DS News

43 » VISIT US ONLINE @ DSNEWS.COM Coverage Part at our request if you have failed to do so; (2) Submits a signed, sworn proof of loss within 60 days after receiving notice from us of your failure to do so; and (3) Has notified us of any change in ownership, occupancy or substantial change in risk known to the mortgage holder. All of the terms of this Coverage Part will then apply directly to the mortgage holder. Despite the clear language of a standard mortgage clause, some insurers have denied payment to mortgagees on the theory that the insured's acts or omissions take the cause of loss, and even the insured property itself, outside of the scope of coverage. In a case where the cause of loss argument was raised, however, the standard mortgage clause stated that "loss or damage, if any, under the policy shall be payable as interests may appear… and this insurance as to the interest of the … mortgagee … shall not be invalidated by any act or neglect of the [insured]." Since the policy defined the term "loss" as "direct and accidental loss," the court rejected the insurer's argument that the arson committed by the insured was not accidental and the "cause of loss" was therefore outside the definition of the perils covered by the policy. e argument that the property itself was not covered was made in a case involving residential property. e policy covered damage and loss to the "residence premises." e policy defined the term "residence premises" as "the place where you reside." It was undisputed that the insured had not resided at the insured dwelling for the four years preceding the loss. e court rejected the insurer's argument that the insured's failure to reside at the home took the dwelling outside of the policy's definition of "covered property." Insurers taking these positions have achieved little success invalidating the mortgagee's coverage because they so irreconcilably conflict with the plain language of the mortgagee's independent contract, stating the insured's acts or failure to comply with policy conditions will not invalidate the mortgagee's coverage. e standard mortgage clause so thoroughly insulates a mortgagee from an insured's conduct that even an insured's material misrepresentations in the application for insurance, which permit an insurer to rescind the policy ab initio, will not void a mortgagee's coverage for a loss. Mortgagee Must Comply with Coverage Conditions While it is clear that an insured's acts, omissions, and misrepresentations cannot compromise a mortgagee's right to payment for a covered loss under a standard mortgage clause, a mortgagee must still comply with the conditions of the clause itself. e language emphasized in the excerpted clause quoted above identifies three conditions commonly found in most standard mortgage clauses. ese include: (1) payment of any unpaid premiums; (2) submission of a sworn proof of loss upon request, if the policyholder had not previously done so; and, (3) notification to the insurer of any changes in title, occupancy, or increase in hazard known to the mortgagee. Proof of Loss and Payment of Premiums e obligations to pay unpaid premiums or to submit in a timely manner a sworn proof of loss at the insurer's request are usually self-explanatory and not the subject of legal controversy. However, servicers must ensure that their insurance department and default servicing department openly exchange information relevant to these conditions, are aware of the obligation to submit a proof of loss, and have procedures to actually pay the premiums and submit proof of loss. Change in Occupancy and Increase in Hazard (Foreclosure) A mortgagee's obligation to notify the insurer of any change in ownership, occupancy, or increase in hazard, however, has been the subject of much litigation. One common scenario involves the mortgagee's foreclosure of the insured property. Generally speaking, property loss is not uncommon in the context of mortgagor default and foreclosure. While foreclosure clearly affects title to the property, it is well established in Michigan, for example, that a mortgagee's initiation of foreclosure proceedings and subsequent purchase of the insured property is not considered a "change in ownership" and does not require notification to the insurer, even after the expiration of the redemption period. Nonetheless, in the event that a mortgagee fails to notify the insurer of a foreclosure, the insurer might argue that the mortgagee forfeited coverage if the insured, for example, vacated the property—since that may constitute a change in occupancy or an increase in hazard. erefore, it is essential that servicers maintain a channel of communication between their insurance department and default servicing department, and that those departments have a clear procedure to follow that facilitates compliance with the terms of the standard mortgage clause. In sum, mortgagees should not automatically assume that denial of a mortgagor's property insurance claim means no recovery for the mortgagee. Servicers should note the mortgage loan servicing file in a manner sufficient to identify the type of coverage the mortgagee is afforded in the event of loss. Because insurance policies do not label their mortgage clauses as ordinary or standard, it is their substance that determines their characterization. A mortgage clause that only promises to pay a loss "as interests may appear" in the declarations may be considered an ordinary mortgage clause by the insurer and the mortgagee remains subject to all the defenses the insurer may assert against the insured. e hallmark of a standard mortgage clause is language that states that the conduct of the Insured will not invalidate the mortgagee's coverage. While a mortgagee can expect that no act, omission, or representation of the insured will compromise its coverage, the mortgagee still needs to be cognizant of and comply with its own duties and obligations under the insurance policy. Again, servicers must ensure that their insurance department and default servicing department openly exchange information relevant to these duties and maintain procedures necessary to comply. Lastly, while this article highlights the prevailing interpretation of the standard mortgage clause, which favors the mortgagee, the insurer might nonetheless attempt to challenge the same. In such instances, servicers should consider retaining an attorney with a record of success for defending policyholders, recovering from property insurance providers, and, where applicable, working collaboratively with foreclosure counsel. Tobias J. Lipski is an attorney with Schneiderman & Sherman, P.C., a firm specializing in representation of creditors. He has worked with creditors and property investors to resolve their real estate related issues for over 15 years. Jason J. Liss is an attorney with Fabian, Sklar & King, P.C., a firm specializing in the representation of policyholders in residential and commercial property insurance disputes. "In sum, mortgagees should not automatically assume that denial of a mortgagor's property insurance claim means no recovery for the mortgagee."

• Cover