Insurance Law

Mortgagee Not Required to Buy Liability Insurance for Borrower

Insurance companies only sell the insurance requested by the insured not the insurance that the insured should have purchased. Mortgagees, who require insurance on the property that was security for a loan require that the mortgagor purchase hazard insurance to protect the mortgagee against loss of its security by fire or some other hazard. To assist its customers most lenders will keep an escrow account to be certain that premium for the hazard insurance is paid.

In Dichira v. Nawid, — N.Y.S.3d —-, 2015 WL 1035921 (N.Y.A.D. 2 Dept., 3/11/2015), 2015 N.Y. Slip Op. 01921, [enhanced version available to lexis.com subscribers], a New York appellate court was asked to reverse a judgment of the trial court, called the Supreme Court in New York, when an insured claimed his mortgagee should have purchased liability insurance as part of the escrow account he set up to pay premium for first party property insurance.

FACTS

In an action to recover damages for personal injuries and a related third-party action, plaintiff appeals from an order of the trial court, the Supreme Court, Kings County, that granted summary judgment for Countrywide Home Loan (Countrywide) dismissing the complaint asserted against it, and granted the separate motion of Tower Insurance Company for summary judgment dismissing the complaint insofar as asserted against it and declaring that it is not obligated to defend or indemnify him in the main action.

The plaintiff sued the defendant and third-party plaintiff Muhammad U. Nawid to recover damages for personal injuries allegedly sustained on April 16, 2008, when the plaintiff tripped and fell on the sidewalk in front of Nawid’s property. Nawid sued, among others, his mortgagee, Countrywide and Tower Insurance Company (Tower). Nawid alleged that he had obtained liability insurance coverage for the property from Tower when he purchased the property in 2006. He alleged that after purchasing the property he made timely payments into an escrow account with Countrywide that was to be used, among other things, to pay insurance premiums, and that Countrywide had negligently failed to pay the insurance premiums.

ANALYSIS

Tower established its prima facie entitlement to judgment as a matter of law by demonstrating that it never issued an insurance policy for the subject property, and that its affiliate, Castlepoint Insurance Company, issued an insurance policy to Nawid for the subject property which only became effective on June 13, 2008, two months after the accident. “A party is not entitled to coverage if it is not named as an insured or additional insured on the face of the policy as of the date of the accident for which coverage is sought” (York Restoration Corp. v. Solty’s Constr., Inc., 79 AD3d 861, 862), [enhanced version available to lexis.com subscribers].

Since Countrywide established its prima facie entitlement to judgment as a matter of law by demonstrating that the insurance premiums that were to be paid from the escrow account related to a policy of hazard insurance, not the policy of liability insurance that Nawid claimed to have procured. Countrywide further demonstrated that the relationship between it and Nawid was based entirely on a contract, that it did not have a contractual duty to maintain liability insurance on the subject property, and that it did not engage in any conduct which gave rise to a legal duty independent of the contract.

“In the absence of an agreement to the contrary, the mortgagee is under no obligation to insure the mortgaged premises” (Beckford v. Empire Mut. Ins. Group, 135 A.D.2d 228, 232), [enhanced version available to lexis.com subscribers].

Accordingly, the Supreme Court properly granted Countrywide’s motion for summary judgment dismissing the third-party complaint insofar as asserted against it, and that branch of Tower’s separate motion for summary judgment dismissing the third-party complaint insofar as asserted against it and declaring that it is not obligated to defend or indemnify Nawid in the main action.

Since the third-party action is, in part, a declaratory judgment action, the appellate court remanded the matter to the Supreme Court, Kings County, for the entry of judgment declaring that Tower is not obligated to defend or indemnify Nawid in the main action.

ZALMA OPINION

If a person desires to be insured against the risk of loss for injuries to third persons it is imperative that a policy of liability insurance be acquired before a loss. Mr. Nawid bought liability insurance two months after the accident. He entered into a contract with Contrywide to pay premium for hazard insurance, not liability insurance thus no action against Countrywide. The appellate court made it clear that Nawid could not change a fire policy into a liability policy.

    By Barry Zalma, Attorney and Consultant

Reprinted with Permission from Zalma on Insurance, (c) 2015, Barry Zalma.

Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. Mr. Zalma serves as a consultant and expert almost equally for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. He recently published the e-books, "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" “Heads I Win, Tails You Lose — 2011,” “Zalma on Diminution in Value Damages,” “Arson for Profit” and “Zalma on California Claims Regulations,” and others that are available at Zalma Books.

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Mr. Zalma can be contacted at or zalma@zalma.com, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma’s Insurance Fraud Letter.

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