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A divergence of interests in mortgage clause

A divergence of interests in mortgage clause

February 26
09:12 2018

A divergence of interests in mortgage clause

On February 20, 2009, Mark and Rhonda Hongsermeier executed a mortgage with GSF Mortgage Corporation for property located in Rockford, Illinois. The owners resided in the property from November 2004 through November 2010. The mortgage was subsequently assigned to GMAC Bank and later transferred to GMAC Mortgage, LLC (GMACM).

On February 21, 2011, Stonegate Insurance Company issued the owners a hazard policy to cover the property against loss and damage caused by fire and other perils. The insured was defined as the owners and “residents of your household.” The “insured location” was defined as the “residence premises,” which was further defined as “the one family dwelling * * * where you reside.” The policy also included a mortgage clause to insure GMACM as the named loss payee and provided:

“If a mortgagee is named in this policy, any loss payable under Coverage A or B will be paid to the mortgagee and you, as interests appear. * * * If we deny your claim, that denial will not apply to a valid claim of the mortgagee, if the mortgagee:

a. Notifies us of any change in ownership, occupancy or substantial change in risk of which the mortgagee is aware;

b. Pays any premium due under this policy on demand if you have neglected to pay the premium[;] and

c. Submits a signed, sworn statement of loss within 60 days after receiving notice from us of your failure to do so. Policy conditions relating to Appraisal, Suit Against Us and Loss Payment apply to the mortgagee.

If we decide to cancel or not to renew the policy, the mortgagee will be notified at least 10 days before the date cancellation or nonrenewal takes effect.”

In addition, the policy contained a fraud clause that provided:

“the entire policy will be void, if whether before or after a loss, an ‘insured’ has:

a. Intentionally concealed or misrepresented any material fact or circumstance;

b. Engaged in fraudulent conduct; or

c. Made false statements; relating to this insurance.”

Stonegate neither inspected the property nor spoke with the owners before it issued the policy. Thereafter, Stonegate forwarded to the owners and GMACM the policy declarations, which indicated the policy was effective on February 21, 2011. GMACM was not provided a copy of the policy itself.

Before and after Stonegate issued the policy, GMACM retained CoreLogic Field Services to inspect the property. CoreLogic provided five inspection reports to GMACM. The first four reports described exterior visual inspections that occurred on July 28, 2010, September 25, 2010, October 22, 2010, and September 29, 2011. The four reports indicated that the property was occupied and that the inspector had had no contact with the occupant. The fifth inspection report stated that on November 1, 2011, an inspector communicated with the tenant on the property premises.

On or about November 4, 2011, a malfunctioning electrical outlet caused a fire that severely damaged the property. At the time the incident occurred, the owners had leased the property to tenants who resided at the property instead of the owners. At the time of the fire, GMACM was the servicer of the mortgage loan.

On November 17, 2011, Stonegate filed a complaint seeking a declaration that it did not have a duty to pay the owners because the owners were not occupying the property at the time of the fire. On January 4, 2012, Stonegate issued a notice of cancellation that was effective February 8, 2012. The notice indicated that the property was not eligible for coverage under the policy because it was not occupied by the owners.

On April 10, 2012, Stonegate filed a first amended complaint in which it joined GMACM as a defendant and asserted that GMACM also could not recover, because it knew the owners were not occupying the property before the fire but failed to notify Stonegate as required under the mortgage clause. On August 14, 2012, GMACM filed an answer in which it stated it had “no knowledge” that the property was rented at any time prior to the fire.

On the same day, on August 14, 2012, GMACM filed a two-count counterclaim that was subsequently amended. In count I, GMACM requested a declaratory judgment that (1) it was insured under the policy, (2) Stonegate’s denial of the owners’ claim did not affect GMACM’s claim for losses and damages to the property arising from the fire, and (3) GMACM’s claim was valid. In count II, GMACM alleged breach of contract against Stonegate.

Stonegate filed an answer to GMACM’s counterclaim along with affirmative defenses. Stonegate alleged that (1) the entire policy was void because the owners had concealed or misrepresented the fact that tenants occupied the property, and (2) GMACM could not recover because it knew or should have known the property was rented, but failed to meet its obligation to notify Stonegate as required in the mortgage clause. GMACM denied Stonegate’s affirmative defenses. On August 15, 2012, the circuit court dismissed the owners from the lawsuit.

During the litigation, Ocwen Loan Services, LLC, purchased GMACM’s servicing rights and became the servicer of the mortgage loan. Subsequently, on September 23, 2013, Ocwen was substituted into the case and GMACM was dismissed.

On March 5, 2014, Ocwen filed a motion for summary judgment, arguing that no genuine issues of material fact existed as to whether it was entitled to recovery under the policy. The court granted the motion, stating that the policy contained a standard mortgage clause that created an independent or separate insurance contract between the parties. Accordingly, the owners’ alleged failure to notify Stonegate of a change in occupancy was not in itself a defense to a claim by Ocwen. The court further stated that because the owners did not reside at the property when the policy was issued, there was no change in ownership, occupancy, or a substantial change in risk for Ocwen to report to Stonegate. The court denied Stonegate’s motion to clarify and reconsider and issued its final judgment in the matter. Stonegate appealed.

On appeal, Stonegate argued that the circuit court erred in granting summary judgment and permitting Ocwen to recover under the policy because (1) the owners’ occupancy of the property was a condition precedent to coverage, (2) questions of fact existed as to whether the policy’s mortgage clause provided coverage to Ocwen, as GMACM knew or should have known that the property was rented but failed to notify Stonegate, as required in the mortgage clause, and (3) the fraud clause precluded coverage for the owners and Ocwen, as the owners purposely concealed the leasing of the property.

The court found that the mortgage clause in the policy was a standard mortgage clause, but noted that and concluded that the insurer’s denial of the owners’ claim did not necessarily apply to Ocwen’s interest, because a separate contractual relationship had been established between Stonegate and Ocwen.

The court also found that Stonegate had presented no evidence to establish that GMACM was aware that the owners were not occupying the property before the fire.

With respect to the policy’s fraud clause, the court noted that the clause did not state whether, in the event of the owners’ wrongdoing, the policy would be void only as to the owners or also as to Ocwen. The court ruled that the fraud clause did not bar GMACM’s recovery under the policy.

Stonegate Insurance Company vs Hongsermeier and Ocwen Loan Services, LLC-Appellate Court of Illinois-First District, Fifth Division-March 3, 2017- No. 1-15-1835.

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