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Fire Insurance Withholding FAQ

What is the purpose of the fire insurance withholding program?
Municipalities - How to participate?
Municipalities - Under which section shall we enroll?
Besides population requirements, are there any differences between Sections 2845 and 2227?
Is a mobile home considered "real property" for purposes of this program?
Are all losses covered by this program?
Insurance Companies - How do we calculate the escrow amount?
Is the maximum escrow amount the total that can be in the account, or the maximum amount per claim?
How does the program work?
When can the money be disbursed after it has been escrowed?
What if I want to sell the property "as is" and the new owner agrees to the repairs?
Why do some people call it PA 495 when we refer to it simply as the fire insurance withholding program?
Insurance Company - Where can I get the forms to notify the involved parties that the loss meets the eligibility criteria of the Fire Insurance Withholding Program?
Insurance Company/Municipality - Who should the escrow check be payable to?
Municipality - What if the insurance company failed to notify us about the escrow opportunity, and paid the insured in full?

 

Question What is the purpose of the fire insurance withholding program?
Answer The program is designed to provide municipalities with some financial protection against the cost of cleaning up a damaged structure following a fire loss. Participating municipalities may be eligible to receive a portion of a policyholder's final settlement to be held in a specified escrow account until the structure is repaired, replaced, or demolished, at which time the escrow funds would be released by the municipality back to the property owner. If the property owner does not repair the structure, the municipality may use the funds to repair, replace, or demolish the damaged structure.
Question
Municipalities - How to participate:
Answer
The Office of Financial and Insurance Regulation (OFIR) compiles and maintains the list of participating municipalities. The list is updated quarterly and is sent electronically to all property and casualty insurance companies, each participating municipality, and OFIR's list of Interested Parties. In order to participate, municipalities must pass a resolution and submit it to OFIR along with the completed appropriate application; the effective date of participation will be 30 days after OFIR's next publication. Instructions and forms are on OFIR's website at: http://www.michigan.gov/documents/cis_ofis_pa495web_25003_7.pdf
Question
Municipalities - Under which section shall we enroll?
Answer
Enrollment in this program is based on the population of the municipality and/or the county in which it is located.
a) Section 2227 of the Insurance Code applies to any municipality that is located in:
i) Counties of 425,000 or more, regardless of the size of the municipality (currently Genesee, Kent, Macomb, Oakland, Wayne), or
ii) Cities of 50,000 or more, regardless of the size of the county.

Ann Arbor (not yet enrolled)
Battle Creek (enrolled)
Kalamazoo (enrolled)
Lansing (enrolled)
Saginaw (enrolled)
Ypsilanti (enrolled)
b) Section 2845 of the Insurance Code applies to all other municipalities.
Question
Besides population requirements, are there any differences between Sections 2845 and 2227?
Answer
The only other difference between the two code sections is that additional perils are eligible for larger municipalities:
Section 2845 pertains to real property caused by fire or explosion.
Section 2227 pertains to real property caused by fire or explosion, as well as losses caused by the perils of vandalism, malicious mischief, wind, hail, riot, or civil commotion.
Question
Is a mobile home considered "real property" for purposes of this program?
Answer
If the structure has utilities attached and/or a foundation, and permanent residents, OFIR considers this a permanent structure and, therefore, included in the definition of real property.
Question
Are all losses covered by this program?
Answer
No, losses caused by the perils referenced in #4 above must also meet the following guidelines of the program:
a. Damage exceeds 49% of the insurance on the real property, AND
b. The property is located within the boundaries of a municipality that is participating in the program,
AND
c. The insurance company has no evidence that the insured has hired a licensed contractor for repairs to
the property (within 15 days after agreement on final settlement).
Question
Insurance Companies - How do we calculate the escrow amount?
Answer
The amount to be escrowed is 25% of the actual cash value of the insured real property at time of loss, OR 25% of the final settlement, whichever is less. For residential property, the escrow amount per claim shall not exceed $7,873* (effective 6/1/11).

*The maximum escrow amount is adjusted annually by OFIR in accordance with the consumer price index; the adjusted amount is reflected in the upper right corner of the published list of participating municipalities, which is on OFIR's website at: http://www.michigan.gov/documents/cis_ofis_pa495lst_25173_7.pdf

For commercial property, the amount to be escrowed is 25% of the final settlement, with no maximum.
Question
Is the maximum escrow amount the total that can be in the account, or the maximum amount per claim?
Answer
The maximum escrow amount, which is updated annually, is per policy—not the total that can be in the account.
Question
How does the program work?
Answer
Municipalities – What do I need to do after a loss has occurred in our municipality?

The responsibility is on the insurance company to notify you; however, if you wish to be proactive, you may contact the insurance company, if known, to remind them the loss has occurred in a participating municipality and you are interested in having the eligible amount of the settlement placed in escrow.

Insurance Company & Municipality responsibilities - In the event of a loss in one of the participating municipalities the following steps should occur:

a. Within 15 days after agreement on a final settlement between the insured and the insurer, the insurance company determines whether the loss meets the guidelines of the program (see #6 above). If the insured has filed with the insurer evidence of a contract to repair the property and consents to the payment of funds directly to the contractor performing the repair services, the insurer should notify the participating municipality there will not be a withholding because of repair contract. (Per Section 13 of 500.2845 & 500.2227).
b. If the program eligibility guidelines are met, the insurer sends written notice of the withholding to the:
i. contact person listed for the particular municipality;
ii. to the insured; and
iii. to any mortgagee.
(Section 1 of 500.2227 & 500.2845 covers the required elements of this written notification.)
c. The municipality has 15 days after the mailing of the notice from the insurance company to respond and request the withheld amount be paid into its escrow account (Section 1f). A copy of the municipality's response to the insurance company to have the funds paid into the escrow account must also be sent to the insured and any mortgagees advising that they have 10 days from the mailing to object to the retention of the withheld amount (Section 2).
Question
When can the money be disbursed after it has been escrowed?
Answer
The municipality must immediately forward the policy proceeds, except any interest earned while in escrow, to the insured or to the service contractor as outlined below upon reasonable proof (defined in Section 5 of 500.2227 or 500.2845) of one of the following:
a. The funds are to be paid to the insured once the structure has been repaired or replaced (at least to the point where the remaining funds are needed to complete such work); or removed in compliance with local code requirements.
b. If the insured has entered into a contract for the repair, replacement, or removal of the damaged structure and consents to payment of the funds directly to the contractor upon completion of the project.
c. The insured may seek resolution with the municipality or seek relief in circuit court if they feel the municipality has not properly disbursed the funds.
Question

What if I want to sell the property "as is" and the new owner agrees to the repairs?

Answer
The municipality is not obligated to release funds until the hazard is repaired, replaced, or demolished. The funds should be released to the insured at that time, or the insured may seek relief in circuit court.
Question
Why do some people call it PA 495 when we refer to it simply as the fire insurance withholding program?
Answer
Public Act 495 was the original act that created the program under Section 2845 of the Insurance Code. Public Act 495 was replaced effective January 1, 1999, with Public Act 216 (now referred to as Section 2845) and Public Act 217 (Section 2227) which divided the previous program into two parts, with participation in each part determined by population.
Question
Insurance Company - Where can I get the forms to notify the involved parties that the loss meets the eligibility criteria of the Fire Insurance Withholding Program?
Answer
OFIR does not have a form; each insurance company is responsible for their own form or letter.
Question
Insurance Company/Municipality - Who should the escrow check be payable to?
Answer
The check should be payable to the municipality; it should not be a two-party check. (The FIW Code releases the insurance company from liability.) 
Question
Municipality - What if the insurance company failed to notify us about the escrow opportunity, and paid the insured in full?
Answer
If the loss meets all of the criteria and the insurance company settled the claim without providing the municipality the opportunity to have a portion of the money put into their escrow account, the municipality should file a written complaint with OFIR (which will be assigned to the FIW analyst). The complaint should include the name of policyholder/property owner, date of loss, and name of insurance company. The complaint form is on OFIR's website at: http://www.michigan.gov/documents/cis_ofis_comp_all_25074_7.pdf
   

The answers provided are not meant to be a substitute for legal advice.