Foreclosure And Fire Loss – Sue Insurance Company First?

When a fire (or other hazard) destroys (or damages) mortgaged premises, the servicer’s dilemma usually is faced on the eve of sale: hold the sale and possibly lose the insurance interest, or postpone the sale and first pursue the insurance claim?  A new case addresses a different point – and one that could have been a danger. [N.C. Venture I, L.P. v. Complete Analysis, 22 A.D.3d 540, 803 N.Y.S. 2d 95 ( 2d Dept. 2005)].  There, at the inception of an action, the question was,  if there is a fire loss, must a mortgage holder sue the insurance company before it can foreclose?

“Yes, “ said the trial court judge in dismissing the foreclosing plaintiff’s foreclosure action (yikes!). “Of course not,” said the appeals court.

The final answer is the most important part, but here is a little detail to highlight the point.  A mortgage was in default.  Shortly before the lender began the foreclosure action, the mortgaged premises were completely destroyed by fire.  The lender proceeded in the usual fashion, naming the borrower – property owners in the foreclosure.

When one of the borrowers answered (claiming he wasn’t personally liable for the debt), the lender of course moved for summary judgment.  The court, however, not only refused to grant summary judgment, it dismissed the entire action on the ground that the lender failed to name the insurance company as a necessary party in the foreclosure.

Could the insurance company be a necessary party and must the insurance company be sued as a prerequisite to foreclosure?  Certainly not.

Yes, any person holding title or acquiring any right or lien to the mortgaged property should be made a defendant in a foreclosure.  But the fire insurance company has no property interest in the mortgaged premises – so it need not be a party.  Moreover, while insurance proceeds could potentially be available to the mortgage holder, it is not required to pursue its rights under the policy in order to prosecute a foreclosure.

Reversal and victory to the lender with a good point of law to remember.

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.