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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 city Insurance Department.

RE: Mortgage Note Language

Question Presented:

Does the below-quoted mortgage note language breach any provision of the New york city Insurance Law?

Conclusion:

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

Facts:

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

4. Fire, Flood and Other Hazard Insurance. Borrower shall guarantee all enhancements on the Residential or commercial property … versus any hazards, casualties and contingencies, consisting of fire, for which Lender needs insurance.

In case of loss, Borrower will offer Lender immediate notification by mail. Lender might make proof of loss if not made quickly by Borrower. Each insurance provider concerned is hereby licensed and directed to make payment for such loss directly to Lender, instead of to Borrower and to Lender collectively. All or any part of the insurance profits may be applied by Lender, at its alternative, either (a) to the reduction of the insolvency under the Note and this Security Instrument, initially to any overdue quantities used in the order in Paragraph 3, and then to prepayment of principal, or (b) to the restoration or repair work of the harmed Residential or commercial property.

(Emphasis added.)

The question asked was whether this language, which to require that insurance continues be paid straight just to the lender, is allowable under the New York Insurance Law.

Analysis:

A mortgage note documents the obligation of a borrower (“mortgagor”) to a loan provider (“mortgagee”) with regard to a loan made to buy real residential or commercial property. Accordingly, its terms apply just the parties thereto. The mortgage note language underscored above, although suggestive, does not, as a basic matter, bind an insurance provider, as the insurance company is not a celebration to the note.

The material and kind of mortgage notes are matters beyond the province of the Insurance Law and this Department. The New York Real Residential or commercial property Law governs the phrasing and construction of the numerous files event to the transfer of genuine residential or commercial property interests. In particular, New york city Real Residential Or Commercial Property Law § 254( 4) provides that any requirement in a mortgage note that the borrower keep any enhancements guaranteed will be construed as needing that the debtor needs to obtain insurance for the benefit of the lender subject to specific conditions. That statute reads, in relevant part, as follows:

In mortgages of real residential or commercial property and in bonds and notes protected thereby … the following or similar stipulations and covenants must be construed as follows:

* * * * *

4. Mortgagor to keep buildings guaranteed.

(a) A covenant “that the mortgagor will keep the structures on the premises guaranteed against loss by fire for the benefit of the mortgagee; that he will designate and provide the policies to the mortgagee; which he will repay the mortgagee for any premiums paid for insurance made by the mortgagee on the mortgagor’s default in so insuring the buildings or in so assigning and providing the policies,” will be interpreted as implying that the mortgagor … will, throughout all the time until the cash protected by the mortgage will be fully paid and satisfied, keep the structures erected on the properties guaranteed against loss or damage by fire, to a total up to be approved by the mortgagee not going beyond in the aggregate one hundred per centum of their complete insurable value and in a business or business to be approved by the mortgagee, and will appoint and provide the policy or policies of such insurance coverage to the mortgagee … which policy or policies will have endorsed thereon the standard New york city mortgagee stipulation in the name of the mortgagee, so and in such manner and kind that he and they shall at all time and times, until the complete payment of said moneys, have and hold the said policy or policies as a collateral and more security for the payment of said cash, and in default of so doing, that the mortgagee … may make such insurance from year to year, in a quantity in the aggregate not surpassing one hundred per centum of the full insurable worth of stated buildings set up on the mortgaged premises for the purposes aforesaid, and pay the premium or premiums consequently, 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 thus in like way as the primary cash, which must the mortgagee by reason of such insurance coverage versus loss by fire get any sum or amounts of cash for damage by fire, and must the mortgagee keep such insurance money instead of paying it over to the mortgagor, the mortgagee’s right to retain the exact same and his task to use it in payment of or on account of the sum protected by the mortgage and in fulfillment or decrease of the lien thereof shall be restricted and qualified as hereafter in this paragraph provided. Said insurance coverage money so gotten by the mortgagee shall be held by him as trust funds up until paid over or applied as hereinafter provided. If the mortgagor will alert the mortgagee in composing within thirty days after the fire that the mortgaged properties have been damaged thus, and will afterwards make great the damage by ways of such repair work, remediation or rebuilding as may be necessary to bring back the structures to their condition prior to the damage, then upon presentation to the mortgagee within three years after the fire of proof that the damage has actually been completely made great (and if he so requires in composing within thirty days after such presentation of proof, then upon discussion to the mortgagee within thirty days after such need of evidence likewise of the actual cost of such repairs, restoration and rebuilding and of the sensible worth of any part of the work so performed by the mortgagor) the mortgagee, unless he turns down the proof sent to him as inadequate, shall pay over to the mortgagor a lot of stated insurance coverage money theretofore received by the mortgagee as does not surpass the lower of (1) the affordable cost of such repair work, restoration and restoring or (2) the total amount really paid therefor by the mortgagor, together with the reasonable worth of any part of the work done by him. Such proof shall be considered sufficient unless, within sixty days after presentation of all such proof to the mortgagee as aforesaid, he shall alert the mortgagor in writing that the evidence is declined. Any excess of stated insurance cash over the quantity so payable to the mortgagor will be used in reduction of the principal of the mortgage. Provided, however, that if and so long as there exists any default by the mortgagor in the efficiency of any of the terms or provisions of the mortgage on his part to be carried out the mortgagee shall not be obliged to pay over any of said insurance money received by him. If the mortgagor will stop working to adhere to any of the foregoing provisions within the time or times hereinabove limited, or shall fail within sixty days after rejection of the proof so sent to start an action against the mortgagee to recuperate a lot of stated insurance coverage money as is payable to the mortgagor as hereinabove offered, or if the whole principal of the mortgage will have ended up being payable by reason of default or maturity, the mortgagee will apply stated insurance coverage cash in satisfaction or decrease of the principal of the mortgage; and any excess of stated insurance coverage cash over the quantity required to satisfy the mortgage shall be paid to the mortgagor. Unless the court, in any such action, shall figure out that the mortgagee’s rejection of the proof submitted by the mortgagor prior to the commencement of the action was unreasonable, the mortgagee might offset the affordable amount, as figured out by the court, of his expenditure occurrence to the litigation, and may compensate himself out of the insurance coverage money for the quantity so identified by the court, of his cost event to the lawsuits, and may repay himself out of the insurance cash for the quantity so determined … The term “mortgagee,” as hereinabove used, will be considered to consist of the followers in interest of the mortgagee.

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

The “standard New york city mortgage clause” referenced in the above-quoted statute is a policy arrangement of the standard New York fire policy, as mandated by the text of Insurance Law § 3404(e). That clause states cancellation arrangements, and enables the mortgagee to submit evidence of loss to the insurance company when the insured stops working to do so. The stipulation, which is set forth verbatim in Insurance Law § 3404(e), checks out as follows:

If loss hereunder is made payable, in whole or in part, to a designated mortgagee not named herein as the insured, such interest in this policy might be cancelled by offering to such mortgagee 10 days’ composed notice of cancellation.

If the insured fails to render evidence of loss such mortgagee, upon notification, will render proof of loss in the kind herein defined within sixty (60) days afterwards and shall be subject to the provisions hereof associating with appraisal and time of payment and of bringing match. If this Company will declare that no liability existed as to the mortgagor or owner, it shall, to the level of payment of loss to the mortgagee, be subrogated to all the mortgagee’s rights of healing, however without hindering mortgagee’s right to take legal action against; or it may settle the mortgage debt and need a project thereof and of the mortgage. Other arrangements relating to the interests and obligations of such mortgagee may be added hereto by contract in writing.

Real Residential Or Commercial Property Law § 254( 4) recognizes that a mortgagee will seek to secure its interest in the insured residential or commercial property, and enables mortgage notes to include provisions that need a mortgagor to keep insurance coverage on the mortgaged residential or commercial property for the advantage of the mortgagee. Section 254( 4) also contains safeguards to prevent the mortgagee’s unfair enrichment at the expenditure of the mortgagor with respect to the application of any insurance coverage continues payable. But the statute neither expressly allows nor disallows language of the nature to which the inquirer refers. More significantly, as kept in mind above, the celebrations to a mortgage note are the lender and the debtor just. Any supposed “direction” to an insurance company included in the note can not, as a general matter, bind the insurance company.