29) Link in the description. Thank you for listening. I'll see you all in the next episode. Hopefully, this was insightful.