Department Of Financial Services

OGC Opinion No. 08-05-11


The Office of General Counsel provided 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 break any arrangement of the New York Insurance Law?


Conclusion:


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


Facts:


A query was made relating to the language of an insurance coverage stipulation of a mortgage note, which offers, in important part, as follows:


4. Fire, Flood and Other Hazard Insurance. Borrower will insure all enhancements on the Residential or commercial property ... versus any risks, casualties and contingencies, including fire, for which Lender requires insurance.


In case of loss, Borrower shall give Lender instant notice by mail. Lender may make evidence of loss if not made promptly by Borrower. Each insurance provider concerned is thus authorized and directed to pay for such loss straight to Lender, instead of to Borrower and to Lender jointly. All or any part of the insurance coverage proceeds may be applied by Lender, at its option, either (a) to the decrease 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 remediation or repair of the damaged Residential or commercial property.


(Emphasis included.)


The concern asked was whether this language, which appears to require that insurance proceeds be paid straight only to the lending institution, is permissible under the New york city Insurance Law.


Analysis:


A mortgage note files the commitment of a debtor ("mortgagor") to a lending institution ("mortgagee") with respect to a loan made to purchase real residential or commercial property. Accordingly, its terms use only the celebrations thereto. The mortgage note language underscored above, although suggestive, does not, as a general matter, bind an insurer, as the insurance provider is not a party to the note.


The content and form 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 of the numerous files incident to the transfer of real 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 customer keep any enhancements insured will be construed as requiring that the customer must obtain insurance for the advantage of the lender subject to certain conditions. That statute reads, in relevant part, as follows:


In mortgages of genuine residential or commercial property and in bonds and notes secured thereby ... the following or similar stipulations and covenants must be interpreted as follows:


* * * * *


4. Mortgagor to keep structures 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; and that he will compensate the mortgagee for any premiums spent for insurance made by the mortgagee on the mortgagor's default in so insuring the structures or in so assigning and providing the policies," shall be construed as meaning that the mortgagor ... will, during all the time until the money secured by the mortgage will be completely paid and satisfied, keep the structures put up on the premises insured against loss or damage by fire, to a quantity 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 business to be authorized by the mortgagee, and will assign and provide the policy or policies of such insurance coverage to the mortgagee ... which policy or policies shall have endorsed thereon the standard New york city mortgagee clause in the name of the mortgagee, so and in such way and kind that he and they will at all time and times, till the complete payment of stated cash, have and hold the said policy or policies as a collateral and more security for the payment of stated cash, and in default of so doing, that the mortgagee ... might make such insurance coverage from year to year, in an amount in the aggregate not going beyond one hundred per centum of the full insurable worth of stated buildings erected 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, as needed, and that the exact same will be deemed to be protected by the mortgage, and shall be collectible thereupon and consequently in like manner as the principal cash, and that ought to the mortgagee by reason of such insurance coverage against loss by fire get any amount or sums of money for damage by fire, and should the mortgagee maintain such insurance coverage money instead of paying it over to the mortgagor, the mortgagee's right to maintain the very same and his responsibility to use it in payment of or on account of the amount secured by the mortgage and in fulfillment or reduction of the lien thereof will be restricted and qualified as hereafter in this paragraph provided. Said insurance coverage money so gotten by the mortgagee will be held by him as trust funds till paid over or applied as hereinafter offered. If the mortgagor will inform the mortgagee in composing within thirty days after the fire that the mortgaged premises have actually been damaged thus, and shall afterwards make great the damage by means of such repairs, restoration or rebuilding as might be required to bring back the buildings 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 totally made good (and if he so demands in writing within thirty days after such presentation of evidence, then upon discussion to the mortgagee within thirty days after such need of proof likewise of the real cost of such repair work, restoration and rebuilding and of the reasonable value of any part of the work so carried out by the mortgagor) the mortgagee, unless he turns down the evidence sent to him as inadequate, will pay over to the mortgagor a lot of said insurance cash theretofore gotten by the mortgagee as does not go beyond the lesser of (1) the reasonable cost of such repairs, repair and restoring or (2) the overall quantity really paid therefor by the mortgagor, together with the reasonable value of any part of the work done by him. Such proof will be considered enough unless, within sixty days after presentation of all such evidence to the mortgagee as aforesaid, he shall alert the mortgagor in composing that the proof is rejected. Any excess of said insurance cash over the quantity so payable to the mortgagor shall be applied in decrease 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 arrangements of the mortgage on his part to be performed the mortgagee will not be obliged to pay over any of stated insurance money received by him. If the mortgagor will fail to abide by any of the foregoing provisions within the time or times hereinabove limited, or shall fail within sixty days after rejection of the evidence so sent to begin an action against the mortgagee to recover so much of stated insurance coverage cash as is payable to the mortgagor as hereinabove supplied, or if the whole principal of the mortgage shall have ended up being payable by reason of default or maturity, the mortgagee shall apply said insurance coverage cash in satisfaction or decrease of the principal of the mortgage; and any excess of said insurance coverage cash over the quantity needed to satisfy the mortgage shall be paid to the mortgagor. Unless the court, in any such action, will figure out that the mortgagee's rejection of the proof sent by the mortgagor prior to the beginning of the action was unreasonable, the mortgagee might balance out the reasonable amount, as figured out by the court, of his expense occurrence to the lawsuits, and may reimburse himself out of the insurance money for the amount so determined by the court, of his expenditure event to the lawsuits, and may repay himself out of the insurance money for the amount so determined ... The term "mortgagee," as hereinabove used, shall be deemed to consist of the successors in interest of the mortgagee.


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


The "standard 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 stipulation sets forth cancellation provisions, and allows the mortgagee to submit evidence of loss to the insurance company when the insured fails to do so. The provision, which is stated 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 called herein as the guaranteed, such interest in this policy might be by providing to such mortgagee ten days' written notification of cancellation.


If the insured fails to render proof of loss such mortgagee, upon notice, shall render proof of loss in the form herein specified within sixty (60) days thereafter and shall undergo the arrangements hereof associating with appraisal and time of payment and of bringing suit. If this Company will declare 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, but without impairing mortgagee's right to take legal action against; or it may pay off the mortgage debt and require a project thereof and of the mortgage. Other provisions connecting to the interests and responsibilities of such mortgagee may be added hereto by arrangement in composing.


Real Residential Or Commercial Property Law § 254( 4) recognizes that a mortgagee will seek to safeguard its interest in the insured residential or commercial property, and permits mortgage notes to include arrangements that need a mortgagor to maintain insurance coverage on the mortgaged residential or commercial property for the benefit of the mortgagee. Section 254( 4) likewise consists of safeguards to prevent the mortgagee's unfair enrichment at the cost of the mortgagor with respect to the application of any insurance coverage continues payable. But the statute neither expressly enables nor prohibits language of the nature to which the inquirer refers. More significantly, as kept in mind above, the celebrations to a mortgage note are the lending institution and the debtor only. Any supposed "direction" to an insurer contained in the note can not, as a general matter, bind the insurance company.