West Virginia Eyes Lien on Fire Insurance to Fight Abandoned Buildings

January 22, 2010

West Virginia may be on the path to helping municipalities pay for debris removal of abandoned buildings with insurance payments in a way that insurers can live with.

The issue of how to pay for the cleanup has irked property insurers since last year when one city, Huntington, initiated its own process of requiring insurers to place funds in escrow. Insurer members of the West Virginia Insurance Federation (WVIF) went to court to block that ordinance because they said it conflicted with state insurance law.

Gov. Joseph Manchin, insurers and the West Virginia Municipal League, as well as the city of Huntington, are now embracing legislation that will allow any city or county to obtain a lien on insurance proceeds for a total fire loss if the municipality has reason to believe the owner will abandon the property and not take care of cleaning up after the fire.

“Unfortunately, after a damaging fire, some property owners take their fire insurance money and run, leaving the city with a dangerous, abandoned building they cannot afford to demolish. We are joining our cities and the Insurance Federation on a bill that gives more flexibility to clean up buildings damaged beyond repair by fire, by allowing the cities to place a lien on fire insurance policies,” said Manchin.

Huntington officials tried to address the same problem with their ordinance but ran into opposition. The Huntington ordinance required insurers to place a portion of any insurance payments of a total fire loss into escrow for use by the city to pay debris removal costs. Insurers were instructed to place $2,000 of every $15,000 in policy value into escrow on these claims.

Insurers balked at the Huntington ordinance on a number of grounds. For one, they said if they complied they would be in violation of the state’s valued policy law that requires them to pay all insurance payments to the policyholder. They also did not like that this process was for just one city and feared compliance headaches if other municipalities decided to come up with their own variations.

WVIF filed suit last summer to block the Huntington ordinance. The group won astay of the ordinance but agreed to hold off on pursuing the lawsuit to overturn it completely to give lawmakers a chance to come up with a solution in the new legislative session, which opened Jan. 13 and runs for 60 days.

Manchin’s proposal tracks with a compromise that insurers discussed with Insurance Commissioner Jane Cline, Huntington and other state officials late last summer, according to Jill Benz, president of the industry’s WVIF.

“We always wanted a statewide solution,” said Benz

Manchin raised the profile of the issue of abandoned properties in his State of the State speech earlier this month in which he linked it to his state’s fight against drugs.

“We have a simple message to all drug dealers in West Virginia: Get out of our state now, while you still can. We are not just going after the dealers themselves; we are going after the places where they operate. Vacant and rundown properties harbor illegal activity, and they also lessen the appeal of our towns and lower the value of homes and buildings that are maintained by responsible property owners,” the state’s chief executive said.

Insurers are “generally OK” with Manchin’s lien proposal because it sets one process for the entire state, according to Benz. Manchin’s bill also makes it clear that insurers complying would not be in violation of other insurance laws.

“It’s not a perfect solution, it’s a compromise,” said Benz, who termed passage “very likely.”

Under the draft legislation (Senate Bill No. 224), insurers would still play a role in seeing that funds are used to remove debris. They would be required to notify any municipality where they have a total fire loss within 10 days. The municipality would then have 30 days to decide whether to file a lien against the insurance payments for an amount based on estimates for cleanup that could not exceed $5,000 or 10 percent of the policy’s limits.

The lien would not affect any payments for any losses other than those to the real property, such as for the loss of personal property or payments for temporary housing and related living expenses.

The new legislation would apply to surplus lines insurers as well as standard market insurers, which was not the case with the Huntington ordinance.

A number of other states have laws permitting municipal liens on fire insurance proceeds; they include New Jersey, Connecticut, New Hampshire, Rhode Island and Massachusetts.

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