Courts To Address Insurance Policies.(Managing REO)

Byline: Jennifer Harmon

LITTLE ROCK, AR-The Tennessee Supreme Court issued an opinion in the case of U.S. Bank NA, as servicer for the Tennessee Housing Development Agency v. Tennessee Farmers Mutual Insurance Co., which addressed industry concerns relevant to notice to insurance companies upon the commencement of a foreclosure action there.

Aaron Squyres, a partner at Wilson & Associates PLLC here, said the issue presented in the case was whether the commencement of foreclosure proceedings constituted an "increase in hazard" for notice purposes under a standard mortgagee clause in an insurance policy.

The parties to this dispute were 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," Mr. Squyres said.

"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."

He said 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 Tennessee 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.