Ziello

In this case, we decide that when a lender does not require in its contract that the borrower obtain earthquake insurance on the property securing the loan, it has no right under the contract to receive or control the insurance proceeds paid as a result of earthquake damage to the property.

Factual and Procedural Summary

On June 27, 1988, petitioner Phyllis Ziello (borrower) obtained a 30-year residential mortgage of $358,400 from real party in interest First Federal Bank of California (lender) to finance the purchase of a home in Northridge. The purchase money mortgage was secured by a deed of trust which included a requirement that borrower keep the property “insured at all times against loss by fire, hazards included within the term ‘extended coverage’ and any other hazards for which Lender . . . requires insurance. This insurance shall be maintained in the amounts and for the periods that Lender requires, with loss payable to Lender.”

Borrower obtained the required insurance from Safeco Insurance Company (Safeco) on June 29, 1988. The policy did not provide earthquake coverage. Earthquake coverage was not required by the deed of trust. Two months later, borrower…