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Bartello v. Option One Mortgage Corp.


January 22, 2009


On appeal from the Superior Court of New Jersey, Law Division, Essex County, Docket No. L-1577-06.

Per curiam.


Argued January 5, 2009

Before Judges Lisa and Sapp-Peterson.

After a homeowner's policy lapsed for nonpayment of premium, the mortgagee, Option One Mortgage Corporation (Option One), as authorized by the mortgage agreement, obtained insurance at the mortgagor's expense covering loss or damage to the structure. The policy did not contain liability coverage. A dog owned by the mortgagor's daughter, a resident in the home, bit a neighborhood child. The child brought a personal injury claim against the mortgagor and his daughter. The homeowner contended that in purchasing insurance without liability coverage the mortgagee breached its obligations under the mortgage agreement. The homeowner and his daughter assigned their claim against Option One to the personal injury claimant, who brought this action against Option One. Judge Schott granted Option One's summary judgment motion and dismissed the complaint, concluding that Option One breached no express or implied obligation under the mortgage agreement.

On appeal, plaintiff argues that (1) Option One breached its implied covenant of good faith and fair dealing contained in the mortgage, (2) to the extent the mortgage permitted Option One to place coverage at higher premiums and for less coverage, the provision is unenforceable as unconscionable and against public policy, and (3) Option One breached its common law duty to the mortgagor. We reject these arguments and affirm.

On September 7, 2000, Frank Capezzano purchased a home at 324 Horseneck Road in Fairfield. In doing so, he entered into a purchase money mortgage in the amount of $301,500 with Option One. Capezzano did not immediately move into the home, but his daughter, Susan LaVarco and her family did. Capezzano bought the home for the benefit of his daughter, and she attended to the payment of the mortgage and insurance on the property. Capezzano eventually moved into the home with his daughter, approximately in late 2001.

The mortgage contained these provisions:

5. Hazard or Property Insurance. Borrower shall keep the improvements now existing or hereafter erected on the Property insured against loss by fire, hazards included within the term "extended coverage" and any other hazards, including floods or flooding, for which Lender requires insurance. This insurance shall be maintained in the amounts and for the periods that Lender requires. . . . If Borrower fails to maintain coverage described above, Lender may, at Lender's option, obtain coverage to protect Lender's rights in the Property in accordance with Paragraph 7.

7. Protection of Lender's Rights in the Property. If Borrower fails to perform the covenants and agreements contained in this Security Instrument . . . then Lender may do and pay for whatever is necessary to protect the value of the Property and Lender's rights in the Property. Lender's actions may include paying any sums secured by a lien which has priority over this Security Instrument . . . . Although Lender may take action under this paragraph 7, Lender does not have to do so.

Any amounts disbursed [b]y Lender under this paragraph 7 shall become additional debt of Borrower secured by this Security Instrument. Unless Borrower and Lender agree to other terms of payment, these amounts shall bear interest from the date of disbursement at the Note rate in effect from time to time and shall be payable, with interest, upon notice from Lender to Borrower requesting payment.

Capezzano initially obtained a typical homeowner's policy, which insured the structure against loss and also provided him with liability coverage. The policy period was from August 16, 2000 to August 16, 2001, and the annual premium was $791. A later renewal of the policy for the period from August 16, 2002 to August 16, 2003 carried an annual premium of $996. On September 14, 2002, the policy was canceled for nonpayment of premium.

Throughout the short history of this mortgage, there were repeated deficiencies in Capezzano's obligation to provide Option One with proof of insurance. As a result, Option One sent multiple notices to Capezzano. Each notice was in similar form, informed Capezzano that proof of current insurance coverage had not been furnished, requested the furnishing of such proof, and stated:

It is important that we receive the correct insurance information within (21) days from the date of this notice, otherwise we may buy insurance to protect the property. If we buy the insurance, we will require you to repay us the premium shown above. No attempt will be made to duplicate any coverage you may have had in the past. The insurance we buy may be more expensive and provide less coverage than you could buy from an insurance agent of your choice. There will be an earned premium charge if the effective date of your policy is different from the coverage we provide.

Please contact your Agent if you have any questions about this notice or you may call our Insurance Center at the number referenced above. [Emphasis added.]

These notices were sent on October 23, 2000, March 7, 2001, December 10, 2001, February 11, 2002, April 15, 2002, June 10, 2002, and October 14, 2002. Each notice contained in its caption the proposed amount of coverage that Option One would purchase and the premium it would pay. For example, the October 23, 2000 notice referenced coverage in the amount of $302,000, for a premium of $2325. Subsequent notices reflected higher amounts of coverage, escalating to $324,000, and ultimately to $357,000, presumably reflecting the increased value of the home with passage of time. The last of this series of notices, on October 14, 2002, reflected proposed coverage of $357,000, at an annual premium of $2749.*fn1

On this occasion, Capezzano did not furnish proof of insurance. Indeed, his homeowner's policy was canceled for nonpayment of premium on September 14, 2002. As a result, Option One purchased insurance covering the structure only in the amount of $357,000 for an annual premium of $2749. Upon doing so, Option One sent a notice to Capezzano on November 18, 2002 advising that the coverage was placed and he would be responsible for the premiums. The notice further stated that the premiums "could be substantially greater than that charged through a standard insurance provider," and that "the coverage provides structural coverage only. Supplemental coverage for . . . injury to persons or property for which you may be liable is not provided." Finally, the notice stated: "If you provide proof of current coverage, we will cancel this lender placed insurance using the effective date of your coverage. We encourage you to obtain acceptable replacement coverage."

Capezzano gave any correspondence received from Option One to LaVarco without reading it. Therefore, he did not recall the particulars of any of the notices. Although LaVarco could not recall which specific notices from Option One she read, she acknowledged reading at least some of the notices and said she read all correspondence from Option One that she received. She also acknowledged that when the dog bite incident occurred she was aware that Option One had purchased replacement coverage.

On January 31, 2003, LaVarco's dog bit a seven-year-old neighborhood boy, Anthony J. Bartello. Bartello, through his father acting as guardian ad litem, filed a personal injury complaint against Capezzano and LaVarco on May 15, 2003. Apparently as part of a settlement of that claim, Capezzano assigned to Bartello any claims Capezzano had against Option One for not obtaining substitute property insurance that contained liability coverage. As assignee of that claim, Bartello brought this action against Option One on February 23, 2006.

After a period of discovery, the parties filed cross-motions for summary judgment. On June 22, 2007, Judge Schott rendered an oral decision granting Option One's motion and denying Bartello's motion. She entered orders to that effect on that date. She found that the notices leading up to placement of the new insurance coverage were "very, very clear," informing the mortgagor that no attempt would be made to duplicate his coverage, that the insurance might be more expensive than his coverage, and that it might provide less coverage than he could buy from an insurance agent of his choice. The judge found that sending these notices satisfied any duty that could be implied from the mortgage agreement. She further found that there was no breach of the implied covenant of good faith and fair dealing.

It is plain to us, as it was to Judge Schott, that the express terms of the mortgage agreement authorized Option One to obtain coverage for the structure only. The agreement did not obligate Option One to do so, but authorized such action, at the expense of the mortgagor, if the mortgagor did not maintain continuous coverage. Of course, the mortgagee's insurable interest was in the property only. The agreement did not obligate either party to provide liability insurance for the mortgagor.

We are also in agreement with Judge Schott's conclusion that Option One fulfilled any implied obligation it had to provide notice to its mortgagor of its intended action. Indeed, the notices were very clear. They not only informed the mortgagor of the action that would be taken, but explicitly set forth the premium that would be charged, and advised that the premium might indeed be higher than the homeowner could obtain from an insurance agent of his choice. Importantly, the notices clearly stated that no attempt would be made to duplicate the homeowner's coverage.

Plaintiff's principal appeal argument is that, notwithstanding Option One's authority under the mortgage agreement to obtain insurance, the manner in which it did so violated the implied covenant of good faith and fair dealing. Plaintiff argues that because homeowners typically obtain "bundled" coverage in a standard homeowner's policy, which includes liability coverage, Option One was aware of this common practice and had a duty to either pay the premium required to its homeowner's carrier to reinstate its canceled policy or to obtain duplicate coverage. Plaintiff argues that failure to do so constituted a breach of the implied covenant of good faith and fair dealing.

Every contract contains an implied covenant of good faith and fair dealing. Sons of Thunder, Inc. v. Borden Inc., 148 N.J. 396, 420 (1997). Although the implied covenant "cannot override an express term in a contract, a party's performance under a contract may breach that implied covenant even though that performance does not violate a pertinent express term." Wilson v. Amerada Hess Corp., 168 N.J. 236, 244 (2001). Thus, in exercising discretionary authority as expressly authorized by an agreement, if a party does so "arbitrarily, unreasonably, or capriciously, with the objective of preventing the other party from receiving its reasonably expected fruits of the contract," the party taking the action may breach the covenant. Id. at 251. Essential to a breach of the good faith obligation is a finding of improper motive. "Without bad motive or intention, discretionary decisions that happen to result in economic disadvantage to the other party are of no legal significance." Ibid. The critical inquiry is whether the party exercised its contractual right arbitrarily and in bad faith in such a manner as to deprive the other party of the reasonably expected benefit of his or her bargain.

Plaintiff analogizes Option One's obligation of good faith and fair dealing in this case to prior New Jersey cases imposing a particular standard of conduct on mortgagees, but in different contexts. We find unpersuasive plaintiff's reliance on Woodview Condominium Ass'n, Inc. v. Shanahan, 391 N.J. Super. 170, 176 (App. Div. 2007) (noting that a mortgagee in possession of a property has the duty to act as a provident owner, including managing and preserving the property), and 79-83 Thirteenth Ave., Ltd. v. DeMarco, 79 N.J. Super. 47, 58-59 (Law Div. 1963), aff'd, 83 N.J. Super. 497 (App. Div. 1964), aff'd, 44 N.J. 525 (1965) (holding that an applicant for the "fair value" credit of an auctioned, mortgaged property must show sale at an unconscionable price or without competitive bidding, an emergency preventing the applicant from protecting himself by refinancing or other means, and the applicant's lack of financial resources to protect himself at the sale). From these and similar cases, plaintiff makes the general assertion that in addition to situations involving possession or foreclosure, "courts should impose a good faith obligation upon mortgagees to act reasonably in procuring replacement homeowners' insurance." These cases are inapposite and do not support the conclusion plaintiff urges.

There is no basis here for a finding of improper motive or arbitrary action. Indeed, Option One sent multiple notices to Capezzano when he was deficient in his contractual obligation to provide proof of ongoing coverage. Each notice clearly explained the consequences of failing to cure the deficiency. Option One encouraged Capezzano to deal with his own agent and buy his own coverage of his choice, and merely to produce proof of coverage. Through this course of conduct, Option One made clear that it did not wish to purchase substitute coverage and made more than reasonable efforts to cajole Capezzano into continuing his own coverage and simply providing proof of it because of Option One's obvious interest in not allowing the property to become uninsured. Each notice informed Capezzano of the premium that would be charged and made clear that no effort would be made to obtain duplicate coverage if Option One was forced to act.

The benefit of Capezzano's bargain under the mortgage agreement was to obtain a loan to purchase a home. By allowing the loan to remain in effect, and enabling Capezzano to keep his home, although paying a somewhat higher insurance premium because he failed to keep his own insurance in effect, Option One can hardly be said to have taken action depriving Capezzano of the benefit of his bargain.

Applying the Brill*fn2 standard, we view the evidence in the light most favorable to the non-moving party. In doing so, we accept for purposes of analysis that Capezzano and LaVarco equivocated on whether they received the November 18, 2002 notice advising that substitute coverage had been placed, the premium amount, and absence of liability coverage. Even if they did not receive it (which is doubtful in light of LaVarco's admission that she knew on January 31, 2003 that Option One had purchased replacement coverage), that notice is further evidence that Option One did not act in bad faith and had no improper motive to deprive Capezzano of any reasonable expectations under the mortgage agreement. In that notice, Option One again informed Capezzano that he was receiving less coverage for a higher premium, and encouraged him to obtain his own coverage, in which event Option One would cancel the coverage it obtained. No rational factfinder could find that Option One breached the implied covenant of good faith and fair dealing. Therefore, summary judgment was properly granted.

Plaintiff's remaining arguments that the mortgage provision allowing Option One to place insurance at a higher premium and for less coverage is unenforceable as unconscionable and against public policy, and that Option One breached its common law duty to Capezzano lack sufficient merit to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E).


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