Failure to advise insurer of foreclosure constituted increase in hazard allowing insurer to disallow coverage

A recent opinion from Tennessee that has generated some concern in the servicing industry. In US Bank, N.A. v. Tennessee Farmers Mutual Ins. Co., No. W2006-02536-COA-R3-CV (Tenn. Ct. App. Dec. 21, 2007) the bank initiated foreclosure proceedings but did not notify the insurance company. Before the foreclosure process was complete, the house was destroyed by a fire. The bank notified the insurance company of the loss and the insurer denied and cancelled coverage. The insurance company asserted that the foreclosure proceedings constituted an increase in hazard of which the bank was required to notify the insurance company. The policy required the Bank to notify [the insurer] of any change in ownership or occupancy or any increase in hazard of which [the Bank] has knowledge. The court found that that the initiation of foreclosure proceedings constituted an ”increase in hazard”. The court also found that the Bank had a duty under Tennessee insurance law to notify the insurer of the commencement of foreclosure proceedings, as this was an increase of hazard. The court reversed summary judgment for the Bank and concluded that the insurer was right in denying and cancelling coverage.