State legislation pending to give rebuilding homeowners the right to receive interest on escrowed insurance
The fundamental purpose of insurance is to compensate insureds for a covered loss, such as when a person’s home burns down in a disastrous wildfire. An insurance policy is intended to empower homeowners to fund rebuilding. Mortgage lenders have a security interest in ensuring that the insurance proceeds are used to restore the damaged property. Accordingly, many mortgage contracts contain a clause naming the lending mortgage company as a co-payee on insurance funds, and many lenders hold insurance proceeds in escrow while homeowners begin to rebuild.
Mortgage companies often require their insured homeowners to provide construction contracts, permit applications, architectural plans, or other documentation before they release some or all of the insurance monies to fund rebuilding.That practice clearly presents obstacles for impecunious fire victim homeowners who could definitely use the insurance to pay for obtaining service providers to supply the documentation that the lenders require before releasing insurance funds.
In the interim, insurance companies have often had the right to retain interest accrued on the insurance monies they hold in escrow, which can amount to many thousands of dollars over a period of months or years.
State assemblymember introducing AB493
State Assemblymember John Harabedian (Dist. 41), sponsor of Assembly Bill 493, which is supported by Gov. Gavin Newsom, explained his bill which proposes to change who has the right to such interest.
“Currently, California law mandates that lenders pay interest on certain escrow funds for some accounts. For example, when you escrow your funds to pay your property tax, the homeowners get interest on that,” Harabedian explained. “However, post-loss insurance payments are excluded, allowing mortgage companies to retain the interest. That hurts wildfire survivors and it hurts any homeowner who suffers an insured loss. This bill seeks to protect homeowners while ensuring the homeowners receive the interest on monies held in escrow.”
The effective date of the proposed act is Jan. 1, 2026. The bill is supported by Robert Herrell, the executive director of the Consumer Federation of California, who testified before the Assembly’s Standing Committee on Banking and Finance.
“The sad fact when you have this level of loss at scale with thousands of homeowners losing their homes is that many of these homeowners are finding out that they are significantly underinsured and that it’s going to take them years to rebuild,” Herrell stated. “The best example is if you look at the fire in Paradise, only one-third of that community is built back in that town’s footprint.”
The proposed measure closes a loophole, he explained, and it helps consumers as they figure out whether they will rebuild or what they will do. He noted that clearly, if mortgage companies end up holding insurance proceeds for years, the accrued interest can be very significant.
The pending legislation provides insureds with some small measure of relief as they navigate the protracted process of rebuilding. However, many homeowners are struggling to pay for the very services required by the mortgage companies to release escrowed funds, a reality that is only one of many challenges those seeking to rebuild are facing.