While the Dallas federal court was looking at the effect of a sale, a Houston appellate court recently examined the reverse situation - what happens to coverage when a former mortgagee forecloses on the property and buys it at foreclosure? In Westview Drive Investments v. Landmark American Ins. Co., 2017 WL 830510 (Tex. App. - Houston [14th Dist.] February 28, 2017), the 14th Court of Appeals in Houston upheld the policy's anti-assignment clause, holding an insurer was not required to grant full named-insured status to a buyer of the property who was not actually been added to the policy as a named insured.
Westview was listed on the policy as a mortgagee, but it assumed ownership of the property after foreclosure. Before Westview could be added to the policy as named insured, the property burned. Landmark refused to acknowledge Westview as a named insured on the property and made only the payments it would be entitled to as mortgagee - physical damage to the structure only and not business income, accounts receivable, or business personal property. The trial court granted partial summary judgment in favor of the insurer, holding Westview was only entitled to mortgagee coverage. The case was tried and the jury found Landmark had not breached the policy. After trial, this appeal followed.
The court first observed that upon buying the property, Westview did not automatically acquire the same rights as the prior owner, particularly noting the policy expressly prevents transfer of the insured's rights in the policy without consent. The court then held Westview was not entitled to an equitable lien on the prior owner's rights in the insurance policy because the former owner's obligations had been extinguished by the foreclosure and sale. Westview's final bid for full coverage was under Texas Insurance Code Section 862.055, which it alleged allows a mortgagee to recover fully on a fire insurance policy if the named insured cannot do so. The court rejected this argument, finding it only protects, and does not expand, the mortgagee's interest. The court affirmed the summary judgment in favor of Landmark. After affirming this issue, the court went on to affirm the jury's finding that in paying mortgagee benefits only, Landmark had not breached the policy or engaged in any unfair or deceptive acts.