SACRAMENTO, Calif. — The California Legislature has approved a new law requiring lenders to pay homeowners at least 2% interest on insurance funds held in escrow after property damage, ensuring that disaster survivors receive the financial benefit of interest that insurance payouts accrue rather than letting lenders keep it. GV Wire
The measure — Assembly Bill 493 — aims to correct a longstanding gap in California law that allowed lenders to profit from interest on insurance proceeds held while homeowners rebuilt or repaired their properties following wildfires, earthquakes, or other disasters. Governor of California
What the New Law Does
Under Assembly Bill 493, lenders and financial institutions that hold hazard insurance proceeds in a loss draft or escrow account while repairs or rebuilding occur must:
- Pay homeowners at least 2 percent interest annually on those insurance funds.
- Credit that interest to the homeowner’s account each year or when the account closes.
- Refrain from charging fees or maintaining the funds in a way that reduces the interest homeowners receive. Governor of California
This ensures that when insurance settlements are delayed — often for months or even years after a major disaster — homeowners still benefit from any interest the funds generate instead of the lender earning it. Of Interest
Why the Change Was Made
Recent devastating wildfire seasons, particularly in the Greater Los Angeles area, highlighted the issue. Insurance payouts following disasters are typically placed in escrow accounts while repairs are completed. Under previous law, lenders could keep the interest earned on those funds — even though homeowners were ultimately rebuilding their properties. abnk.assembly.ca.gov
Supporters of the bill, including its legislative sponsors and homeowner advocates, argued that this practice was unfair to disaster-affected homeowners who were already facing financial hardship and rebuilding costs. The law aligns treatment of insurance settlement funds with longstanding requirements for other property-related escrow funds, such as those for property taxes and insurance premiums. abnk.assembly.ca.gov
Support and Implementation
The bill passed through the state Legislature with bipartisan backing and was sent to Governor Gavin Newsom for signature. Lawmakers emphasized that the measure provides meaningful economic relief to families recovering from disasters without imposing new burdens on lenders beyond established escrow-interest norms. GV Wire
The new requirements took effect immediately upon enactment as an urgency statute, allowing homeowners currently holding insurance proceeds in loss draft accounts to begin accruing interest right away. Of Interest
Broader Context: California’s Insurance Landscape
California has been aggressively reforming its insurance laws in response to rising homeowner insurance costs and market instability driven by frequent wildfires and climate risks. Alongside AB 493, the Legislature recently approved other measures to support homeowners and stabilize the insurance market, including stronger wildfire mitigation incentives and protections in the state’s FAIR Plan — the insurer of last resort for properties that private insurers won’t cover. Governing
What Homeowners Need to Know
If you’re a homeowner in California:
- Your lender must pay interest on insurance funds held for repairs or rebuilding at 2 percent or more while they remain in escrow.
- You should confirm with your mortgage servicer that any insurance proceeds are being placed in an interest-bearing account.
- Review your escrow statements and ask for documentation if interest credits are not appearing as required under the new law. Governor of California
Why This Matters: By ensuring homeowners benefit from interest on insurance payouts — especially after disasters — the California Legislature’s action delivers real financial relief and strengthens homeowner protections at a time of increasing climate-related property losses.