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The lender is obliged to be in good faith towards the borrower with regard to insurance income



When a mortgaged home is damaged by a storm and the homeowners' property or flood insurer pays compensation for the storm damage, how should the mortgage company decide whether to use these insurance funds to pay off the overdue mortgage's capital and interest; or alternatively use the funds to repair the property, according to the loan agreement? In Wilmington Savings Fund Society, FSB, d / b / a Christiana Trust, not individually but as trustee of the Pretium Mortgage Acquisition Trust, plaintiff-respondent against Patricia E. Daw and Richard C. Daw, and TD Bank, NA, and the State of New Jersey, No. A-0829-19, Superior Court of New Jersey, Appellate Division (October 22, 2021), the court established an obligation to show good faith and fairness between a lender and mortgagee with respect to the proceeds of an insurance claim.

When the loan agreement states that the lender can choose to use the funds on the outstanding debt if either repairs are "financially impossible" or if such expenses would impair the lender's security interest, does the lender have an obligation to the borrower to make that decision immediately and in good faith?

FACTS

The lender's transferor kept the storm insurance proceeds for over three years before finally applying them to the homeowners' outstanding debt. During the long interval, an estimated amount of $ 40,000 in mortgage interest arose. Negotiations to change the terms of the loan failed when the transferor demanded that two thirds of the insurance funds be applied to the debt in advance as a condition of the loan change, which the homeowners claim would have provided them with insufficient funds to complete all repairs and disqualify them for a government grant.

ANALYSIS

Once the lender has been provided with adequate information to determine how the insurance funds will be used – such as the estimated costs of repairs and market values ​​- the lender is obliged to clearly inform the borrower within a reasonable time whether it The requested use of insurance amounts for repairs is financially impossible or will impair its security in the property. The time for notifying the borrower of the disposition can be extended if the parties negotiate in good faith to change the loan terms. If the lender unreasonably delays in making a decision to approve the proposed use of the insurance funds for repairs, the court has a reasonable power to reduce the mortgage interest that has accumulated in the meantime. In addition, the lender must place the insurance funds in an interest-bearing, separate account until the proper use of these funds is resolved.

Superstorm Sandy and its aftermath

On October 29, 2012, Superstorm hit the Sandy Jersey Shore. . As described by the Daws, the storm caused the ocean to break through the dunes near their Point Pleasant home and rush into the bay. The home was flooded with over two feet of water, which destroyed much of the first floor and required it to be cleaned. The distribution of insurance compensation was regulated by several provisions within the mortgage. These provisions are obviously common or standard terms that have been discussed in other mortgage cases.

The Foreclosure Litigation and Other Events

As the loan remained in default, the plaintiff filed a mortgage complaint against Daws in March 2016, to which Daws did not respond. Consequently, a third-party judgment was handed down against them in June 2016.

Despite the plaintiff filing the foreclosure complaint, Daws requested a further loan change so that they could keep the house. At the same time, in October 2016, the lender received a broker's price statement ("BPO"). The BPO stated that the house was "in average condition" and that "in its existing condition" for the next 90 to 120 days, the house's likely selling price was $ 440,000, compared to $ 450,000 if the proposed repairs were completed. BPO estimated that the "in existing condition" list price for the home was estimated at $ 459,900, compared to $ 469,900 if the property was repaired. The BPO stated that it was "unknown" if the property needed emergency repairs, noting only that the property needed exterior repairs that cost just over $ 6,000.

On March 3, 2017, the trial court issued a decision that partially granted and partially denied. the Daws' objection to the imposition of the final judgment. The court found that Daws had identified a discrepancy in the amount of the mortgage at the time of foreclosure because the $ 150,000 insurance income had not been deducted from the debt. In addition, the judge noted that the plaintiff had not approved the repairs and therefore violated the agreement by failing to perform either of the two stated options for the insurance income.

Final Motion Practice

The Daws claimed that the plaintiff had unfairly kept the insurance income of $ 150,000 without disposition for over three years. They estimated that if the plaintiff, hypothetically, had immediately applied the insurance income to the outstanding principal amount and interest when it received the funds in October 2015, the final balance of the mortgage would have been about $ 40,000 less.

THE DECLARATION [19659005] It is well established that "an implied union of good faith and fair settlement" exists in "every contract in New Jersey." Sons of Thunder, Inc. v. Borden, Inc. 148 N.J. 396, 420 (1997); see also Restatement (Second) of Contracts § 205 (Am. Law Inst. 1981) ("Each agreement imposes on each party an obligation in good faith and fair handling in its performance and its execution."). The implied alliance means that "neither party shall do anything that will have the effect of destroying or harming the other party's right to receive the fruits of the contract." Sons of Thunder, Inc. 148 NJ at 420 (citing Palisades Props., Inc. v. Brunetti 44 NJ 117, 130 (19459025) 9012965s general). Principles extend sensibly to how a mortgage lender or its transferor exercises control over insurance income received after a borrower's home has been damaged by a storm. The old adage "Do not throw good after bad" applies. In some cases, it will be unreasonably expensive for some repairs to be done with insurance money, even if it goes against what the homeowner wants.

Lenders and their contractors must communicate their decisions and reasons regarding the disposition of insurance income to homeowners. with clarity and consistency.

The insurance funds are seen as compensation guarantees and the mortgagee's claim on them is sometimes described as a "reasonable mortgage". This simply means that the mortgagee has the right to recover the funds to the extent necessary to compensate for the deterioration of the security that follows from the loss or damage, with a maximum recovery corresponding to the amount of the mortgage debt. This result is required to avoid injustice to the mortgagee by devaluing the property as a result of the loss or damage. [ Third reformulation § 4.7 cmt. a (1997)]

If repairs objectively prove to be financially impossible or would impair the lender's security, the insurance income must be applied immediately to the mortgage balance, unless otherwise agreed between the parties.

appropriate that the insurance funds Placed in an interest-bearing account until their disposition is finally determined. Such an opportunity for the funds to grow, even at a modest interest rate, is preferable to the funds remaining dormant, because if the funds are valued, that growth can be applied to either the available resources to finance repairs or to repay the debt. [19659012] Instead of trying to apply the new standards in an incomplete way, the court announced in this opinion, it chose to refer the question of the disposition of the insurance funds to the district court. In accordance with the principles of justice and reasonableness expressed in Restatement (Third) of Property (Mortgages) (1997), the mortgage lender (or its transferor) in such situations owes the borrower an implicit bond of good faith and fair settlement in determining the disposition of the property or the insurance funds.

People sometimes forget that the union of good faith and fair settlement applies to all contracts, not just insurance contracts. In this case, the court of New Jersey established this obligation on mortgage contracts with respect to the use of insurance proceeds held by the mortgagor instead of using the funds for repair or to reduce the mortgage debt. The mortgagor did neither and was questioned by the court for having held money for too long without explaining the reasons to the mortgagee. There are no damages for the infringement but there are contractual damages that may be available to the mortgagee.


© 2021 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his internship to the position of insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He also acts as a mediator for insurance-related disputes. He practiced law in California for more than 44 years as a lawyer for insurance coverage and claims management and more than 54 years in the insurance industry.

Subscribe to Excellence in Claims Handling at https://barryzalma.substack.com/welcome.

He is available at http://www.zalma.com and zalma@zalma.com. Zalma is the first recipient of the first annual Claims Magazine / ACE Legend Award. For the past 53 years, Barry Zalma has devoted his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to enable insurers and their claimants to become professionals in insurance claims.

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