Court Rules Lender Can Force Place Terror Insurance.( Omni Berkshire Corp)

A decision has been rendered on a case involving a dispute between a servicer and a borrower about "force placement" of terrorism insurance, with a United States District Court in New York ruling that a servicer is free to "force place" terrorism insurance if the borrower refuses to get the insurance. This decision could set a precedent since other similar cases have been settled before getting to the end of the legal process, possibly to avoid the expense of long-drawn out legal skirmishes and attendant legal fees. The case was initiated by Dallas-based Omni Berkshire Corp., who had borrowed $250 million in 1998 from Secore Financial, against Wells Fargo, the special servicer on the loan. The loan - secured by five hotel properties in New York, Chicago, Houston, Dallas, and Irving, Texas - is part of a $1.8 billion commercial mortgage-backed securities offering.

Kathryn O'Neall, a managing director with the Wells Fargo commercial mortgage servicing group said that Wells Fargo is "very pleased" with the decision on this matter.

She noted, "We think the judge's decision clarifies an important issue facing the commercial real estate industry post-9/11. A servicer can still require a borrower to carry terrorism insurance under the standard 'other reasonable insurance' provision of the loan documents, despite the insurance industry's decision to routinely exclude terrorism insurance coverage from 'all risk' policies." About whether Omni would appeal this decision, Ms. O'Neall declined to comment, noting that "this is a potentially ongoing legal matter." Omni did not return a call seeking comment, made to the company's general counsel.

While terrorism insurance on the Omni hotel properties was covered in the "all risk" policy prior to the terrorist attacks of 9/11, the insurance industry specifically started excluding terrorism insurance from "all risk" coverage in the aftermath of the attacks.

In July 2002, Wachovia, the master servicer on the loan, asked Omni to comply with the loan documents by getting terrorism insurance, and Omni responded saying that the loan documents did not specifically require terrorism insurance. Omni also said that it had made inquiries about "standalone" terrorism coverage and found that such coverage was extremely expensive at that point.

After that, Wells Fargo, the special servicer, stepped into the picture and asked for $60 million in terrorism insurance coverage on the hotels. Omni then ...