Yes – The Insurance Company Has To Pay You

A case of somewhat recent vintage reminds us of a point well worth emphasizing, particularly because experience tells us the scenario is more common than would be imagined.  When there is a fire or other hazard loss at mortgaged property, if that mortgage is in default, the insurance proceeds must be paid directly and solely to the lender or servicer. [See Associates Commercial Corp. v. Nationwide Mutual Insurance Co., 298 A.D.2d 537, 748 N.Y.S.2d 792 (2d Dept. 2002)].

When a fire loss is incurred, and this really does happen, insurance companies will sometimes send the check to the borrower, or make the check payable jointly to the borrower and the lender/servicer.  The unfortunate consequences of this are obvious.  If the check is paid only to the borrower, he just might negotiate it, be pleased to have the funds and abscond.  Where the check is payable to both the borrower and the lender, obtaining the borrower’s signature is sometimes difficult or impossible.

And so it is that the applicable insurance statute in New York addresses this situation.  While insurance companies sometimes seem to err, statute and case law are clear on this point B something reaffirmed in the new case having to do with a lender who had an interest in construction equipment.  But the point with real estate is the same.  There the insurance company had notice that the lender had an interest in the equipment and that it was a loss payee.  Moreover, the policy required payment to the insured and the loss payee as their interests appeared.

For whatever reason, the insurance company paid the property owner alone!  In the resultant suit by the he lender against the insurance company, it was ruled that with notice of the lender’s status, the insurance company paid the insured at its peril and assumed the hazard of resisting plaintiff’s claim. That the insured owner made a misrepresentation regarding the satisfaction of all liens didn’t protect the insurance company.

The concept remains: When the borrower is in default, the insurance company needs to pay the lender/servicer when there is a hazard loss. If the insurance company chooses to do something other than that, they are liable.

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.