Must A Lender Purchase Fire Insurance For A Defaulting Borrower?

No, and although it might seem apparent, the principle nonetheless fails to discourage borrowers who might sue the lender or servicer for the supposed failure — as a recent case confirms. [Dookie v. Astoria Fed. Savings, 95 A.D.3d 936, 944 N.Y.S.2d 234 (2d Dept. 2012)].  The precise rule is that without an agreement in the mortgage contract to the contrary, a mortgage holder is under no obligation to insure the mortgaged premises.

The facts will help lenders and servicers to be on guard.

Here, the borrower was responsible for maintaining fire insurance and did so, but also paid the lender monthly one twelfth of the insurance premium to assure future payments of those premiums.

After a year the carrier declined to renew and so the lender placed the insurance, but on terms the borrower alleged to be less favorable.  When fire destroyed the property the borrower sued the lender (!) claiming (among other things) that the lender breached its contractual obligation to pay the premium to the original insurer causing non-renewal of that policy.

The court assessed the facts differently.  When a renewal notice had come from the first insurer it stated clearly that there were no automatic renewals.  To renew, the borrower had to sign a renewal form and check the appropriate box – which the borrower did not do.

No cause of action here for the borrower against the lender.

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.