Department Of Financial Services

OGC Opinion No. 08-05-11


The Office of General Counsel released the following opinion on May 23, 2008, representing the position of the New York Insurance Department.


RE: Mortgage Note Language


Question Presented:


Does the below-quoted mortgage note language breach any arrangement of the New York Insurance Law?


Conclusion:


No. However, the Insurance Law does not govern the material or kind of mortgage notes; the legal requirements for such instruments are set forth in the New York Real Residential Or Commercial Property Law.


Facts:


A questions was made regarding the language of an insurance provision of a mortgage note, which supplies, in relevant part, as follows:


4. Fire, Flood and Other Hazard Insurance. Borrower shall insure all enhancements on the Residential or commercial property ... against any threats, casualties and contingencies, consisting of fire, for which Lender needs insurance coverage.


In the occasion of loss, Borrower shall offer Lender instant notification by mail. Lender might make evidence of loss if not made promptly by Borrower. Each is hereby licensed and directed to pay for such loss straight to Lender, rather of to Borrower and to Lender collectively. All or any part of the insurance coverage earnings might be applied by Lender, at its option, either (a) to the reduction of the insolvency under the Note and this Security Instrument, initially to any overdue amounts used in the order in Paragraph 3, and then to prepayment of principal, or (b) to the repair or repair of the harmed Residential or commercial property.


(Emphasis included.)


The concern asked was whether this language, which appears to need that insurance coverage proceeds be paid straight just to the lender, is permissible under the New york city Insurance Law.


Analysis:


A mortgage note files the responsibility of a customer ("mortgagor") to a loan provider ("mortgagee") with regard to a loan made to purchase genuine residential or commercial property. Accordingly, its terms apply only the parties thereto. The mortgage note language highlighted above, although suggestive, does not, as a general matter, bind an insurance company, as the insurer is not a celebration to the note.


The material and kind of mortgage notes are matters beyond the purview of the Insurance Law and this Department. The New York Real Residential or commercial property Law governs the wording and building and construction of the numerous documents event to the transfer of real residential or commercial property interests. In specific, New York Real Residential Or Commercial Property Law § 254( 4) supplies that any requirement in a mortgage note that the debtor keep any improvements guaranteed will be construed as needing that the customer must acquire insurance coverage for the advantage of the lender topic to certain conditions. That statute reads, in pertinent part, as follows:


In mortgages of genuine residential or commercial property and in bonds and notes protected thereby ... the following or similar stipulations and covenants should be construed as follows:


* * * * *


4. Mortgagor to keep buildings insured.


(a) A covenant "that the mortgagor will keep the buildings on the premises guaranteed versus loss by fire for the benefit of the mortgagee; that he will designate and deliver the policies to the mortgagee; which he will compensate the mortgagee for any premiums paid for insurance made by the mortgagee on the mortgagor's default in so guaranteeing the buildings or in so appointing and delivering the policies," shall be construed as indicating that the mortgagor ... will, throughout all the time until the money protected by the mortgage will be fully paid and satisfied, keep the buildings put up on the premises guaranteed against loss or damage by fire, to a total up to be approved by the mortgagee not surpassing in the aggregate one hundred per centum of their complete insurable worth and in a business or companies to be approved by the mortgagee, and will designate and provide the policy or policies of such insurance coverage to the mortgagee ... which policy or policies will have backed thereon the basic New york city mortgagee clause in the name of the mortgagee, so and in such way and form that he and they will at all time and times, until the full payment of said moneys, have and hold the said policy or policies as a collateral and additional security for the payment of stated moneys, and in default of so doing, that the mortgagee ... might make such insurance from year to year, in an amount in the aggregate not exceeding one hundred per centum of the complete insurable worth of stated structures set up on the mortgaged properties for the functions aforesaid, and pay the premium or premiums therefor, and that the mortgagor will pay to the mortgagee ... such premium or premiums so paid, with interest from the time of payment, on need, and that the very same shall be deemed to be protected by the mortgage, and shall be collectible thereupon and therefore in like way as the primary moneys, which need to the mortgagee by factor of such insurance versus loss by fire receive any sum or sums of cash for damage by fire, and ought to the mortgagee maintain such insurance coverage cash rather of paying it over to the mortgagor, the mortgagee's right to keep the same and his responsibility to apply it in payment of or on account of the amount secured by the mortgage and in complete satisfaction or reduction of the lien thereof will be restricted and certified as hereafter in this paragraph offered. Said insurance coverage cash so gotten by the mortgagee will be held by him as trust funds until paid over or used as hereinafter offered. If the mortgagor shall notify the mortgagee in writing within thirty days after the fire that the mortgaged premises have actually been damaged thereby, and will thereafter make great the damage by ways of such repairs, remediation or restoring as might be needed to bring back the structures to their condition prior to the damage, then upon discussion to the mortgagee within 3 years after the fire of proof that the damage has been completely made great (and if he so requires in writing within thirty days after such discussion of evidence, then upon presentation to the mortgagee within thirty days after such demand of evidence also of the real cost of such repair work, repair and restoring and of the reasonable worth of any part of the work so carried out by the mortgagor) the mortgagee, unless he declines the evidence sent to him as insufficient, shall pay over to the mortgagor a lot of stated insurance cash theretofore received by the mortgagee as does not exceed the lesser of (1) the sensible cost of such repair work, repair and restoring or (2) the overall amount in fact paid consequently by the mortgagor, together with the affordable value of any part of the work done by him. Such evidence will be deemed adequate unless, within sixty days after presentation of all such proof to the mortgagee as aforesaid, he will inform the mortgagor in composing that the evidence is declined. Any excess of stated insurance cash over the quantity so payable to the mortgagor shall be used in reduction of the principal of the mortgage. Provided, nevertheless, that if and so long as there exists any default by the mortgagor in the performance of any of the terms or arrangements of the mortgage on his part to be performed the mortgagee will not be obligated to pay over any of said insurance coverage cash received by him. If the mortgagor will fail to adhere to any of the foregoing provisions within the time or times hereinabove limited, or shall stop working within sixty days after rejection of the proof so sent to start an action versus the mortgagee to recover a lot of said insurance coverage cash as is payable to the mortgagor as hereinabove supplied, or if the entire principal of the mortgage will have ended up being payable by factor of default or maturity, the mortgagee shall use stated insurance cash in complete satisfaction or reduction of the principal of the mortgage; and any excess of stated insurance cash over the amount required to please the mortgage shall be paid to the mortgagor. Unless the court, in any such action, will determine that the mortgagee's rejection of the evidence submitted by the mortgagor prior to the beginning of the action was unreasonable, the mortgagee might balance out the affordable quantity, as figured out by the court, of his expenditure event to the litigation, and may repay himself out of the insurance coverage money for the quantity so determined by the court, of his cost event to the lawsuits, and may reimburse himself out of the insurance money for the quantity so figured out ... The term "mortgagee," as hereinabove utilized, will be considered to include the successors in interest of the mortgagee.


N. Y. Real Prop. Law § 254( 4 )(McKinney Supp. 2008).


The "basic New york city mortgage provision" referenced in the above-quoted statute is a policy provision of the basic New york city fire policy, as mandated by the text of Insurance Law § 3404(e). That provision states cancellation provisions, and allows the mortgagee to submit evidence of loss to the insurance company when the insured fails to do so. The clause, which is stated verbatim in Insurance Law § 3404(e), reads as follows:


If loss hereunder is made payable, in entire or in part, to a designated mortgagee not named herein as the insured, such interest in this policy may be cancelled by offering to such mortgagee ten days' written notification of cancellation.


If the insured fails to render evidence of loss such mortgagee, upon notice, shall render evidence of loss in the type herein specified within sixty (60) days thereafter and will undergo the provisions hereof connecting to appraisal and time of payment and of bringing match. If this Company shall claim that no liability existed regarding the mortgagor or owner, it shall, to the degree of payment of loss to the mortgagee, be subrogated to all the mortgagee's rights of recovery, however without impairing mortgagee's right to take legal action against; or it may settle the mortgage debt and need an assignment thereof and of the mortgage. Other arrangements relating to the interests and obligations of such mortgagee might be included hereto by arrangement in composing.


Real Residential Or Commercial Property Law § 254( 4) acknowledges that a mortgagee will seek to protect its interest in the insured residential or commercial property, and allows mortgage notes to include arrangements that need a mortgagor to preserve insurance on the mortgaged residential or commercial property for the benefit of the mortgagee. Section 254( 4) also contains safeguards to prevent the mortgagee's unjustified enrichment at the cost of the mortgagor with regard to the application of any insurance coverage proceeds payable. But the statute neither specifically enables nor prohibits language of the nature to which the inquirer refers. More importantly, as kept in mind above, the parties to a mortgage note are the loan provider and the borrower only. Any supposed "direction" to an insurer contained in the note can not, as a basic matter, bind the insurance company.