Hoping to swindle his insurance company and make a quick buck, Blaze Bandit torched his shop. Before the smoke drifted away, his property insurer denied his claim due to arson. Crime, it has been said, does not pay, and neither does the insurer. Or does it?
March 03, 2021 Feature
Navigating Mortgage Holder Coverage Issues When the Insured Property Owner Forfeits Coverage
Steven E. Peiper and John R. Ewell
The lender that financed the shop—completely innocent of the arson—expects its interests in the property to be protected. As such, said lender, which is listed on the policy, makes a claim for coverage under Bandit’s property insurance. Property insurance policies contain a mortgage clause, a provision that addresses the contractual rights and obligations of the property insurer and mortgage holder. The lender, provided it complies with its obligations, enjoys protection of its interests and indemnification against loss from the property insurer.
Herein, of course, lies the rub. Given the expansive rights afforded to mortgage holders, an insurer is really writing two distinct coverage grants. The first, as issued to the named insured, covers fortuitous perils. This follows our traditional notions of insurance. Where the insured acts in a way that intentionally, deceitfully, or fraudulently causes loss to the insured property, our historical understanding of insurance law and common sense dictates that the insurer be relieved of its contractual duties to honor coverage.
The second policy, however, eschews those traditional notions and preserves coverage for mortgage holders even in the face of clear fraud and/or intentionality. In effect, an insurer underwrites its policy to cover only those risks it elects to insure and then, by inclusion of a standard mortgagee clause, expands that risk to a mortgage holder unencumbered by the nefarious actions of the insured property owner.
This scenario is far from unique. Indeed, aside from arson, there are a number of circumstances where an insured forfeits coverage, giving rise to a mortgage holder claim: fraud, material misrepresentation made on the insurance policy, long-term vacancy of the property, and the named insured’s failure to comply with the terms and conditions of the policy are but a few of the commonly invoked defenses.
The mortgage holder generally only has three duties under a policy:
- pay the premiums if the insured does not;
- submit a proof of loss if the insured does not; and
- notify the insurer if there is a change in ownership or occupancy or a substantial change to the property.
As long as the mortgage holder has complied, it is entitled to have either the building rebuilt or the mortgage debt paid off, up to the policy limit. The only decision left to the insurer is whether to rebuild or discharge the mortgage.
Against this backdrop, mortgage holder claims are on the rise in recent years. The mortgage clause is drafted to provide broad coverage to mortgage holders and will provide coverage in all but a very limited number of circumstances. A property insurer has a limited number of defenses to raise against a mortgage holder’s claim, discussed in detail below along with which defenses cannot be raised against a mortgage holder’s claim to round out the mortgage holder’s perspective.
Mortgage Holder’s Rights and Property Insurer’s Obligations
To understand the rights and obligations of property insurers1 and mortgage holders,2 we begin with the grant of coverage. These provisions set forth what the property insurer agreed to in the contract.
A standard form homeowners insurance policy contains the following mortgage holder provision:
Mortgage Clause
If a mortgagee is named in this policy, any loss payable under Coverage A or B will be paid to the mortgagee and you, as interests appear. If more than one mortgagee is named, the order of payment will be the same as the order of precedence of the mortgages.3
Similarly, a typical commercial property policy provides:
Mortgageholders
. . . We will pay for covered loss of or damage to buildings or structures to each mortgageholder shown in the Declarations in their order of precedence, as interests may appear.4
Where an insurance policy provides for insurance proceeds to be paid to the mortgagee “as interests appear,” the mortgagee is entitled to insurance proceeds to the extent of the mortgage debt.5 The “order of precedence” refers to the priority of the liens.6 The first mortgage holder will receive payment up to the full amount of its debt and interest, and junior lienholders will take the balance, if any, up to the total of their interest.7
Types of Mortgage Clauses
There are two types of mortgage holder clauses: (1) a “simple” or “open” loss payable clause, and (2) a “standard” or “union” mortgage clause.
A “simple” loss payable clause provides that when a covered loss occurs, the proceeds of the policy shall first be distributed to the lender.8 Under this type of clause, the lender has no greater rights than the named insured. Any act or omission of the insured that voids the insured’s coverage will also terminate the mortgage holder’s coverage.9 In other words, if the policy is not collectible by the insured, the mortgage holder cannot collect either. Open mortgage clauses will not be further discussed because when no coverage is owed to the named insured, the lender has no claim for coverage—as a practical matter, the analysis has ended.
The more modern, and more prevalent, clause is the “standard” clause. The mortgage holder is an additional insured10 on the policy, and language is added to prevent the lender’s coverage from being invalidated by the insured’s actions or neglect.11 This is accomplished by a legal fiction that there are two separate and distinct contracts of insurance: one with the owner of the property and a separate contract with the mortgage holder.12 Even if the insured’s policy is later found to be void, the insurer’s obligation to the mortgage holder is not affected.13 The mortgage holder is treated “just as if the [mortgage holder] had applied for the insurance entirely independently” of the named insured.14
Common Circumstances Giving Rise to a Mortgage Holder Claim
When a first-party claim submitted by the named insured (the borrower) is covered, the mortgage holder has no reason to make a claim for coverage. Where the property insurer denies coverage to the named insured, the insurer has an independent obligation to protect the mortgage holders listed on the policy.15
The relevant policy language in the standard form commercial property policy provides:
If we pay the mortgageholder for any loss or damage and deny payment to you because of your acts or because you have failed to comply with the terms of this Coverage Part:
(1) The mortgageholder’s rights under the mortgage will be transferred to us to the extent of the amount we pay; and
(2) The mortgageholder’s right to recover the full amount of the mortgageholder’s claim will not be impaired.
At our option, we may pay to the mortgageholder the whole principal on the mortgage plus any accrued interest. In this event, your mortgage and note will be transferred to us and you will pay your remaining mortgage debt to us.16
Similarly, the standard homeowners policy provides:
At our option, we may pay to the mortgagee the whole principal on the mortgage plus any accrued interest. In this event, we will receive a full assignment and transfer of the mortgage and all securities held as collateral to the mortgage debt.17
There are a number of factual circumstances where coverage will be denied to the named insured but owed to the mortgage holder:
- arson or fraud committed by the named insured;
- the insured’s failure to submit a proof of loss18 within 60 days (a condition precedent to coverage);
- the insured’s failure to cooperate with its insurer, such as failure to appear for examination under oath;
- the insured’s failure to timely notify its insurer where the late notice prejudiced the insurer;
- a coverage denial to the named insured based upon vacancy;19 and
- material misrepresentation on the insurance application.
The last one, material misrepresentation on the insurance application, can result in the insurer rescinding the named insured’s policy—voiding it as if it never existed. Where the policy contains the standard mortgage clause, the insurer cannot void the policy as to the mortgage holder unless the mortgage holder was aware of the misrepresentation.20
Mortgage Holder’s Obligations
As with the named insured, the mortgage holder has a duty to comply with the terms and conditions of the policy. A mortgage holder generally has only three duties under the policy. First, where the named insured ceases paying the policy premiums, the mortgage holder must pay the premium for coverage to continue. Second, upon request of the insurer, the mortgage holder must submit proof of loss within 60 days. Third, the mortgage holder is required to notify the property insurer if it becomes aware of a change in ownership or occupancy or a substantial change in risk.21
For example, where the named insured abandons the property and defaults on the mortgage, the mortgage holder would typically assign a property preservation company to routinely inspect the risk and secure the premises. Upon receipt of reports that the property is vacant, the mortgage holder should promptly advise the property insurer in order to comply with the policy terms and ensure it obtains coverage if a loss occurs.
The policy’s notice provisions are written to be accommodating to the mortgage holder. While the named insured is required to “give prompt notice” or notify its insurer of a loss “as soon as practicable,”22 the mortgage holder is only required to “notify.”23 No temporal restriction is applied to the mortgage holder; either notice was provided or it was not.24
This is obviously quite favorable to mortgage holders because they can become aware of a change in the risk, such as vacancy, and months later notify the insurer of the change and have complied with the policy terms. Based on this language, it is very difficult for the property insurer to assert a late notice defense. Either the mortgage holder gave notice prior to the loss and complied, or no notice of the substantial change in risk was provided prior to submitting the claim. Complying with the policy’s notice requirement is simple. The mortgage holder only needs to send a letter or email or otherwise notify the insurer.25
In the adjustment of a mortgage holder claim, an insurance company may request an examination under oath of a representative of the mortgage company. In one jurisdiction however—New York—there is a case ruling that a mortgage holder has no obligation to appear for examination under oath.26 As of this writing, no other jurisdictions have agreed.
Most commercial property policies today provide that where the mortgage holder has complied with these conditions, the terms and conditions of the policy then apply directly to the mortgage holder.27 Giving effect to that provision, property insurers of commercial property could argue, and likely successfully so, that mortgage holders are subject to the policy’s condition requiring an examination under oath.
Policy Defenses to Mortgage Holder’s Claims
Defenses that apply. Clearly, the typical insurance contract is constructed to preserve, when possible, the interests of the mortgage holders. Not surprisingly, there are relatively few defenses available to an insurer for a mortgage holder claim. Three are set forth in the policy: (1) failure to pay the premiums after the named insured ceases paying, (2) failure to submit proof of loss within 60 days of request, and (3) being aware of a change in ownership or occupancy or substantial change in risk and failing to notify the insurer.28
If the insured declines to pay the policy premiums, the policy is canceled. The failure to submit proof of loss within 60 days is a complete defense to the mortgage holder’s claim.29 Where the mortgage holder does have knowledge of a change in ownership or occupancy or material change to the risk and fails to notify the insurer, this will bar the mortgage holder’s recovery in the event of a loss.30 The property insurer bears the burden of proof that the mortgage holder violated the policy terms.31 Where the insurer cannot establish that the mortgage holder knew of the change in ownership or occupancy or substantial change in risk, the mortgage holder is entitled to coverage.32
In sum, the property insurer owes coverage to the mortgage holder where either (1) the mortgage holder is aware of a change in ownership or occupancy or a material change in the risk and notified the insurer,33 or (2) the mortgage holder never knew about the change.34
In extremely rare instances, the property insurer could deny a mortgage holder claim based upon the lack of an insurable interest. Imagine, for example, the insured fails to pay the property taxes, resulting in a tax lien, and the tax lienholder forecloses and joins the mortgage holder. After the mortgage holder fails to appear, a judgment of foreclosure is obtained and served upon the lender. All of the lender’s rights in the property were extinguished in the foreclosure action, of which it was notified. The property insurer has a judicial order declaring that the mortgage holder lost all of its rights, lien, and interest in the property; therefore, the property insurer could deny the claim due to the lack of an insurable interest.35
Defenses that do not apply. Due to the increased risk of vandalism, theft, and water damage due to freezing, property insurers write their policies to include a vacancy provision.36 Vacancy provisions preclude coverage for such damages where the property has been vacant for more than 60 days.
Courts across the country reason that insurers cannot enforce the vacancy provision to deny coverage to the mortgage holder without disregarding the insuring grant protecting the lender’s interest.37 These conflicting provisions are construed in favor of coverage, and therefore national case law holds that the vacancy provision does not apply to a mortgage holder unless it knew the property was vacant and failed to notify its insurer.
As a Texas appellate court has explained:
While under the Vacancy Clause, there is no coverage for [the named insured] for fire damage when the property has remained vacant for the specified period, the clear import of the standard loss payable language in the policy means that the Vacancy Clause does not operate to defeat coverage for [the] mortgagee, so long as [the mortgagee] meets the required conditions, such as informing [the insurer] of any change in occupancy or substantial change in risk that was known to [the mortgagee].38
These courts reason that to best effectuate the language and purpose underlying the standard mortgage clause, the mortgage holder must not be refused coverage as long as the loss did not result from its own breach of the policy.39
Coinsurance
Property insurance policies routinely include a “coinsurance” provision. A coinsurance provision imposes “an obligation upon the insured to keep a specific amount or a percentage of additional insurance in force, failing which he or she becomes a coinsurer to the extent of the omitted insurance.”40 Property policies typically require that the building be insured to at least 80 percent of its value.41 Where the insured fails to do so, the property is considered underinsured and the insurer will not pay the full amount of loss. Instead, the insured becomes a coinsurer to the extent of the shortfall or, better stated, its proportionate share.
Where the property is underinsured and the mortgage holder makes a claim, is the mortgage holder subject to the coinsurance penalty? Generally yes.42 In Savarese v. Ohio Farmers’ Insurance Co., the New York Court of Appeals considered whether a coinsurance penalty applied to a mortgage holder’s claim.43 The policy contained an 80 percent coinsurance clause. The court reasoned that when the policy was purchased, it contained a coinsurance clause, stating, “This is the agreement—no more, no less.”44 The court further explained that a coinsurance clause “is not a warranty or a condition, but a statement of the amount to be paid . . . either to the owner or the [mortgage holder].”45 Thus, the coinsurance provision was enforceable against the lender.
The only exception to this rule is where the mortgage holder clause contains language indicating an intent to not apply a coinsurance penalty to the mortgage holder.46 In Pennsylvania Co. for Insurances on Lives & Granting Annuities v. Ohio Farmers’ Insurance Co., the mortgage clause contained the subheading “Non-Contribution.”47 The U.S. District Court for the Eastern District of Pennsylvania ruled that “the addition of the words ‘(Non-Contribution)’ indicate[d] an intention on the part of the parties to exclude the mortgagee from the operation of the coinsurance clause, and should be given that effect.”48
Insurer Decides to Repair Building or Pay Off Mortgage
One of the most interesting aspects of mortgage holder claims is that the insurer chooses whether the property is rebuilt or left in its damaged or fire-burned state and a check issued to the bank covering the loan debt—a decision that significantly affects the property owner.
Where the property insurer has denied coverage to its named insured and the mortgage holder makes a claim for coverage, the insurer has two options. It can either (1) repair the property damage or (2) purchase the note and mortgage from the mortgage holder. It is the insurer’s option. The mortgage holder cannot choose, because either way its interests are protected. The mortgage holder receives either the benefit of having the damaged property repaired or its mortgage paid in full.
An interesting and unintended consequence occurs when the property insurer chooses to repair the property damage: the named insured—who otherwise should not have received coverage (due to fraud, arson, misrepresentations, or failure to comply with the policy terms)—nonetheless receives coverage.
Purchasing the note and mortgage is a unique process. The property insurer becomes the new mortgage holder, just as if the lender had sold the note and mortgage to another bank. This is, in effect, a form of subrogation where the property itself is the recoverable asset.
Where the loan has fallen into default, it is typical for a default interest rate (a steep interest rate) to be applied. In addition, late fees and penalties are tacked onto the mortgage debt. An insurer that elects to purchase the note and mortgage should negotiate with the mortgage holder to only pay principal and interest (which is only what the insurer agreed to pay49) and refuse to pay late fees and penalties. The mortgage holder is already receiving the benefit of an accelerated interest rate, allowing some room for negotiation.
The mortgage holder, on the other hand, should seek full payment of the principal, interest, and any fees it expended to protect the security interest, such as where the mortgage holder paid the property taxes to prevent additional liens from accruing on the property. The mortgage holder should assert that by paying the property taxes, it kept the property free of further liens so that the insurer would receive unencumbered property.
Once a pay-off amount has been agreed upon, a real estate attorney is necessary to prepare the assignment of the note. Once that assignment has been executed and filed in the clerk’s office where the property is situated, the property insurer can then attempt to collect the mortgage payments. With commercial property, where the loan is in default, the insurer can typically file the foreclosure action immediately. During that process, the property insurer must be mindful to pay the municipal taxes on the property; otherwise, it risks competing liens against the property.
Whether Property Insurer Should Repair the Property or Buy the Note
In order to evaluate whether to repair the building or to purchase the note, the insurer needs to know the following:
- the value of the damages being claimed;
- the outstanding loan balance; and
- the value of the subject property.
Where the loss is relatively small, it will be more economical for the insurer to elect to repair the building. A large loss, however, requires a careful cost-benefit analysis in comparing the estimated cost to repair the premises to the insurer’s exposure in purchasing the note. The insurer’s exposure can be calculated by taking the property’s fair market value and subtracting the mortgage debt, repair costs, anticipated foreclosure costs, and property taxes that will be incurred while the foreclosure action is pending.
The Property Insurer’s Equation
Costs to Repair/Replace vs. Insurer’s Exposure (Fair Market Value − Mortgage Debt − Repair Costs − Foreclosure Costs − Property Taxes)50
When repair/replace makes sense. Suppose a building insured for $500,000 sustains vandalism damage. Coverage is denied to the named insured based on material misrepresentations on the insurance application. It will cost $250,000 to repair the damage. Since the named insured stopped paying the mortgage, the mortgage debt exceeds $900,000. The property has a market value, after repairs, of $1 million.
If the insurer repairs the property, it will pay out $250,000. This is the more economical option for the insurer.
Purchasing the note and mortgage is not a viable option. The mortgage debt exceeds the policy limit. The property insurer would pay $900,000 to pay off the note, $250,000 in repairs, plus the foreclosure costs. This option would cost $1.15 million—well over the $500,000 policy limit. Repair and replace is the clear choice for the insurer. Interestingly, the named insured receives the benefit of the repairs despite the insured’s material misrepresentations.
When purchasing the note is the better option. Imagine a fire breaks out at the insured premises, burning the property to the ground. During its claim investigation, the insurer uncovers CCTV video showing the insured entering the building with a can of gasoline minutes before the fire. Coverage is denied to the named insured based on arson and fraud. The building limit is $400,000. It will cost $500,000 to rebuild the premises. The property, now a vacant lot, is worth $200,000, and the outstanding mortgage debt is $200,000.
The property insurer cannot rebuild the premises within the limits of coverage. As such, the property insurer should purchase the note and mortgage to extinguish the mortgage holder’s claim. Having satisfied the mortgage holder’s interests, the property insurer could walk away—owing no coverage to the named insured and satisfying the named insured’s mortgage debt.
Having elected to purchase the note and mortgage, however, the property insurer could also attempt to collect the mortgage payments. If defaulted upon, the property insurer could foreclose and sell the property at public auction. Since the property is worth at least $200,000, the property insurer may be able to recover back what it expended to cover the lender’s interest. This principle is similar to subrogation. Having covered the lender’s claim, the property insurer’s recourse is against its insured.
Foreclosure, Lien Priority, and Default Interest
What is perhaps the most significant effect of the mortgage holder clause is that the named insured by its misconduct risks not only a denial of coverage, but also the sale of its promissory note, foreclosure, and, if the insurer elects to foreclose, ultimately all rights in the property.
If the property insurer chooses to purchase the note and forecloses, the insurer is entitled to be paid in full (if possible) because the first mortgage has highest lien priority. Any surplus funds will be distributed to creditors holding junior liens and then, if any money remains, to the named insured.51
Most promissory notes contain an acceleration provision and allow for a default interest rate, typically a much higher rate, to be imposed. After the property insurer has been assigned the note, it can continue to charge interest at the default interest rate.
Conclusion
Where the named insured’s acts or omissions vitiate coverage, the mortgage clause protects the mortgage holder’s interest, providing broad indemnity coverage for physical damage. To ensure their interests are protected, mortgage holders should be cognizant of their duties and rights under the mortgage clause. Property insurers have a right to collect the unpaid premiums and a right to information—information concerning material change to the property and a statement of the loss. Where these duties are fulfilled, the lender’s interest is protected. Where these duties are breached, however, the property insurer can defeat the mortgage holder’s claim for coverage. Otherwise, mortgage holders are entitled to the repair of the building or to have the mortgage debt extinguished, up to the policy limit.
Property insurers have a unique option, and a substantial amount of control, in the adjustment of a mortgage holder’s claim. This includes deciding whether the damaged building is restored to its pre-loss condition or left “as is” and the mortgage debt paid off. In losses less than the mortgage debt, a savvy policyholder attorney might even turn to the mortgage holder to press for coverage—particularly, as the named insured receives the benefit of the risk being repaired, despite not being entitled to coverage.
Mortgage holder claims become even more interesting where the property insurer takes an assignment of the promissory note and forecloses on the property. This is the only recourse for a property insurer that incurs a loss due to the named insured’s misconduct to recover the payment it made to the lender—a recourse that is almost a type of subrogation. As mortgage holder claims increase in frequency, it is vital for property insurers, mortgage holders, policyholders, and their counsel to understand the mortgage clause, and the rights and obligations owed between mortgage holders and property insurers.
Notes
1. The term “property insurer” refers to the insurance company that issued a first-party property policy covering a designated premises.
2. The term “mortgage holder” or “lender” refers to the entity that holds the note and mortgage.
3. See, e.g., Ins. Servs. Office, Inc. (ISO), Homeowners 3 – Special Form HO 00 03 05 11, § I – Conditions, ¶ L.1. (emphasis added); Ins. Servs. Office, Inc. (ISO), Homeowners 5 – Comprehensive Form HO 00 05 05 11, § I – Conditions, ¶ L.1. (emphasis added). ISO prepares insurance coverage forms for industry-wide use.
4. Ins. Servs. Office, Inc. (ISO), Bldg. & Pers. Prop. Coverage Form CP 00 10 10 12, ¶ F.2.b. (emphasis added).
5. In re Simerlein, 497 B.R. 525, 542 (Bankr. E.D. Tenn. 2013); see also Durbin v. Allstate Ins. Co., 267 So. 2d 779, 781 (La. Ct. App. 1972).
6. Weems v. Am. Sec. Ins. Co., 486 So. 2d 1222, 1228 (Miss. 1986).
7. Id. (quoting 5A John Alan Appleman & Jean Appleman, Insurance Law and Practice § 3404 (1970)); see also EverHome Mortg. Co. v. Charter Oak Fire Ins. Co., No. 07-CV-98 RRM RML, 2012 WL 868961, at *5 (E.D.N.Y. Mar. 14, 2012) (“Where a policy names two mortgages ‘as interests may appear,’ the first mortgage has priority in the insurance proceeds up to the outstanding amount owed under the first mortgage.”).
8. Simerlein, 497 B.R. at 541–42.
9. Gallant v. Lake States Mut. Ins. Co., 142 Mich. App. 183, 187 (1985).
10. An “additional insured” is a “person or organization not automatically included as an insured under an insurance policy who is included or added as an insured under the policy at the request of the named insured.” Additional Insured, IRMI, https://www.irmi.com/term/insurance-definitions/additional-insured (last visited Jan. 19, 2021).
11. Fireman’s Fund Ins. Co. v. Rogers, 18 Ark. App. 142, 145 (1986); Bankers Joint Stock Land Bank v. St. Paul Fire & Marine Ins. Co., 158 Minn. 363, 366 (1924); Fidelity-Phenix Fire Ins. Co. v. Brennan, 85 N.H. 291, 294 (1931); Syracuse Sav. Bank v. Yorkshire Ins. Co., 301 N.Y. 403, 407 (1950); Guar. Trust & Safe Deposit Co. v. Home Mut. Ins. Co., 180 Pa. Super. 1, 5 (1955); Firstbank Shinnston v. W. Va. Ins. Co., 185 W. Va. 754, 759–60 (1991).
12. Westchester Fire Ins. Co. v. Coverdale, 48 Kan. 446, 451–52 (1892); Better Valu Homes, Inc. v. Preferred Mut. Ins. Co., 60 Mich. App. 315, 319 (1975); Hennessey v. Helgason, 168 Miss. 834, 839 (1934); Malvaney v. Yager, 101 Mont. 331, 339 (1936); Guar. Trust, 180 Pa. Super. at 5.
13. Thomas v. NASL Corp., No. 99CIV.11901(JGK), 2000 WL 1725011, at *9 (S.D.N.Y. Nov. 20, 2000); see, e.g., Vega v. N. River Ins. Co., 410 N.Y.S.2d 813, 813 (App. Div. 1978) (“The mortgagee clause in the policy created an independent contract between the insurer and mortgagee, which is not subject to defenses defendant-respondent may have against plaintiff owner.” (citations omitted)).
14. Granite State Ins. Co. v. Emp’rs Mut. Ins. Co., 125 Ariz. 275, 278 (Ct. App. 1980) (quoting 5A Appleman & Appleman, supra note 7, § 3401).
15. As stated above, this analysis applies to standard mortgage clauses and not simple clauses.
16. ISO Form CP 00 10 10 12, supra note 4, ¶ F.2.e. (emphasis added).
17. ISO Form HO 00 03 05 11, supra note 3, § I – Conditions, ¶ L.4.b.; ISO Form HO 00 05 05 11, supra note 3, § I – Conditions, ¶ L.4.b.
18. “Proof of loss” is “a formal statement made by the insured to the insurer regarding a claim, especially in property insurance, so that the insurer may determine its liability under the policy.” Proof of Loss, IRMI, https://www.irmi.com/term/insurance-definitions/proof-of-loss (last visited Jan. 19, 2021).
19. As discussed further below, courts across the country have ruled that a property insurer cannot raise the vacancy condition (or similar defenses based upon vacancy) to disclaim coverage to the mortgage holder where the mortgage holder was not aware of the vacancy or upon learning of the vacancy notified the insurer.
20. Goldstein v. Nat’l Liberty Ins. Co., 256 N.Y. 26, 32 (1931) (holding that a policy that was void ab initio as to the owner was still valid as to the mortgagee under a standard mortgagee clause); cf. SWE Homes, LP v. Wellington Ins. Co., 436 S.W.3d 86, 89 n.2 (Tex. App. 2014) (finding that a property insurer could not deny coverage to a mortgage holder due to the property’s vacancy unless it was aware that the property was vacant).
21. See, e.g., ISO Form HO 00 03 05 11, supra note 3, § I – Conditions, ¶ L.2.; ISO Form HO 00 05 05 11, supra note 3, § I – Conditions, ¶ L.2.; ISO Form CP 00 10 10 12, supra note 4, ¶ F.2.d.
22. ISO Form CP 00 10 10 12, supra note 4, ¶ E.3.a., provides that the named insured is to give “prompt notice.” Similarly, commercial general liability policies require the named insured to give notice “as soon as practicable.” See, e.g., Ins. Servs. Office, Inc. (ISO), Commercial Gen. Liab. Coverage Form CG 00 01 04 13, § IV, ¶ 2.a.
23. See, e.g., ISO Form HO 00 03 05 11, supra note 3, § I – Conditions, ¶ L.2.a.; ISO Form HO 00 05 05 11, supra note 3, § I – Conditions, ¶ L.2.a.; ISO Form CP 00 10 10 12, supra note 4, ¶ F.2.d.(3).
24. Hiscox Dedicated Corp. Member, Ltd. v. Matrix Grp. Ltd., No. 8:09-CV-2645-T-33AEP, 2011 WL 3319557, at *2 (M.D. Fla. Aug. 2, 2011) (concluding that the mortgage holder was entitled to payment so long as it notified the property insurer of any change in ownership or occupancy or substantial change in risk); Transamerica Ins. Co. v. Carter Cty. State Bank, 794 F. Supp. 324, 327 (E.D. Mo. 1992) (finding that since the mortgage holder failed to notify the property insurer of a change in ownership, it failed to comply with the policy terms and forfeited coverage).
25. See Potomac Ins. Co. of Ill. v. NCUA, No. 96 C 1044, 1996 WL 396100, at *3 (N.D. Ill. July 12, 1996) (suggesting that providing notice, such as via letter, is sufficient).
26. U.S. Fid. & Guar. Co. v. Annunziata, 67 N.Y.2d 229, 233 (1986); see also Brien v. Kullman Indus., Inc., 71 F.3d 1073, 1078 (2d Cir. 1995) (applying New York law).
27. See, e.g., ISO Form CP 00 10 10 12, supra note 4, ¶ F.2.d. (“All of the terms of this Coverage Part will then apply directly to the mortgageholder.”).
28. See, e.g., ISO Form HO 00 03 05 11, supra note 3, § I – Conditions, ¶ L.2.; ISO Form HO 00 05 05 11, supra note 3, § I – Conditions, ¶ L.2.; ISO Form CP 00 10 10 12, supra note 4, ¶ F.2.d.
29. Cf. Igbara Realty Corp. v. N.Y. Prop. Ins. Underwriting Ass’n, 63 N.Y.2d 201, 210 (1984) (stating that failure to provide proof of loss within 60 days is an “absolute defense” to an action on the policy).
30. Wright v. Firemen’s Ins. Co., 291 N.Y.S. 508 (App. Div. 1936); Rio Grande Nat’l Life Ins. Co. v. Hardware Dealers Mut. Fire Ins. Co., 209 S.W.2d 654 (Tex. Civ. App. 1948); Myron C. Weinstein, 29 N.J. Prac., Law of Mortgages § 14.5 (2d ed.).
31. Westre Invs., L.L.C. v. Assurance Co. of Am., No. 4:07-CV-2022 (CEJ), 2008 WL 818492, at *4 (E.D. Mo. Mar. 24, 2008).
32. Id.
33. See, e.g., ISO Form CP 00 10 10 12, supra note 4, ¶ F.2.d.
34. SWE Homes, LP v. Wellington Ins. Co., 436 S.W.3d 86, 89 n.2 (Tex. App. 2014) (concluding that where a mortgage holder was unaware that the property was vacant or that there was a substantial change in risk, it had no duty to notify its property insurer); see also Westre Invs., 2008 WL 818492, at *4; Dreyer v. Century Ins. Co., 187 A. 38 (N.J. 1936).
35. See Sotelo v. Wash. Mut. Ins. Co., 734 A.2d 421, 423 (Pa. Super. Ct. 1999); Jones v. Tex. Pac. Indem. Co., 853 S.W.2d 791, 794 (Tex. App. 1993) (“A party must have an insurable interest in the insured property to recover under an insurance policy.”); accord Reynolds v. Allstate Ins. Co., 629 F.2d 1111, 1114 (5th Cir. 1980) (applying Texas law and reasoning that a mortgagor’s insurable interest was not extinguished because the attempted foreclosure was void).
36. Old Second Nat’l Bank v. Ind. Ins. Co., 29 N.E.3d 1168, 1175–76 (Ill. App. Ct. 2015).
37. See, e.g., id. at 1176; Wells Fargo Bank, N.A. v. Null, 304 Mich. App. 508, 531 (2014).
38. SWE Homes, 436 S.W.3d at 90–91.
39. See id.; Old Second Nat’l Bank, 29 N.E.3d at 1176; Wells Fargo Bank, 304 Mich. App. at 531. But see Waterstone Bank, SSB v. Am. Family Mut. Ins. Co., 832 N.W.2d 152 (Wis. Ct. App. 2013).
40. J.R.A. Inc. v. Essex Ins. Co., 72 So. 3d 862, 872 (La. Ct. App. 2011) (citing 7 Steven Plitt et al., Couch on Insurance § 98:20 (3d ed. 2006)).
41. Kielbania v. Indian Harbor Ins. Co., No. 1:11CV663, 2012 WL 3957926, at *6 (M.D.N.C. Sept. 10, 2012); Fry v. Walters & Peck Agency, Inc., 141 Ohio App. 3d 303, 306 (2001).
42. Pa. Co. for Ins. on Lives & Granting Annuities v. Aachen & Munich Fire Ins. Co., 257 F. 189, 194 (E.D. Pa. 1919); Savarese v. Ohio Farmers’ Ins. Co., 260 N.Y. 45, 57 (1932); Hartwig v. Am. Ins. Co., 169 A.D. 60, 62 (N.Y. App. Div. 1915); Weinstein, supra note 30, § 3.20.
43. 260 N.Y. 45.
44. Id. at 57.
45. Id.
46. Pa. Co. for Ins. on Lives & Granting Annuities v. Ohio Farmers’ Ins. Co., 7 F. Supp. 701, 703 (E.D. Pa. 1933); 4 Plitt et al., supra note 40, § 65:48; 15 Plitt et al., supra note 40, § 220:12.
47. Pa. Co. for Ins., 7 F. Supp. at 703.
48. Id.
49. See, e.g., ISO Form HO 00 03 05 11, supra note 3, § I – Conditions, ¶ L.4.b.; ISO Form HO 00 05 05 11, supra note 3, § I – Conditions, ¶ L.4.b.; ISO Form CP 00 10 10 12, supra note 4, ¶ F.2.e.
50. As set forth below, if the insurer is able to be paid in full, it cannot keep the excess proceeds. The excess proceeds must be distributed to the junior lienholders next, and then if all liens are paid in full, the remainder goes to the named insured.
51. Sotelo v. Wash. Mut. Ins. Co., 734 A.2d 421, 423 (Pa. Super. Ct. 1999); Weinstein, supra note 30, § 14.5.