Image Copyright Dennis J. Wall.
I did not know that there is apparently support in more than one jurisdiction for the proposition that the standard mortgage clause is a separate and distinct contract between the homeowner's insurance company and the homeowner's mortgagee. My quick and earnest research disclosed that courts in other States say the same thing that I read to this effect in the case of Avila v. Citimortgage, Inc., 801 F.3d 777, 780 n.2 (7th Cir. 2015)(case involved Illinois substantive law).
That came as a surprise. I always thought that in order to form a contract the law requires two contracting parties. Here one of the contracting parties seemingly has no interest in an insurance contract for which that party paid a premium, i.e., gave consideration for the contract. That missing contracting party in the case of the standard-mortgage-clause-as-separate-contract situation is of course the policyholder who is here also the homeowner with a mortgage.
So, the mortgagee which gave no consideration to the insurance company is a party to a contract with the insurance company even though no consideration passed between them?
I can understand if the courts label the mortgagee as an "incidental beneficiary" capable of enforcing the contract under a standard mortgage clause. But is it correct as a matter of contract law to say in this situation bereft of consideration, that there is a separate and independent contract aside from the insurance policy?
And if there is such a separate and independent contract, what is this agreement all about other than the payment of insurance proceeds to the mortgagee under an insurance contract paid for by someone else, namely, the homeowner?
This whole thing bears a closer look. Parenthetically, when Judge Sykes wrote the opinion upholding Mr. Avila's complaint for breach of contract against Citi in this case, she carefully pointed out that "[w]e do not, of course, express any view on the ultimate merits of Avila's claim." Then she proceeded to suggest at least three defenses potentially available to Citi on the ultimate merits of Avila's claim.
Apparently, Judge Sykes was under the impression that Citi and its lawyers needed her help, perhaps thinking that they might overlook those defenses if she did not point them out.
Judge Sykes did not offer any advice at all to Mr. Avila or his lawyers, however.
Please Read The Disclaimer. ©2015 by Dennis J. Wall, author of "Lender Force-Placed Insurance Practices" (American Bar Association 2015). All rights reserved.
Comments