As most readers know, real estate prices have seen record declines during the past few years.1 The declines came on the heels of a dramatic period of rising home values and a “real estate bubble” caused by a wild combination of easy access to capital and speculative fervor on the part of homeowners and investors alike.2 The aftermath of the real estate bubble resulted in a meltdown of the financial system, and led to the insolvency of old line investment banks Bear Stearns and Lehman Brothers as well as the near collapse of insurance giant AIG.3
Here in Florida, where real estate speculation fueled building projects from downtown Miami to the gulf coast, we are at ground zero of the boom and bust cycle in real estate. After seeing sharp price increases during the early part of the decade, for the past few years Florida has experienced steep price declines and an incredible slowdown in real estate sales activity.4 Although government action and lender assistance programs appear to be slowing the rate of filings, Florida is now experiencing one of the highest foreclosure rates in the country.5
By any measure, the foreclosure problem in Florida is simply staggering. Just how staggering, you may ask? Well, to put it in perspective, the Supreme Court of Florida recently established a task force on residential mortgage foreclosure cases because “residential mortgage foreclosure case filings have increased dramatically in the circuit courts, resulting in a tremendous strain on limited judicial resources and reflecting a significant crisis in Florida communities.”6
Just how many foreclosure filings are there in Florida? For the third quarter 2009 alone there were 53,710 new residential foreclosure filings for the metropolitan areas comprising Miami, Fort Lauderdale, and Pompano Beach, FL.7 This ranks as number 15 out of 203 markets surveyed nationwide by RealtyTrac, a California based company that tracks foreclosure statistics.8 The problem is not limited to the residential market as commercial properties and even some very well known hotels are being reported as falling delinquent on their mortgage payments.9
Just how many foreclosure lawsuits are pending in Florida’s courts? Foreclosures now take up 75 percent of the courts’ dockets and 266,000 foreclosures have already been reported through August 2009.10
For claims managers and attorneys working on first party property claims, foreclosure is presently a very important issue to consider. As a group, CSK’s first party property attorneys have recently seen an influx of claims filed by insureds whose properties are, upon closer review, the subject of a pending foreclosure lawsuit. In some cases, we have seen foreclosures completed during the investigative stage of a claim or in the course of litigation. In at least one case, we discovered an insured who had filed a claim after losing his property to foreclosure.
The fact of a completed or pending foreclosure is certainly troubling and may raise a number of questions for the claim. Can the claim continue? Can the lawsuit continue? Since the insured no longer owns the property, what damages can be pursued? What, if anything, is still owed on the claim? More importantly, to whom does the carrier owe it to? Fortunately, Florida courts have already answered a number of the questions posed above.
In Lenart v. Ocwen Fin. Corp.11, the Third District Court of Appeal held that, in the event of foreclosure and where an insurance policy contains a standard, or New York loss payable clause, the rights of a loss payable mortgagee is determined as of the time of the loss. In Lenart, the homeowner-insured reported a claim to his insurer, the Florida Residential Property and Casualty Joint Underwriting Association.12 The claim was reported due to a fire which occurred in December 1998.13 Ocwen Financial Corporation (“Ocwen”) held the mortgage on the property and was the loss payee on the policy.14 The insurer denied the claim and the insured then stopped paying the mortgage.15 Foreclosure proceedings ensued and a final judgment of foreclosure was entered in February 2000.16
Some time after the foreclosure sale, the insured settled the claim with his insurer for $90,000.17 The insurer included Ocwen on the settlement check as the policy contained the standard New York loss payable clause and Ocwen was named as the loss payee on the policy declarations.18 Ocwen, however, refused to endorse the check and the insured filed a third party action against Ocwen seeking the full amount of the proceeds from the settlement of the insurance claim.19 The trial court granted summary judgment in favor of Ocwen and awarded the mortgage company the full amount of the $90,000 settlement.
However, the Third District Court of Appeal reversed the trial court’s decision. In so doing, the Court reaffirmed the rule that foreclosure has a different effect on the loss payee’s interest to a claim based on whether the foreclosure occurs (1) before or (2) after the loss. The Third District referenced its prior holding in Secured Realty Inv. Fund Ltd., III v. Highlands Ins. Co.20 and the Supreme Court of Alabama’s holding in Nationwide Mut. Fire Ins. Co. v. Wilborn21, and stated that:
In the “foreclosure prior to loss” situation . . . the foreclosure . . . occurs in the context of the insured property existing in its undamaged condition and the satisfaction of debt takes into account the value of such property in its undamaged condition prior to loss and the need for the insurance to follow the property. In the “foreclosure after loss” situation . . . the foreclosure occurs in the context of the insured property having been damaged and the satisfaction of the debt takes into account the damaged condition of the property at the time of such foreclosure.22
The Wilborn Court explained that when the foreclosure precedes the loss, the mortgagee occupies the status of “owner” at the time of the loss, and has an insurance interest in protecting his property from loss . . . On the other hand, where the loss precedes the foreclosure the mortgagee is the creditor of the owner at the time of loss, and has an election as to how to satisfy the debt. The mortgagee may either turn to the insurance company for payment as mortgagee under the New York Standard Mortgage Clause and recover, up to the limits of the policy, the mortgage debt; or the mortgagee may foreclose on the property. If the mortgagee elects to pursue the insurance company for payment of the debt, then the debt is fully satisfied and the mortgagee does not have any addition or recourse against the mortgagor. If the mortgagee elects to foreclose on the property and the foreclosure sale does not bring the full amount of the mortgage debt, then the mortgagee may recover the deficiency under the insurance policy as owner . . . The Court reiterated that “in no event is the plaintiff-mortgagee due to collect more than the debt secured.”23
In other words, where the foreclosure occurs before the loss, the mortgagee is considered the owner of the property at the time of the loss and is entitled to recover “the full amount of the covered loss provided all other applicable coverage conditions have been met.”24 Since the mortgagee is entitled to a full recovery, it follows that in cases where the foreclosure occurs before the loss the “named insured” should not be entitled to any recovery on the claim.
Conversely, where the foreclosure occurs after the loss the mortgagee is the creditor of the owner and has an election as to how to satisfy the debt. The mortgagee may either turn to the insurance company for payment under the New York Standard Mortgage Clause or the mortgagee may foreclose on the property. If the mortgagee elects foreclosure, and the foreclosure sale does not bring the full amount of the mortgage debt, then the mortgagee may recover the deficiency from the insurance company.
Therefore, in Lenart the Third District Court of Appeal held that Ocwen (i.e., the mortgagee) was entitled to recover the amount of the deficiency plus interest and the insured (i.e., Mr. Lenart) was entitled to the balance of the $90,000 settlement. The deficiency in the Lenart case, inclusive of interest, was found to be $11,062.98. As a result, the insured was entitled to recover $78,937.02 from the settlement payment.
Based on the holding of Lenart and the number of foreclosure cases now pending in Florida the following considerations may be helpful in handling or litigating first party property claims at this time:
Search the public records. When a claim is reported or when a new lawsuit is filed, complete a search of the public records to assess for foreclosure judgments relative to the insured property. To do so, it will first be necessary to locate the legal description of the property, which can be found in a number of places including the tax appraiser’s records, the deed transferring title to the insured, or the mortgage documents. The public records may not contain a final judgment of foreclosure; however, foreclosure proceedings may be in progress or the final judgment of foreclosure may be on its way to being recorded in the public records. Accordingly, court records should also be reviewed to locate any pending foreclosure lawsuits. Even more useful is searching the public records for any lis pendens filed and recorded relative to the insured property. If a lis pendens was filed and recorded by the mortgage company, then it’s a good bet the property is subject to a pending or completed foreclosure action.
Confirm the date of the foreclosure judgment. If the judgment of foreclosure has been entered, it is necessary to confirm the date of the judgment. Use that date to evaluate whether the situation is one where the foreclosure occurs before the loss or, alternatively, one where the foreclosure occurs after the loss.
Confirm the details of foreclosure before entering into a settlement. Paradoxically, insureds who have lost their properties to foreclosure may still report new claims to their insurance carriers or determine to continue with lawsuits already pending when the judgment of foreclosure is entered. Before settling a case it is very important to check the public records and assess whether the property is in foreclosure or subject to a final judgment of foreclosure.
Consider the claim and the deficiency. It is important to consider the specific claim at issue and evaluate whether the policy might limit certain claims from being made or pursued. For example, where a claim is for “Coverage A” damages only, the loss settlement clause in the policy may limit payment to the “necessary amount actually spent to repair or replace the damaged building.” If the insured lost the property to foreclosure and incurred no costs for repair or replacement prior to the foreclosure, it then follows that the insured may not be able to prove any damages in the case.
Similarly, where the insured is subject to a very large deficiency judgment there may be no prospect of any recovery for the insured on the claim or in litigation filed in connection with the claim. For example, where the mortgage deficiency is for $250,000 and the claim is for $50,000 any recovery would automatically go to the bank. As a result, the facts and circumstances of the claim and deficiency should be considered before continuing with litigation or agreeing to settle a claim affected by foreclosure.
Consider moving for summary judgment and interplead the bank where appropriate. As discussed above, when foreclosure occurs before the loss the entire claim belongs to the mortgage company when the policy contains the New York loss payable clause. On the other hand, where the foreclosure occurs after the loss the mortgage company is entitled to receive payment on the claim up to the amount of the deficiency. Among other things, an insured (or an insured’s attorney) might dispute the mortgage company’s entitlement to the insurance proceeds or the amount of the deficiency at issue.25
Where the foreclosure occurs before the loss and an insured has reported a claim and filed litigation in connection with that claim, a motion for final summary judgment should be filed in the case. In other cases, it may be appropriate to seek partial summary judgment as to the issue of entitlement to the proceeds of the insurance claim. In addition to moving for summary judgment, attorneys should consider an interpleader action under Fla. R. Civ. P. 1.240, in order to bring the bank into the lawsuit as a third party to the case and to require an insured to litigate their position with the bank directly.
Please note the above list represents a few general considerations and the appropriate manner for addressing a first party claim affected by a foreclosure will likely vary depending on the circumstances involved. It is always best to consult one of CSK’s first party property attorneys in order to ascertain how to proceed on a claim or lawsuit in the event of a foreclosure of the insured property.
1 Key home price index shows record decline, Associated Press, Feb. 26, 2008, available at http://www.msnbc.msn.com/id/23350937.
2 Rana Foroohar, Boom and Gloom, Investors are bidding up stocks, gold, and oil to dizzying heights. If’s déjà vu all over again, Newsweek, November 9, 2009.
3 Lehman Brothers Collapse Stuns Global Markets, CNN, September 15, 2008, available at http://edition.cnn.com/2008/business/09/15/lehman.merrill.stocks.turmoil/index.html.
4 Susan R. Miller and Oscar Pedro Musibay, RealtyTrac: South Florida Foreclosures Fall in Q3, South Florida Business Journal, October 28, 2009.
6 In Re Task Force on Residential Mortgage Foreclosure Cases, Supreme Court of Florida, Administrative Order No. AOSC09-8, March 27, 2009.
7 Susan R. Miller and Oscar Pedro Musibay, RealtyTrac: South Florida Foreclosures Fall in Q3, South Florida Business Journal, October 28, 2009.
9 Hotel Foreclosure Watch: Miami’s Swank Shore Club Goes Delinquent, The Wall Street Journal, October 20, 2009 available at http://blogs.wsj.com/developments/2009/10/20/hotel-foreclosure-watch-miamis-swank-shore-club-goes-delinquent.
10 Annie Butterworth Jones, Courts Brief Lawmakers on Foreclosure Issues, The Florida Bar News, November 1, 2009, at 1.
11 Lenart v. Ocwen Fin. Corp., 869 So. 2d 588 (Fla. 3d DCA 2004).
15 Lenart, 869 So. 2d. at 589.
19 Lenart, 869 So. 2d. at 589.
20 Secured Realty Inv. Fund Ltd., III v. Highlands Ins. Co., 678 So. 2d 852 (Fla. 3d DCA 1996).
21 Nationwide Mut. Fire Ins. Co. v. Wilborn, 279 So. 2d 460 (Ala. 1973).
22 Lenart, 869 So. 2d. at 591.
23 Id. (citing Wilborn, 279 So. 2d at 463-64).
24 Secured Realty Inv. Fund Ltd., III v. Highlands Ins. Co., 678 So. 2d 852, 856 (Fla. 3d DCA 1996).
25 See e.g., Pick v. Gilbert, 605 So. 2d 182 (Fla. 3d DCA 1992).