A Michigan attorney is challenging a little-known state program that allows participating local governments to withhold a portion of insurance proceeds after a property is damaged by fire, arguing the system can make it harder for victims to rebuild.
Attorney Philip Ellison of Outside Legal Counsel said Michigan’s fire insurance withholding program can allow participating municipalities to receive up to 25% of certain insurance proceeds before the remaining money reaches the policyholder.
The money is held as a way to ensure fire-damaged property is repaired or demolished rather than abandoned.
Ellison argues the system can create a financial catch-22 for property owners who need their insurance money to pay for the very work required to get the withheld money released.
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“The problem is, if you want to rebuild or you want to demo, where are you going to get the money?” Ellison said. “That’s what the insurance money was there to pay for.”
Ellison said his firm is involved in several lawsuits challenging the program, including cases involving Port Huron and Detroit.
In one case, Ellison said he represents the owner of a banquet or meeting hall in the Port Huron area that was damaged by fire. According to Ellison, the owner was initially due approximately $1 million in insurance proceeds, but a local township received nearly $275,000 under the withholding program.
Ellison said that left the property owner without money he otherwise could have used to recover from the fire.
“Of course, what that’s caused is he doesn’t have enough money to get back on his feet because the money that was supposed to be available to him to get back on his feet, a large chunk of it’s gone at this point,” Ellison said.
Ellison acknowledged the government does not necessarily keep the principal permanently. Instead, the money can be held until requirements involving the damaged property are satisfied.
But he said that creates another problem. A property owner who needs the withheld portion to complete repairs or demolition may have to borrow money and pay interest while the government holds the insurance proceeds.
Ellison also said the withheld funds can generate interest while being held by the government.
His firm is arguing that the withholding system violates the Takings Clause of the Fifth Amendment, which generally prohibits the government from taking private property for public use without just compensation.
Ellison said the central legal question includes when insurance proceeds legally become the property of the policyholder.
In a Detroit federal case, Ellison said the judge has so far rejected his side’s position, finding that the withheld insurance money was not yet the fire victim’s property because it had not reached the policyholder.
Ellison said his firm disagrees with that reasoning and intends to appeal.
“We simply disagree with that,” Ellison said. “We’re going to be appealing that.”
Ellison said his firm has received more favorable decisions involving other aspects of its challenges elsewhere, describing the constitutional questions surrounding the program as a developing area of law.
The attorney acknowledged the public-policy argument behind the program. Communities have an interest in preventing owners from collecting insurance proceeds and abandoning burned-out buildings that could become dangerous or blighted.
Ellison argues, however, that municipalities could accomplish that goal without withholding such a large portion of insurance proceeds from people trying to recover from fires.
“I get what they’re trying to do at a basic level, which is we don’t want people to have burnt out houses just abandoned and the owner walks away with the insurance proceeds,” Ellison said. “Fair point.”
But Ellison said he believes there are better ways to accomplish that goal than withholding money until local government requirements are satisfied.
Ellison said the program can be particularly difficult for fire victims because many people do not know it exists until they suffer a major loss.
He said Outside Legal Counsel is challenging the withholding system involving municipalities across Michigan and encouraged property owners who have encountered the issue to seek legal guidance.
The constitutional claims described by Ellison remain disputed legal arguments, and at least one federal judge has ruled against his position on a key issue. The litigation remains ongoing.