Two Insurers who Insure the Same Risk of Loss Must Pay Claim Equally

Forced Placed Insurance and Direct Insurance Both Validly Insured the Same Risk

When a lender was listed as a mortgagee on a policy and, because it mistakenly believed that policy had been cancelled, protected its interest by initiated forced placed insurance on the same property. When a loss occurred it was determined that both policies were in effect at the time of the loss.

In Ocean Harbor Casualty Insurance Company v. Great American E&S Insurance Company, 19-cv-3778 (BMC), United States District Court Eastern District Of New York (April 14, 2020) the USDC was called upon to determine who owed what to whom after a fire engulfed Andrea Afam’s home, resulting in her death and the complete destruction of her home.  Ywo insurance policies covered the loss, the first issued by plaintiff, Ocean Harbor Casualty Insurance Company (“Ocean Harbor”), and the second by defendant, Great American E&S Insurance Company (“GAIC”).

Ocean Harbor sued for declaratory judgment that it need only contribute 50% towards the loss amount of the premises. GAIC has filed two counterclaims, alleging Ocean Harbor should reimburse it for the entire amount ($378,799.30) because it claims it was required under federal and state law to return Afam’s monthly insurance premiums to her estate once the existence of concurrent hazard insurance was uncovered.

BACKGROUND

Afam owned a home, and Selene Finance LP (“Selene”) serviced Afam’s mortgage as her lender/mortgagee. Afam maintained homeowner’s insurance through Ocean Harbor, whose insurance policy provided up to $550,000 in property damage coverage for the premises. As Afam’s mortgagee, Selene had an interest to ensure that the property was adequately covered by insurance in the event of a loss. Without Selene’s knowledge, Ocean Harbor later reinstated its policy after Afam represented that her property was occupied by only two families and provided photos showing her yard had been cleaned up.

Still under the mistaken belief that Afam’s property was uninsured, GAIC claims that Selene advised Afam on December 21, 2017 that it had purchased lender-placed hazard insurance (“forced-placed insurance”) for her property retroactive to September 25, 2017, as its records reflected that her hazard policy with Ocean Harbor had expired. Both insurance policies contained “other insurance” clauses.

The fire occurred in April 2018. GAIC paid Selene $378,779.30 to cover the actual cash value of the Afam property loss, less the deductible. Ocean Harbor offered to reimburse GAIC for 50% of the claim, but GAIC rejected this offer.

DISCUSSION

The general rule under New York law is that there is a well-settled equitable right to contribution, where there is concurrent insurance even in the absence of a policy provision for apportionment, and that where each of the policies covering the risk generally purports to be excess to the other, the excess coverage clauses are held to cancel out each other and each insurer contributes in proportion to its limit amount of insurance.

Both insurance policies covered the same person (i.e., Selene), the same risk (i.e., fire hazard), and the same interest (i.e., the mortgagee’s interest in Afam’s property).

GAIC argued that Ocean Harbor should reimburse it for the entire loss because GAIC was legally obligated under federal and state law to return Afam’s premiums to her estate once it was revealed that her policy with Ocean Harbor had been retroactively reinstated. Based on federal and state regulations, GAIC argued that, since it was required to cancel Selene’s force-placed insurance on Afam’s property and return the premiums once Ocean Harbor’s reinstated policy was uncovered, its later-in-time policy was void ad initio or, alternatively, it should be able to rescind the contract because there was a failure of consideration. In other words, GAIC claimed the mandated refund of premiums resulted in the “retroactive” cancellation of its policy with Selene.

The obligation to return Afam’s premiums should have been borne by Selene, the person responsible for servicing her mortgage. GAIC had no obligation to return the premiums under that particular provision. In addition, the regulation does not provide that the servicer’s policy is void ab initio. GAIC fails to provide any authority for such a counterintuitive proposition. Although Regulation X requires the return of premiums to the borrower, the regulation fails to mention whether the policy may be retroactively cancelled. To the contrary, the regulation suggests that any cancellation should be “prospective” – declaring that the servicer “must [c]ancel the forced-place insurance plan.”

Like its federal counterpart, the purpose of the a state rule is to “protect homeowners and borrowers from harm caused by excessive forced-placed insurance rates, questionable business practices and relationships in the force-placed insurance industry, and inadequate notice of force-placed insurance.” Nothing in the rule suggests an insurer may retroactively cancel a policy when there is concurrent coverage.

The USDC concluded that the plain language of GAIC’s policy and its “other insurance” clause controlled the decision. Under the terms and conditions of its policy, GAIC must provide its proportional share if there is concurrent coverage. That clause does not become inoperative simply because a servicer and insurer thrust upon a homeowner forced-placed insurance at the homeowner’s expense for several months even when the forced placed insurance was not necessary.

As to GAIC’s failure of consideration argument, this lacks merit for two reasons. First, there was a full exchange of valid consideration and performance in this case. Selene had an insurance policy with GAIC for coverage for all of its properties in which it held an interest as a servicer or mortgagee, including residential homes. Selene promised to pay monthly premiums, and there is no evidence that it failed in this obligation. In turn, GAIC fully performed on the contract by paying for the loss that occurred at Afam’s property after the fire. Accordingly, there was no failure in consideration.

The forced-placed insurance coverage on Afam’s property formed only a small portion of the consideration between GAIC and Selene. The commercial policy issued by GAIC didn’t just cover the Afam property, but also “all buildings and properties” across the nation in which Selene had an interest. It was obvious that the contractual relationship between Selene and GAIC remained intact and supported by sufficient consideration. That is why GAIC paid Selene and is not seeking recoupment from it.

Ocean Harbor’s motion for summary judgment was granted, and GAIC’s motion for summary judgment as to its counterclaims was denied and the USDC concluded the parties’ respective insurance policies provide the same level and priority of coverage; the parties are required to cover the loss to the Afam property on a pro rata or proportional basis; and thus, Ocean Harbor is required to contribute half of the amount paid to Selene.

ZALMA OPINION

A forced place policy of insurance is not limited to a single property but covers all of the properties the lender/insured has throughout the U.S. Each loan is protected rather than a single policy but an obligation under the policy to protect each loan. The coverage cannot be eliminated after a loss and although incorrectly acquired it was available to protect the lender at the time of the loss. Since both policies were in force and effect at the time of the fire, fairness and insurance law required the two insurers to share the loss equally.


© 2020 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

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 zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 52 years Barry Zalma has dedicated 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 make it possible for insurers and their claims staff to become insurance claims professionals.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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