Reversal Of Case Requiring Lenders To Notify Insurers Of Foreclosure

In December, we discussed a recent case from the Tennessee Court of Appeals that held that an insurance company was relieved of its obligation to pay on its policy insuring a home because the bank foreclosing on the home did not notify the insurance company of the commencement of the foreclosure. U.S. Bank, N.A. v. Tennessee Farmers Mutual Insurance Company, 2007 WL 4463959 (Tenn. App. 2007). That decision has now been reversed by the Tennessee Supreme Court in U.S. Bank, N.A. v. Tennessee Farmers Mutual Insurance Company, 2009 WL 199856 (January 29, 2009).The policy contained what the court described as a “standard mortgage clause”, under which the benefits of the policy ran to the bank holding the mortgage on the property. That clause provided in part that: “The mortgagee will…notify [the insurance company] of any change of ownership or occupancy or any increase in hazard of which the mortgagee has knowledge.”The bank foreclosed on the home, but did not notify the insurance company of the foreclosure. During the foreclosure process, the home was destroyed by a fire. The bank made a claim on the insurance policy and the insurance company denied the claim. It based the denial on the argument that the commencement of the foreclosure was an “increase in hazard” within the meaning of the policy clause, that the bank knew of the increase in hazard, and that coverage was invalidated by the bank’s failure to notify the insurance company of the commencement of the foreclosure. Although it recognized that other courts have come to a different conclusion, the lower court in the Tennessee case agreed with the insurance company and ruled that it was not required to pay on the policy. In doing so, it cited among other cases a 1924 case decided by the U.S. Court of Appeals for the Ninth Circuit applying Washington State law, Neil Bros. Grain Co. v. Hartford Fire Ins. Co., 1 F.2d 904 (9th Cir. 1924), for the proposition that: “It is universally recognized…that the hazard is increased by a mortgage of the property insured, and still further increased by the commencement of proceedings to foreclose.”On January 29, 2009, the Tennessee Supreme Court reversed the lower appellate court’s decision. In doing so, it held: “We conclude that the Bank was not required to give notice to [the insurance company] of the initiation of foreclosure proceedings, and therefore, the lack of notice does not invalidate coverage in this case….We do not agree that by its plain meaning the phrase “increase of hazard” includes the commencement of foreclosure proceedings….”