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Bartello v. Option One Mortgage Corporation

A-2492-07T1 (N.J. Super. App. Div. 2009) (Unpublished)

MORTGAGES; INSURANCE — Where, pursuant to its mortgage, a mortgagee is authorized, but not obligated, to obtain insurance coverage if its borrower fails to do so, the mortgagee is not liable to an injured third party by reason of the mortgagee’s failure to have obtained liability insurance coverage.

A child was bitten by a neighbor’s daughter’s dog and sued the neighbor and his daughter. At the time the child was bitten, the neighbor’s homeowner’s insurance had lapsed, but his mortgagee had obtained coverage for property loss or damage but not liability coverage. The child, as well as the neighbor and his daughter, sought coverage from the mortgagee through assignment of the neighbor’s claims against the mortgagee to the child’s father acting as guardian ad litem. The injured party argued that the mortgagee breached its obligations under the mortgage by not obtaining liability insurance coverage at the same time it obtained property insurance coverage. The lower court dismissed the claim, finding that the mortgagee did not breach any obligation under the mortgage since the mortgagee had provided notice to its borrower that it was going to obtain coverage at a rate higher than standard and that only property insurance coverage was to be provided.

On appeal, the Appellate Division pointed out that according to the mortgage, the mortgagee was authorized, but not obligated, to obtain coverage if its borrower failed to do so. It agreed with the lower court’s findings that neither party was obligated to provide liability insurance and that the mortgagee provided adequate notice to its borrower that it was obtaining only property insurance coverage. The injured party argued that procuring only property damage was a breach of the covenant of good faith and fair dealing. That argument was rejected. The Court also agreed with the lower court that there was no breach because the homeowner had not been deprived of the benefits of its mortgage and because there was no improper motive or arbitrary action on the part of the mortgagee. As a result, the Court affirmed the lower court’s dismissal of the injured party’s claims against the mortgagee for failure to provide liability coverage for the home.

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