Insurance case to address mortgage clauses

Interests representing the insurance and banking industries are preparing to make arguments to the Minnesota Supreme court in a case which could have an important effect on the security of property used to collateralize commercial real estate mortgages in the state. .West Bend Mutual Insurance Company of West Bend, Wis., is challenging an appellate court decision in favor of Commerce Bank compelling the insurance company to pay a property damage claim for which the insurer says it is not liable. The $175 million Commerce Bank, chartered in Geneva, Minn., has its main office in Edina, Minn. The case pits two common insurance notions against one another..The standard mortgage clause generally means lenders that secure a loan with commercial property can collect remuneration from an insurance company if the property is damaged due to the borrower's neglect. A vacancy provision, another common feature of a commercial real estate insurance policy, generally removes the insurance company's obligation to pay a claim if damage occurs on a property that has been vacant for more than 60 days..In 2012, when Commerce Bank took back a Burnsville, Minn., property in lieu of payment on a mortgage, it filed a claim with the borrower's insurance company to pay for damage caused by vandalism that occurred in 2011. The property had been vacant since 2010. West Bend, citing the vacancy provision, refused to pay the claim. Commerce Bank, citing the standard mortgage clause, said the property was vacant due to neglect of the borrower so it was entitled payment..The Dakota County District Court ruled in favor of West Bend in late 2013. Commerce Bank appealed, and the State of Minnesota Court of Appeals overturned the decision last fall. Now West Bend is taking the issue to the Supreme Court. About $400,000 is at stake, but more importantly, a Supreme Court ruling in the case will set a precedent for future commercial real estate mortgages. If the Supreme Court rules in favor of the insurance company, it will be overturning precedence based on New York case law dating back to 1850..The Minnesota Association of Farm Mutual Insurance Companies has filed a friend of the court brief supporting West Bend Insurance. The Minnesota Credit Union Network and the Minnesota Bankers Association are in the process of filing friend of the court briefs in support of Commerce Bank..Minnesota banks that collateralize loans with commercial property have historically been able to rely on the standard mortgage clause to maintain the integrity of their collateral. If the Supreme Court rules in favor of the insurance company, banks will have to monitor the property to determine whether the borrower has allowed it to become vacant. The vacancy would thus render the property (collateral) uninsured and significantly diminish its value. .The Supreme Court is expected to hear the case in late spring/early summer, with a decision coming late this year.