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COLONIAL MORTGAGE COMPANY, INC. v. ANNETTE LEE

MAY 11, 1988

COLONIAL MORTGAGE COMPANY, INC.
v.
ANNETTE LEE, INDIVIDUALLY, AND AS ADMINISTRATRIX OF THE ESTATE OF JOHN MORRIS LEE, DECEASED



BEFORE DAN M. LEE, P.J.; ROBERTSON AND ZUCCARO, JJ.

ROBERTSON, JUSTICE, FOR THE COURT:

I.

This is another punitive damages case, although the factual setting is a bit different from the familiar bad faith refusal claim. Here a mortgage servicing company, charged to administer escrow accounts and therefrom to pay insurance and taxes, allowed a policy to lapse. The jury, however, found the policy in force and ordered the insurer to pay the homeowners' fire loss claim.

 We find the mortgage service company's default wholly the product of an unintentional mistake, falling well short of gross neglect or reckless disregard for homeowners' rights. We reverse and render.

 II.

 A.

 On or about June 1, 1979, Anthony Webber executed a purchase money deed of trust and delivered it to Southern Security Savings & Loan Association. The deed of trust contemplated and provided for an escrow arrangement for payment of property taxes and of fire and extended coverage insurance premiums. The escrow paragraph provided that Webber's monthly payments should include, in addition to principal and interest, a sum equal to the premiums that will next become due to renew the policies of fire and other hazard insurance on the mortgaged premises.

 On November 1, 1979, Anthony Webber conveyed his home to John Morris Lee and Annette Lee as joint tenants with rights of survivorship. The instrument of conveyance provided that the Lees would assume all obligations owing to Southern Security under the deed of trust granted by Webber.

 The critical player in today's production is Colonial Mortgage Company, Inc. Colonial Mortgage is in the business of" servicing "mortgages held by others. The Lees' mortgage was one of the 42,000 accounts serviced by Colonial Mortgage. In September, 1980, the Lees' mortgage was assigned to Colonial.

 Colonial Mortgage manages mortgage escrow accounts in the conventional manner. The annual taxes and insurance premiums are estimated and that sum is divided by twelve, yielding an amount added to the mortgage payment and charged to the mortgagor each month. The funds for taxes and

 insurance are placed in a single escrow account and expended as required. If at the time an insurance premium payment is due the mortgagor had no funds in the escrow account, Colonial advances money from its corporate funds so that the premises are protected. Any funds so advanced are added to the mortgagor's debt. This custom and practice protects mortgagor, mortgagee and Colonial Mortgage as well.

 Colonial Mortgage does not choose the insurance company, though it will procure coverage if necessary. The Lees had been forced to purchase insurance through Mississippi Insurance Underwriters Association (MIUA) after a fire in their home made it impossible to purchase coverage from any other than the insurer of" last resort ".

 MIUA is an insurer created by the state to insure those who cannot obtain coverage from commercial insurance companies. As MIUA does not encourage or desire customers, it offers a basic, one year policy that is not renewable. A new application must be submitted each year. Nor does MIUA offer frills such as a thirty day grace period upon expiration. The Lees first purchased insurance from MIUA covering March 28, 1980, through March 28, 1981. The Lees reapplied for insurance for a second year but, due to a series of errors (to be explained in detail later), coverage lapsed for a number of days (from March 28 through April 15) before the new policy went into effect. As no damage to the Lees' property occurred during this lapse, the lapse went unnoticed by all. Unfortunately, when the same thing occurred between the end of the second year of coverage and the application for a third year of coverage (lapse between April 15, 1982, and April ...


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