Forced Placed Insurance Only Protects the Lender
Mortgage lenders include within the terms and conditions of the deed of trust allows the lender to unilaterally select insurance to protect its interest in case the property owner fails to purchase insurance naming the lender as a named mortgagee. If the owner fails the lender can buy insurance for its sole protection and bill the borrower for the premium.
In Mark R. Bautzer, as Trustee v. Select Portfolio Servicing, Inc., et al., E072733, Court Of Appeal Of The State Of California Fourth Appellate District Division Two (December 24, 2020) Mark R. Bautzer, sued the mortgage servicing company (Select Portfolio Servicing, Inc.) and the provider of fire insurance (Assurant, Inc.). He claimed Select procured, or Assurant provided, a policy with limits insufficient to cover the loss from a fire that destroyed the property. The trial court sustained Select’s demurrer without leave to amend and granted Assurant’s motion for judgment on the pleadings, resulting in a dismissal of the entire action. Bautzer appealed.
Bautzer sued in his capacity as the trustee of his deceased mother’s revocable trust, which owns real property in Ojai containing a single-family residence. He claimed that in July 2014, “while acting as an agent of Assurant,” Select “offered [him] to have the premises protected by fire insurance through an insurance policy that Select would purchase from Assurant.”
When a fire destroyed the home in December 2017, Assurant paid out the policy limit of $866,977, which covered neither the cost to rebuild the residence nor the balance of the mortgage (which at that time was approximately $1,013,000). Select applied the proceeds to the mortgage, then initiated foreclosure proceedings to collect the remaining balance of about $150,000. Although the value of the land was appraised at only $645,000, Select would not accept payments from Bautzer that were less than “what was called for by the terms of the loan.”
The deed of trust required that “Borrower shall keep . . . the Property insured against loss by fire.” (Italics added.) However, it also says if the borrower “fails to maintain any of the coverages,” including fire insurance, the “Lender may obtain insurance coverage, at Lender’s option and Borrower’s expense.” (Italics added.) The insurance industry often commonly refers to this type of insurance scenario as “force-placed” or “lender-placed” insurance.
After a demurrer was sustained with leave to amend Bautzer filed a first amended complaint (FAC) that was identical to the original complaint except it added allegations to demonstrate his standing to sue. Select once again demurred and raised the same arguments against the merits of Bautzer’s claims as it had in its demurrer to the original complaint.
The court granted Select’s request for judicial notice and concluded Select was correct—Bautzer failed to allege an additional insurance agreement apart from the covenants in the deed of trust.
The Breach of Contract Claims Fail
Bautzer articulated for the first time in his opposition admits that (a) the deed of trust is the applicable contract and (b) the insurance Select purchased was force-placed, obtained in the event the borrower defaults on their obligation to purchase insurance.
Bautzer cannot state a claim for breach of contract against either Select or Assurant under the deed of trust. That document makes quite clear that when a borrower fails to obtain fire insurance, the lender may, “at [its] option,” obtain fire insurance, but is not required to. What’s more, the deed of trust also warns that although any force-placed or lender-placed insurance the lender does procure will be “at . . . Borrower’s expense,” it “might not” protect the borrower’s interest in the property and need not be of any specific type or in any specific amount.
In short, once Bautzer failed to obtain insurance, the deed of trust permitted Select to purchase any type or amount of insurance for the lender’s benefit (to protect its security interest in the loan). Assurant, in turn, was not in privity with Bautzer. Its customer was the lender (and its mortgage servicer, Select), not the borrower.
Since Bautzer himself admitted that Select had “elect[ed]” to purchase force-placed insurance that admission contradicts his allegation that Select had instead offered to act as something like an insurance broker and obtain insurance to his specifications. Where, as here, judicial notice is requested of a legally operative document—like a contract—the court may take notice not only of the fact of the document and its recording or publication, but also facts that clearly derive from its legal effect.
The essential elements of contract formation are capacity to contract, a lawful object, mutual consent of the parties to be bound, and sufficient consideration. A complaint must indicate on its face whether the contract is written, oral, or implied by conduct. If the action is based on an alleged breach of a written contract, the terms must be set out verbatim in the body of the complaint or a copy of the written instrument must be attached and incorporated by reference. Bautzer’s complaint satisfied none of these requirements. Importantly, it contained no allegations demonstrating that he provided Select with any consideration for promising to procure an insurance policy “sufficient” for his purposes.
The Negligence and Unfair Business Practice Claims Fail
The fact that the insurance covenants in the deed of trust control and do not require Select to purchase any particular type of fire insurance means that Bautzer’s other two causes of action also fail. In California, as a general rule, a financial institution owes no duty of care to a borrower when the institution’s involvement in the loan transaction does not exceed the scope of its conventional role as mere lender of money. Loan servicers do not owe a duty to the borrowers of the loans they service. Select did not owe Bautzer a duty of care. Its obligations to Bautzer sound in contract, not tort.
Select is the servicer of the loan; Bautzer never alleged he hired it to act as an insurance broker for him. Nor did Assurant owe Bautzer a duty of care. Its relationship to Bautzer is even more attenuated than Select’s, as Assurant was never in privity with him. Select obtained the insurance policy from Assurant then, as authorized under the deed of trust, billed Bautzer for the premiums. Assurant did not owe a legal duty to Select (let alone to Bautzer) to make any particular insurance available or to advise of any inadequacies in the policy limits.
Bautzer’s arguments on appeal were boiled down to an insistence that, because the case was at the demur stage, the court should look at his complaint only and ignore the terms of the deed of trust. He argues that since he alleged Select promised to find him an acceptable insurance policy, the court should accept that as the truth.
Legal principles and common sense dictate that the court should not. Bautzer’s allegations and the judicially noticed deed of trust reveal, as a matter of law, that none of his theories of liability is tenable.
When a person acquires property with a mortgage he, she or it is required to insure against the risk of loss of the property by fire and other enumerated perils to protect the owner’s interest and the interest of the lender. When, as here, the borrower fails to acquire the insurance mandated by the deed of trust, the lender has the option to protect its interest with forced placed insurance that only protects the interest of the lender. Bautzer, without any logical basis, relied on the forced placed insurance to protect his interest as well as that of the lender. He made a major error that cost him and his mother’s estate severely and allowed an asset valued at more than a million dollars to be destroyed without any insurance protection for Bautzer or the estate.
© 2020 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and email@example.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
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