Friday, May 29, 2009

Commencement of foreclosure proceedings does not constitute an increase in hazard; no notice to insurance company required


The issue presented in this case is whether the commencement of foreclosure proceedings constitutes an increase in hazard for notice purposes under a standard mortgage clause in an insurance policy. The parties to this dispute are the bank that loaned funds to a homeowner for the purchase of a house and the insurance company that issued a personal fire and extended coverage insurance policy on the premises. After the homeowner became delinquent on her payments, the bank began foreclosure proceedings by notifying the homeowner of its intent to foreclose on the house. No notification of the foreclosure was given to the insurance company which insured the house against fire loss. Before the foreclosure process was complete, the homeowner filed for bankruptcy, which stayed the foreclosure proceedings. Thereafter, the house was destroyed by fire. The insurance company refused to pay the insurance proceeds to the bank on the theory that the commencement of foreclosure proceedings constituted an increase in hazard of which the bank was required to notify the insurance company under the policy. The bank filed suit against the insurance company for breach of contract, bad faith refusal to pay an insurance claim, and violation of the Tennessee Consumer Protection Act. The trial court granted partial summary judgment to the bank, concluding that the bank's failure to give the insurer notice of the foreclosure proceedings did not invalidate the insurance coverage. The Court of Appeals reversed, finding that the bank's initiation of foreclosure proceedings amounted to an increase in hazard under the policy and the bank's failure to provide notice precluded coverage. After careful review, we conclude that commencement of foreclosure proceedings does not constitute an increase in hazard under the terms of the insurance policy or the applicable statutory provisions, and therefore, no notice was required to be given to the insurance company. Accordingly, we reverse the judgment of the Court of Appeals.

Opinion may be found at the TBA website:

"Our review of cases from other jurisdictions reveals that courts have reached a similar conclusion on the issue of whether the commencement of foreclosure proceedings constitutes an increase in hazard for purposes of a standard mortgage clause.  In an Indiana case, for example, the insurance policy contained a provision requiring the lienholder to notify the insurance company of “any . . . increase of hazard which shall come to his knowledge.”   After the insured property was destroyed by fire, the insurance company argued that the commencement of foreclosure proceedings by the lienholder prior to the fire “so greatly increased the risk of loss by fire to the property insured, as necessarily to avoid the contract of insurance.”  Id.  The Supreme Court of Indiana rejected this argument, holding that the “courts can not assume that the mere commencement of the foreclosure proceedings, of itself, increased the hazard of the risk . . . to such an extent as would, in the absence of notice or consent, avoid the contract of insurance.”   The Indiana Supreme Court explained that if the insurance company had “desired to be notified of the commencement of foreclosure proceedings, or had supposed that the mere commencement of such proceedings would increase the hazard of the risk, it would have stipulated for such notice in direct terms.”Id.

"In similar cases involving standard mortgage clauses requiring notice of an “increase of hazard,” courts have found that the plain meaning of those words do not include an event such as a foreclosure proceeding, but rather, refer to physical conditions on the insured property posing a more hazardous risk to the property.  Commentator Commentators on insurance law have likewise observed that the “foreclosure of a mortgage on the insured premises is not such an increase of hazard as requires notice to the insurer.”  Id.