New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
ONE COMMERCE PLAZA
ALBANY, NEW YORK 12257

David A. Paterson
Governor

Eric R. Dinallo
Superintendent

OGC Op. No. 08-09-02

The Office of General Counsel issued the following opinion on September 10, 2008, representing the position of the New York State Insurance Department.

RE: Cancellation of homeowner’s insurance policy based upon impending foreclosure action.

Question Presented:

May an insurer cancel a homeowner’s insurance policy based solely on notification by the bank of an impending or commenced foreclosure action?

Conclusion:

No. An insurer may not cancel a homeowner’s insurance policy based solely on notification by the bank of an impending or commenced foreclosure action, because a foreclosure filing is not one of the permissible grounds for cancellation set forth in N.Y. Ins. Law § 3425(c)(2) (McKinney 2007)

Facts:

The inquirer reports that some banks are notifying homeowner’s insurance companies that an insured property is being foreclosed upon. The inquirer further reports that the insurer is then issuing a cancellation notice based upon the pending foreclosure action, and the prospect of the home becoming unoccupied.

Analysis:

Insurance Law §3425(c)(2) is pertinent to the inquiry. That statute sets forth the permissible grounds under which an insurer may cancel a personal lines insurance policy, such as a homeowner’s insurance policy. The statute, in relevant part, states:

(c) After a covered policy has been in effect for sixty days, or upon the effective date if the policy is a renewal, no notice of cancellation shall be issued to become effective unless required pursuant to a program approved by the superintendent as necessary because a continuation of the present premium volume would be hazardous to the interests of policyholders of the insurer, its creditors or the public, or unless it is based on one or more of the following:

* * *

(2) With respect to personal lines insurance policies:

(A) nonpayment of premium, provided, however, that a notice of cancellation on this ground shall inform the insured of the amount due;

(B) conviction of a crime arising out of acts increasing the hazard insured against;

(C) discovery of fraud or material misrepresentation in obtaining the policy or in the presentation of a claim thereunder;

(D) discovery of willful or reckless acts or omissions increasing the hazard insured against;

(E) physical changes in the property insured occurring after issuance or last annual anniversary date of the policy which result in the property becoming uninsurable in accordance with the insurer's objective, uniformly applied underwriting standards in effect at the time the policy was issued or last voluntarily renewed . . . 

By its terms, Insurance Law § 3425(c) prevents an insurer from cancelling an insurance policy that has been in effect for more than 60 days, unless the cancellation is based on one of the grounds stated in the statute itself.

Insurance Law § 3425(c)(2)(A), (B), and (C) do not apply to the facts presented here, because there is no allegation that the insured has failed to pay the premium, that criminal activity has occurred that increases the hazard to the property, or that there has been fraud or misrepresentation on the part of the insured. Nor do Insurance Law § 3425(c)(2)(D) or (E) authorize an insurer to issue a policy cancellation based solely upon the fact that a bank has filed or may file a foreclosure action.

With respect to subparagraph (D), the filing of a foreclosure action does not constitute a “willful or reckless act[] or omission[]” or “increas[e] the hazard insured against.” The Department has previously concluded that the increase in the “hazard insured against” as a result of a “willful or reckless” act, or an omission that triggers an insurer’s right to cancel, must be more than a minor or insignificant increase. See Opinion of Office of General Counsel No. 04-11-29 (November 29, 2004). Although it is conceivable that there may be some resulting increase in risk, a bank’s foreclosure action filing alone does not increase any hazard that the policy insures against in more than a minor or insignificant degree. Indeed, the mere act of filing a foreclosure action does not change the property owner's interest in the property. Nor does the filing change any characteristics of the property or risks insured. Rather, the filing of a foreclosure action only starts a process under which, if completed, the insured property is sold at public auction. (In fact, it is not uncommon for a foreclosure action to end without the sale of the property.) Thus, if there is any significant change in the risk insured, it flows not from the foreclosure action filing itself but from some other cause or causes related to the particular circumstances.

To the extent that the insurer claims the right to cancel based upon some other cause, such other cause must be specified, in accordance with Insurance Law § 3425(c), as the ground for cancellation and the resultant increase in risk must be more than minor or insignicant. Any interpretation of Insurance Law § 3425 to the contrary would run afoul of the legislative intent behind the statute, which is to protect the insured from unwarranted cancellations. In any event, the prospect of the home becoming unoccupied as a result of a foreclosure action filing is insufficient to warrant cancellation of the homeowner’s policy pursuant to subparagraph (D), because it does not necessarily follow that the property will be unoccupied.

With respect to subparagraph (E), the filing of a foreclosure action in no way constitutes a physical change in the property, which requires a physical alteration to the property. See Opinion of Office of General Counsel No. 04-11-29 (November 29, 2004). For instance, the Department previously has concluded that the addition of an in-ground pool constitutes a significant alteration to the permanent structure of the property that satisfies the “physical change” requirement of Insurance Law § 3425(c)(2)(E). Id. At the same, the Department also has opined that the addition of a business to the premises, without any physical alterations to the structure of the property itself, is not a “physical change” within the meaning of the statute. Id.

Further, an insurer that bases its cancellation solely on the fact that a foreclosure action has been filed could be found by the Superintendent to violate Insurance Law § 2802(c). That statute prohibits an insurer from using credit information to cancel a personal lines insurance policy, such as a homeowner’s policy. Insurance Law § 2801(f) defines credit information to include any credit-related information, such as foreclosure filings, found on a credit report itself.

For further information you may contact Senior Attorney Brenda Gibbs at the Albany Office.\