OGC Opinion No. 08-05-11

The Office of General Counsel released the following viewpoint 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 violate any provision of the New york city 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 stated in the New york city Real Residential Or Commercial Property Law.

Facts:

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

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

In case of loss, Borrower will give Lender immediate notification by mail. Lender may make proof of loss if not made without delay by Borrower. Each insurance company concerned is thus authorized and directed to pay for such loss directly to Lender, rather of to Borrower and to Lender jointly. All or any part of the insurance coverage proceeds may be used by Lender, at its choice, either (a) to the reduction of the indebtedness under the Note and this Security Instrument, initially to any delinquent quantities applied in the order in Paragraph 3, and after that to prepayment of principal, or (b) to the repair or repair work of the damaged Residential or commercial property.

(Emphasis added.)

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

Analysis:

A mortgage note files the commitment of a customer ("mortgagor") to a lender ("mortgagee") with regard to a loan made to acquire genuine residential or commercial property. Accordingly, its terms use just the parties thereto. The mortgage note language underscored above, although suggestive, does not, as a general matter, bind an insurance provider, as the insurance company 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 construction of the numerous files incident to the transfer of genuine residential or commercial property interests. In specific, New york city Real Residential Or Commercial Property Law § 254( 4) offers that any requirement in a mortgage note that the customer keep any improvements insured will be construed as needing that the customer should obtain insurance coverage for the advantage of the loan provider subject to specific conditions. That statute checks out, in pertinent part, as follows:

In mortgages of genuine residential or commercial property and in bonds and notes protected therefore ... the following or similar stipulations and covenants need to be interpreted as follows:

* * * * *

4. Mortgagor to keep buildings insured.

(a) A covenant "that the mortgagor will keep the buildings on the facilities guaranteed versus loss by fire for the advantage of the mortgagee; that he will assign and provide the policies to the mortgagee; and that he will repay the mortgagee for any premiums paid for insurance coverage made by the mortgagee on the mortgagor's default in so insuring the buildings or in so designating and providing the policies," will be interpreted as implying that the mortgagor ... will, throughout all the time up until the cash protected by the mortgage shall be fully paid and pleased, keep the buildings erected on the facilities insured versus loss or damage by fire, to a total up to be approved by the mortgagee not exceeding in the aggregate one hundred per centum of their full insurable value and in a company or business to be authorized 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 backed thereon the basic New york city mortgagee provision 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 full payment of said cash, have and hold the said policy or policies as a security and additional security for the payment of said moneys, 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 exceeding one hundred per centum of the full insurable worth of stated structures erected on the mortgaged facilities for the purposes aforesaid, and pay the premium or premiums consequently, which the mortgagor will pay to the mortgagee ... such premium or premiums so paid, with interest from the time of payment, on need, which the same will be deemed to be secured by the mortgage, and shall be collectible thereupon and consequently in like manner as the principal moneys, which ought to the mortgagee by factor of such insurance versus loss by fire get any sum or amounts of money for damage by fire, and ought to the mortgagee retain such insurance money rather of paying it over to the mortgagor, the mortgagee's right to keep the exact same and his responsibility to use it in payment of or on account of the amount secured by the mortgage and in satisfaction or decrease of the lien thereof shall be limited and qualified as hereafter in this paragraph supplied. Said insurance cash so received by the mortgagee shall be held by him as trust funds until paid over or applied as hereinafter supplied. If the mortgagor will inform the mortgagee in composing within thirty days after the fire that the mortgaged properties have been harmed therefore, and will thereafter make great the damage by ways of such repair work, restoration or restoring as may be needed to restore the structures to their condition prior to the damage, then upon discussion to the mortgagee within three years after the fire of evidence that the damage has actually been fully made great (and if he so requires in composing within thirty days after such discussion of proof, then upon discussion to the mortgagee within thirty days after such need of evidence also of the real cost of such repair work, restoration and rebuilding and of the affordable value of any part of the work so performed by the mortgagor) the mortgagee, unless he declines the proof sent to him as insufficient, shall pay over to the mortgagor a lot of stated insurance coverage money theretofore gotten by the mortgagee as does not surpass the lesser of (1) the affordable expense of such repairs, remediation and restoring or (2) the overall amount really paid consequently by the mortgagor, together with the sensible worth of any part of the work done by him. Such evidence shall be deemed sufficient unless, within sixty days after presentation of all such evidence to the mortgagee as aforesaid, he shall alert the mortgagor in composing that the evidence is declined. Any excess of said insurance money over the quantity so payable to the mortgagor will be applied in decrease of the principal of the mortgage. Provided, nevertheless, that if therefore 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 bound to pay over any of said insurance cash gotten by him. If the mortgagor shall fail to adhere to any of the foregoing arrangements within the time or times hereinabove limited, or shall stop working within sixty days after rejection of the evidence so sent to commence an action versus the mortgagee to recuperate a lot of said insurance money as is payable to the mortgagor as hereinabove provided, or if the whole principal of the mortgage will have become payable by reason of default or maturity, the mortgagee will use stated insurance cash in complete satisfaction or decrease of the principal of the mortgage; and any excess of stated insurance cash over the quantity needed to please the mortgage will be paid to the mortgagor. Unless the court, in any such action, shall identify that the mortgagee's rejection of the proof submitted by the mortgagor prior to the start of the action was unreasonable, the mortgagee may offset the affordable amount, as figured out by the court, of his expenditure incident to the lawsuits, and might reimburse himself out of the insurance coverage money for the amount so determined by the court, of his expenditure occurrence to the litigation, and may reimburse himself out of the insurance money for the quantity so identified ... The term "mortgagee," as hereinabove utilized, will be considered to consist of the followers in interest of the mortgagee.

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

The "basic New york city mortgage stipulation" 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 permits the mortgagee to send proof of loss to the insurer when the insured stops working 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 guaranteed, such interest in this policy may be cancelled by providing to such mortgagee 10 days' composed notification of cancellation.

If the insured stops working to render evidence of loss such mortgagee, upon notification, will render proof of loss in the form herein specified within sixty (60) days afterwards and shall undergo the provisions hereof associating with appraisal and time of payment and of bringing suit. If this Company shall claim that no liability existed regarding 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 recovery, but without impairing mortgagee's right to take legal action against; or it may pay off the mortgage debt and need an assignment thereof and of the mortgage. Other arrangements associating with the interests and commitments of such mortgagee may be included hereto by contract in writing.

Real Residential Or Commercial Property Law § 254( 4) acknowledges that a mortgagee will seek to safeguard its interest in the insured residential or commercial property, and allows mortgage notes to contain 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) likewise contains safeguards to avoid the mortgagee's unjustified enrichment at the expense of the mortgagor with regard to the application of any insurance proceeds payable. But the statute neither expressly permits nor prohibits language of the nature to which the inquirer refers. More significantly, as noted above, the parties to a mortgage note are the lender and the customer only. Any purported "direction" to an insurance provider contained in the note can not, as a basic matter, bind the insurer.