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Dear Clients and Friends:
On behalf of our firm, I am pleased to send you the latest edition of our client newsletter, Secured Creditors' Rights to Insurance Proceeds. Those of you whose businesses were affected by Hurricanes Katrina and Rita may find this article of particular interest.
We appreciate the concern and support expressed by so many of you over the past six months. Despite the many challenges wrought by the storms, we share our communities' optimism and commitment. Each day brings new signs of recovery, and we are pleased to be a part of the rebuilding process.
Sincerely,
S. Gene Fendler
President |
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Wednesday,
March 29, 2006
In the aftermath of Hurricane Katrina, it is imperative that commercial lending institutions and similarly situated entities understand their right to be involved in the recovery of insurance proceeds resulting from damaged collateral, even when the lender is not listed as a loss payee in the borrower's insurance policy. A secured creditor believing that it has a right to insurance proceeds owed on the loss of the mortgaged property typically seeks recovery of those funds from the borrower, often resulting in legal action to ultimately enforce its interest in the proceeds. However, a unique provision under Louisiana law may provide a secured creditor with a powerful means of working directly with the insurance company to ensure proper recovery instead of waiting for the funds to cycle through the borrower before asserting its rights.
Under La. R.S. 9:5386, a mortgage of immovable property may provide for the collateral assignment or pledge of the right to receive proceeds resulting from the insurance loss of the mortgaged property. Lenders should review their mortgage to ensure that such an assignment or pledge is properly contained in the instrument. Post-Katrina, lenders should confer with legal counsel to ensure that this type of an assignment or pledge is properly contained in future mortgages. This type of collateral assignment or pledge shall have effect, other than between the immediate parties, and shall be deemed perfected by the proper recordation of the actual mortgage in the mortgage records of the parish in which the immovable is situated. A creditor with a perfected security interest in the insurance proceeds has priority over other claims and the insured is then required to honor the mortgagee's secured interest regardless of whether that creditor is actually listed as a loss payee on the borrower's insurance policy.
Secured creditors should promptly notify the insurance company in writing of the collateral assignment or pledge of the right to receive the insurance proceeds. Once proper notice is received, the insurer is obligated, following an adjustment of the lost or damaged property claim, to make insurance proceeds payable to the mortgagee as well as the borrower for endorsement purposes. If the insurer is not notified in writing and, in good faith, makes payment of the insurance proceeds attributable to the loss of the mortgage property, the insurer is exonerated of liability to make payment to the secured creditor. Of course, the borrower who receives such proceeds shall be accountable and liable to the secured creditor for the sums received.
For more information, please contact Todd Wallace at ktwallace@liskow.com or James Brown at jabrown@liskow.com or simply go to www.liskow.com.
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