Bank can't grab fire insurance proceeds to pay off loan
Since the economy has turned home equity upside-down on so many people, a new problem has surfaced. When a structure suffers damage that is insured, the mortgagee bank is tempted to grab the money for repayment of its loan, rather than allowing the home to be re-built. That's exactly what happened to Allen and Julie Hilliker in Ogemaw County after their home suffered a fire loss. They were insured by Wolverine Mutual and elected to have the home re-built. Rebuilding would cost $185,859.51, but the actual cash value of the home was only $119,127.13---less than the $140,000.00 mortgage.
Rather than celebrating the fact that its loan would be secured by a more valuable property, FirstBank Corporation decided it simply wanted the cash value from Wolverine to apply to the mortgage balance. When Wolverine financed the reconstruction instead, FirstBank sued, preventing the home from completion and seeking damages from Wolverine. The Court noted that under the terms of the insurance contract, FirstBank was entitled to be identified as a payee on the check (a point that Wolverine conceded, as the check was erroneously issued only to the Hillikers) but it ruled that FirstBank had no right to apply the check to the mortgage balance rather than re-building.
The mortgagee's right to pay off the mortgage is contingent upon the insurer's denial of the homeowner's damage claim. Since Wolverine did not deny the Hilliker's rights under the policy, FirstBank's right to have the mortgage pay-off check issued to it never ripened. The Court did return the case to the lower court to determine what, if any, damages the bank had suffered by reason of Wolverine's failure to interplead the insurance proceeds as required under its policy.