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First National Bank of Palmerton v. Motor Club of America Insurance Co.

A-7345-95T5 (N.J. Super. App. Div. 1997) (Unpublished)

MORTGAGES; INSURANCE—A mortgagee in possession was found to be a (covered) real estate manager for the purposes of the mortgagee’s insurance policy.

In August, 1988, a mortgagor entered into a mortgage and security agreement with a financial institution on property known as the Newport Club apartments. The Agreement required the mortgagor to maintain insurance on the property and provided that in the event of default, the lender could take possession and assume operation of the property. The Agreement also provided that all insurance proceeds would be assigned to the lender and the mortgagor would direct the insurance company to make future payments directly to it. Insurance was purchased from an insurance company and covered not only the insured but also “any person or organization while acting as your real estate manager.” The lender filed a foreclosure action in 1991 against the mortgagor for failing to make mortgage payments. As a result of the default, the lender took control of the property and its representative took over management as the sole agent to lease and manage the property. The insurance company then issued a note of cancellation of its policy, but stated that the policy would remain in effect until February, 1994. In January, 1994, Keith Thomas fell and injured himself on the property and sued the Newport Club, the lender and the representative who was managing the property. The insurance company refused to represent the lender despite repeated requests, so the lender sought a judgment requiring the insurance company to defend it. The motion judge held that once the lender became the mortgagee in possession, it was acting as the mortgagor’s real estate manager and thus qualified as an insured under the policy. The judge reasoned that even though the words “real estate manager” were not in the security agreement, the rights and responsibilities of the lender, as mortgagee in possession, were so analogous to that of a real estate manager that they should be included as part of the mortgagor’s insurance coverage.

The insurance company claimed that the lender was not the equivalent of the mortgagor’s “real estate manager” and had no agency relationship with it. Rather, the lender was acting under its own power and solely for its own interests. The Appellate Division rejected this claim, holding that under the Agreement, the mortgagor gave the lender the right to possess and operate the property in its stead in the event of default. Whether the lender was a “real estate manager” for purposes of insurance coverage is determined by the language of both the Agreement and the insurance policy. The Court also held that a reasonable interpretation of the insurance policy leads to the conclusion that a mortgagee in possession is considered a real estate manager for purposes of insurance coverage. Furthermore, since insurance contracts are contracts of adhesion, they are strictly construed against the insurance company and any ambiguities are resolved in favor of, and in accordance with the reasonable expectations of, the insured.


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