By Brian H.Liebo, Esq.

Liebo, Weingarden, Dobie & Barbee, PLLP

USFN Member (MN)

The mortgage is in default and in foreclosure. Coincidentally, the house mysteriously burns down. What appears to be just terribly bad luck for a borrower may turn out to be far more sinister-- arson. In these instances, a mortgage servicer needs to quickly focus on hazard insurance claim issues, in addition to foreclosing the mortgage.  A critical issue with fire damage cases, and other hazard insurance, is whether the foreclosure should be completed without regard to a pending hazard insurance claim.

When a home in foreclosure burns down, the mortgage servicer should not automatically rush to complete the foreclosure. Instead, the mortgage servicer should fully resolve the hazard policy claim and obtain the claim proceeds before having the sheriff’s sale conducted. Speeding to sale and improperly handling the hazard claim process can have more than one detrimental impact, including full loss of coverage. Specifically, the Minnesota Court of Appeals has held that where a mortgagee forecloses its mortgage after the date of the hazard loss and bids full debt, the mortgagee may forfeit its separate rights under the mortgage clause of a fire insurance policy.

In the pivotal case, Margaretten & Co. v Illinois Farmers Ins. Co., 526 N.W.2d 389 (Minn. Ct. App. 1995), a fire destroyed the mortgaged property. The insurer denied the homeowner’s claim for insurance proceeds because the owners caused the fire. The mortgagee filed a claim for its own insurance benefits under the terms of the hazard insurance policy. However, the insurer also denied the mortgagee’s claim because the mortgagee refused to give the insurer a partial assignment of the mortgage equal to the insurance benefits payment. The insurer was trying to preserve its own right of subrogation for the arson. The mortgagee ultimately foreclosed on the delinquent mortgage and bid in the full debt amount at the sheriff’s sale. After the lender sued to recover the insurance proceeds, the Court held the insurer was right to deny the claim, and it was justified in requiring the mortgagee to give a partial assignment of the mortgage that would have balanced the parties’ interests. This result makes clear that a mortgage servicer with a pending hazard loss should not complete a foreclosure until it is sure it has satisfied all insurance policy requirements and fully resolved its claim with the insurer.

It is important to note that Minnesota has a short, two-year statute of limitations period for insurance loss claims.  In fact, it is necessary to not just make a claim within two (2) years from the date of loss, but also commence a lawsuit within two years from the date of loss to compel coverage and ensure all policy rights are preserved by the lender.

While a foreclosure can be a complicated enough process, throwing in a large hazard loss such as arson can create a process full of pitfalls and peril. Hence, the safest approach, wherever possible, is for a servicer to fully resolve hazard-loss claims and funds with both the insurers and borrowers, respectively, before completing foreclosures. Doing so may help prevent not only losses of coverage, but also protracted litigation.

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Fall 2022 USFN Report