OGC Opinion No. 08-05-11

The Office of General Counsel issued 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 break any provision 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 city Real Residential Or Commercial Property Law.

Facts:

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

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

In case of loss, Borrower will give Lender immediate notification by mail. Lender may make proof of loss if not made promptly by Borrower. Each insurance provider worried is hereby licensed 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 earnings might be used by Lender, at its choice, either (a) to the reduction of the insolvency under the Note and this Security Instrument, first to any delinquent amounts applied in the order in Paragraph 3, and after that to prepayment of principal, or (b) to the repair or repair of the harmed Residential or commercial property.

(Emphasis included.)

The question asked was whether this language, which appears to need that insurance proceeds be paid directly just to the lending institution, is allowable under the New york city Insurance Law.

Analysis:

A mortgage note files the commitment of a borrower ("mortgagor") to a loan provider ("mortgagee") with respect to a loan made to purchase 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 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 province of the Insurance Law and this Department. The New York Real Residential or commercial property Law governs the wording and building of the different files occurrence to the transfer of genuine residential or commercial property interests. In particular, New York Real Residential Or Commercial Property Law § 254( 4) provides that any requirement in a mortgage note that the debtor keep any enhancements guaranteed will be interpreted as requiring that the debtor must get insurance coverage for the benefit of the loan provider subject to specific conditions. That statute checks out, in pertinent part, as follows:

In mortgages of real residential or commercial property and in bonds and notes protected thus ... the following or similar provisions and covenants must be interpreted as follows:

* * * * *

4. Mortgagor to keep structures guaranteed.

(a) A covenant "that the mortgagor will keep the buildings on the properties insured against loss by fire for the advantage of the mortgagee; that he will assign and provide the policies to the mortgagee; which he will repay the mortgagee for any premiums paid for insurance coverage made by the mortgagee on the mortgagor's default in so guaranteeing the structures or in so appointing and providing the policies," will be construed as meaning that the mortgagor ... will, throughout all the time until the cash secured by the mortgage will be totally paid and satisfied, keep the structures set up on the facilities insured against loss or damage by fire, to a total up to be authorized 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 designate and provide the policy or policies of such insurance to the mortgagee ... which policy or policies will have backed thereon the standard New york city mortgagee provision in the name of the mortgagee, so and in such manner and form that he and they will at all time and times, up until the full payment of stated cash, have and hold the said policy or policies as a collateral and further 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 a quantity in the aggregate not going beyond one hundred per centum of the complete insurable value of said buildings set up on the mortgaged premises for the functions 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, as needed, and that the exact same will be considered to be protected by the mortgage, and shall be collectible thereupon and thereby in like way as the principal moneys, and that ought to the mortgagee by reason of such insurance versus loss by fire get any amount or sums of cash for damage by fire, and ought to the mortgagee keep such insurance coverage cash rather of paying it over to the mortgagor, the mortgagee's right to retain the same and his responsibility to use it in payment of or on account of the sum protected by the mortgage and in complete satisfaction or reduction of the lien thereof will 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 used as hereinafter offered. If the mortgagor will alert the mortgagee in writing within thirty days after the fire that the mortgaged properties have actually been damaged consequently, and will thereafter make great the damage by means of such repairs, remediation or restoring as may be essential to restore the structures to their condition prior to the damage, then upon discussion to the mortgagee within 3 years after the fire of evidence that the damage has been fully made great (and if he so requires in writing within thirty days after such presentation of proof, then upon presentation to the mortgagee within thirty days after such need of evidence also of the actual expense of such repair work, restoration and restoring and of the reasonable worth of any part of the work so performed by the mortgagor) the mortgagee, unless he rejects the evidence sent to him as inadequate, shall pay over to the mortgagor so much of said insurance cash theretofore gotten by the mortgagee as does not exceed the lower of (1) the reasonable cost of such repairs, remediation and rebuilding or (2) the total quantity actually paid therefor by the mortgagor, together with the affordable value of any part of the work done by him. Such proof will be considered sufficient unless, within sixty days after discussion of all such proof to the mortgagee as aforesaid, he shall notify the mortgagor in composing that the evidence is rejected. Any excess of said insurance coverage money over the amount so payable to the mortgagor will be used in decrease of the principal of the mortgage. Provided, nevertheless, that if therefore 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 carried out the mortgagee shall not be obligated to pay over any of stated insurance money received by him. If the mortgagor will stop working to adhere to any of the foregoing arrangements within the time or times hereinabove restricted, or shall stop working within sixty days after rejection of the proof so sent to commence an action versus the mortgagee to recuperate so much of said insurance coverage money as is payable to the mortgagor as hereinabove provided, or if the entire principal of the mortgage will have ended up being payable by factor of default or maturity, the mortgagee shall apply stated insurance cash in fulfillment or reduction of the principal of the mortgage; and any excess of said insurance coverage money over the amount needed to satisfy the mortgage will be paid to the mortgagor. Unless the court, in any such action, shall determine that the mortgagee's rejection of the evidence submitted by the mortgagor prior to the start of the action was unreasonable, the mortgagee might offset the sensible amount, as determined by the court, of his expense incident to the lawsuits, and may repay himself out of the insurance coverage money for the quantity so identified by the court, of his expense incident to the lawsuits, and may compensate himself out of the insurance cash for the amount so figured out ... The term "mortgagee," as hereinabove utilized, shall be deemed to include the successors in interest of the mortgagee.

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

The "basic New York mortgage stipulation" referenced in the above-quoted statute is a policy arrangement of the standard New york city fire policy, as mandated by the text of Insurance Law § 3404(e). That clause states cancellation provisions, and allows the mortgagee to send proof of loss to the insurance provider when the insured stops working to do so. The stipulation, which is set forth verbatim in Insurance Law § 3404(e), reads as follows:

If loss hereunder is made payable, in whole or in part, to a designated mortgagee not named herein as the guaranteed, such interest in this policy may be cancelled by offering to such mortgagee 10 days' written notification of cancellation.

If the insured fails to render proof of loss such mortgagee, upon notification, shall render evidence of loss in the type herein specified within sixty (60) days thereafter and shall undergo the provisions hereof relating to appraisal and time of payment and of bringing match. If this Company shall claim that no liability existed as to 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 hindering mortgagee's right to take legal action against; or it might pay off the mortgage debt and need a task thereof and of the mortgage. Other arrangements connecting to the interests and responsibilities of such mortgagee might 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 permits mortgage notes to consist of arrangements that need a mortgagor to preserve insurance coverage on the mortgaged residential or commercial property for the benefit of the mortgagee. Section 254( 4) likewise contains safeguards to avoid the mortgagee's unjustified enrichment at the expenditure of the mortgagor with respect to the application of any insurance coverage proceeds payable. But the statute neither specifically allows nor prohibits language of the nature to which the inquirer refers. More notably, as noted above, the celebrations to a mortgage note are the loan provider and the borrower only. Any purported "instructions" to an insurance company contained in the note can not, as a basic matter, bind the insurance company.