New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

David A. Paterson
Governor

Eric R. Dinallo
Superintendent

OGC Op. No. 08-05-11

The Office of General Counsel issued the following opinion on May 23, 2008, representing the position of the New York Insurance Department.

Re: Mortgage Note Language

Question Presented:

Does the below-quoted mortgage note language violate any provision of the New York Insurance Law?

Conclusion:

No. However, the Insurance Law does not govern the content or form of mortgage notes; the legal requirements for such instruments are set forth in the New York Real Property Law.

Facts:

An inquiry was made regarding the language of an insurance clause of a mortgage note, which provides, in pertinent part, as follows:

4. Fire, Flood and Other Hazard Insurance. Borrower shall insure all improvements on the Property … against any hazards, casualties and contingencies, including fire, for which Lender requires insurance.

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In the event of loss, Borrower shall give Lender immediate notice by mail. Lender may make proof of loss if not made promptly by Borrower. Each insurance company concerned is hereby authorized and directed to make payment for such loss directly to Lender, instead of to Borrower and to Lender jointly. All or any part of the insurance proceeds may be applied by Lender, at its option, either (a) to the reduction of the indebtedness under the Note and this Security Instrument, first to any delinquent amounts applied in the order in Paragraph 3, and then to prepayment of principal, or (b) to the restoration or repair of the damaged Property.

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(Emphasis added.)

The question asked was whether this language, which appears to require that insurance proceeds be paid directly only to the lender, is permissible under the New York Insurance Law.

Analysis:

A mortgage note documents the obligation of a borrower (“mortgagor”) to a lender (“mortgagee”) with respect to a loan made to purchase real property. Accordingly, its terms apply only the parties thereto. The mortgage note language underscored above, although suggestive, does not, as a general matter, bind an insurer, as the insurer is not a party to the note.

The content and form of mortgage notes are matters beyond the purview of the Insurance Law and this Department. The New York Real Property Law governs the wording and construction of the various documents incident to the transfer of real property interests. In particular, New York Real Property Law § 254(4) provides that any requirement in a mortgage note that the borrower keep any improvements insured will be construed as requiring that the borrower must obtain insurance for the benefit of the lender subject to certain conditions. That statute reads, in relevant part, as follows:

In mortgages of real property and in bonds and notes secured thereby … the following or similar clauses and covenants must be construed as follows:

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4. Mortgagor to keep buildings insured.

(a) A covenant "that the mortgagor will keep the buildings on the premises insured against loss by fire for the benefit of the mortgagee; that he will assign and deliver the policies to the mortgagee; and that he will reimburse the mortgagee for any premiums paid for insurance made by the mortgagee on the mortgagor's default in so insuring the buildings or in so assigning and delivering the policies," shall be construed as meaning that the mortgagor … will, during all the time until the money secured by the mortgage shall be fully paid and satisfied, keep the buildings erected on the premises insured against loss or damage by fire, to an amount to be approved by the mortgagee not exceeding in the aggregate one hundred per centum of their full insurable value and in a company or companies to be approved by the mortgagee, and will assign and deliver the policy or policies of such insurance to the mortgagee … which policy or policies shall have endorsed thereon the standard New York mortgagee clause in the name of the mortgagee, so and in such manner and form that he and they shall at all time and times, until the full payment of said moneys, have and hold the said policy or policies as a collateral and further security for the payment of said moneys, and in default of so doing, that the mortgagee … may make such insurance from year to year, in an amount in the aggregate not exceeding one hundred per centum of the full insurable value of said buildings erected on the mortgaged premises for the purposes aforesaid, and pay the premium or premiums therefor, and that the mortgagor will pay to the mortgagee … such premium or premiums so paid, with interest from the time of payment, on demand, and that the same shall be deemed to be secured by the mortgage, and shall be collectible thereupon and thereby in like manner as the principal moneys, and that should the mortgagee by reason of such insurance against loss by fire receive any sum or sums of money for damage by fire, and should the mortgagee retain such insurance money instead of paying it over to the mortgagor, the mortgagee's right to retain the same and his duty to apply it in payment of or on account of the sum secured by the mortgage and in satisfaction or reduction of the lien thereof shall be limited and qualified as hereafter in this paragraph provided. Said insurance money so received by the mortgagee shall be held by him as trust funds until paid over or applied as hereinafter provided. If the mortgagor shall notify the mortgagee in writing within thirty days after the fire that the mortgaged premises have been damaged thereby, and shall thereafter make good the damage by means of such repairs, restoration or rebuilding as may be necessary to restore the buildings to their condition prior to the damage, then upon presentation to the mortgagee within three years after the fire of proof that the damage has been fully made good (and if he so demands in writing within thirty days after such presentation of proof, then upon presentation to the mortgagee within thirty days after such demand of proof also of the actual cost of such repairs, restoration and rebuilding and of the reasonable value of any part of the work so performed by the mortgagor) the mortgagee, unless he rejects the proof submitted to him as insufficient, shall pay over to the mortgagor so much of said insurance money theretofore received by the mortgagee as does not exceed the lesser of (1) the reasonable cost of such repairs, restoration and rebuilding or (2) the total amount actually paid therefor by the mortgagor, together with the reasonable value of any part of the work done by him. Such proof shall be deemed sufficient unless, within sixty days after presentation of all such proof to the mortgagee as aforesaid, he shall notify the mortgagor in writing that the proof is rejected. Any excess of said insurance money over the amount so payable to the mortgagor shall be applied in reduction of the principal of the mortgage. Provided, however, that if and so long as there exists any default by the mortgagor in the performance of any of the terms or provisions of the mortgage on his part to be performed the mortgagee shall not be obligated to pay over any of said insurance money received by him. If the mortgagor shall fail to comply with any of the foregoing provisions within the time or times hereinabove limited, or shall fail within sixty days after rejection of the proof so submitted to commence an action against the mortgagee to recover so much of said insurance money as is payable to the mortgagor as hereinabove provided, or if the entire principal of the mortgage shall have become payable by reason of default or maturity, the mortgagee shall apply said insurance money in satisfaction or reduction of the principal of the mortgage; and any excess of said insurance money over the amount required to satisfy the mortgage shall be paid to the mortgagor. Unless the court, in any such action, shall determine that the mortgagee's rejection of the proof submitted by the mortgagor prior to the commencement of the action was unreasonable, the mortgagee may offset the reasonable amount, as determined by the court, of his expense incident to the litigation, and may reimburse himself out of the insurance money for the amount so determined by the court, of his expense incident to the litigation, and may reimburse himself out of the insurance money for the amount so determined. . . .The term "mortgagee," as hereinabove used, shall be deemed to include the successors in interest of the mortgagee.

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N. Y. Real Prop. Law § 254(4)(McKinney Supp. 2008).

The “standard New York mortgage clause” referenced in the above-quoted statute is a policy provision of the standard New York fire policy, as mandated by the text of Insurance Law § 3404(e). That clause sets forth cancellation provisions, and allows the mortgagee to submit proof of loss to the insurer when the insured fails to do so. The clause, which is set forth verbatim in Insurance Law §3404(e), reads as follows:

If loss hereunder is made payable, in whole or in part, to a designated mortgagee not named herein as the insured, such interest in this policy may be cancelled by giving to such mortgagee ten days’ written notice of cancellation.

If the insured fails to render proof of loss such mortgagee, upon notice, shall render proof of loss in the form herein specified within sixty (60) days thereafter and shall be subject to the provisions hereof relating to appraisal and time of payment and of bringing suit. If this Company shall claim that no liability existed as to the mortgagor or owner, it shall, to the extent of payment of loss to the mortgagee, be subrogated to all the mortgagee’s rights of recovery, but without impairing mortgagee’s right to sue; or it may pay off the mortgage debt and require an assignment thereof and of the mortgage. Other provisions relating to the interests and obligations of such mortgagee may be added hereto by agreement in writing.

Real Property Law § 254(4) recognizes that a mortgagee will seek to protect its interest in the insured property, and allows mortgage notes to contain provisions that require a mortgagor to maintain insurance on the mortgaged property for the benefit of the mortgagee. Section 254(4) also contains safeguards to prevent the mortgagee’s unjust enrichment at the expense of the mortgagor with respect to the application of any insurance proceeds payable. But the statute neither expressly allows nor disallows language of the nature to which the inquirer refers. More importantly, as noted above, the parties to a mortgage note are the lender and the borrower only. Any purported “direction” to an insurer contained in the note cannot, as a general matter, bind the insurer.

For further information, you may contact Supervising Attorney Michael Campanelli at the New York City office.