§ 107.601. Reasonable Cause: Right to Approve or Disapprove of the Insurer Selected to Underwrite Insurance.

(a) General Provisions:

(1) Any lender engaged in the business of financing the purchase of real property or of lending money on the security of real property and any trustee, director, officer, agent or other employee, or affiliate, of any such lender shall have the right to disapprove, for reasonable cause, the insurer selected to underwrite the insurance required by the contract of sale or deed of trust or other loan agreement and shall have the right to furnish or renew such insurance if the borrower or purchaser shall have failed to furnish the insurance or renewal thereof within such reasonable time or form as may be specified in the sale or loan agreement.

(2) Notwithstanding any other provisions of these regulations, the California FAIR Plan Association shall not be rejected as an insurer.

(3) The corporate structure of an insurer shall not be a basis for disapproval of such insurer.

(4) These regulations shall not affect the respective rights of a borrower and its lender to contract as to the insurance coverage or the right of a lender to require an insurance policy and coverage in accordance with such agreement between it and the borrower.

(5) These regulations do not apply to insurance covering personal property as the subject of security for the loan.

(b) “Reasonable Cause” for Disapproval. Any one or more of the following reasons may constitute reasonable cause to disapprove of the insurer selected to underwrite the insurance:

(1) Financial Status of Insurer.

(A) Failure of the insurer to be rated in the most recently published ratings made by a nationally recognized rating service.

(B) Failure of the insurer to be rated in one of the two highest policyholder ratings in the most recently published ratings made by a nationally recognized rating service.

(C) Failure of the insurer to be rated in one of the twelve highest financial ratings in the most recently published ratings made by a nationally recognized rating service.

(D) The insured amount would exceed three percent of the policyholder surplus of the insurer.

(E) Failure of the insurer to have a policyholder surplus of $5 million or more where the insurer has already underwritten an aggregate amount of $300,000 on properties in close proximity in a tract or in adjoining tracts for the borrowers of an association.

Paragraphs (A) through (E) above shall not constitute reasonable cause to disapprove if there shall be obtained and attached to the evidence of insurance afforded to the lender appropriate evidence of reinsurance. Such reinsurance may be required by the lender to be in a company meeting all of the criteria of this regulation.

(2) License of Insurer. Failure of the insurer or reinsurer to be licensed by the State of California to transact the line of insurance afforded.

(3) Claims Settlement Practices and Servicing Practices.

(A) Knowingly committing or performing with such frequency as to indicate a general business practice, unfair claims settlement practices as defined in Section 790.03 of the Insurance Code as amended in 1983.

(B) A lender relying upon the provisions of this paragraph (3) with respect to the disapproval of a particular insurer must follow the provisions of the following subsection (d) of these regulations, which will then control the determination of this issue.

(4) Failure of the policy to stipulate on the face of the policy or the declarations page that the term of the policy shall be continuous until cancelled or nonrenewed or for no less than three years, although premium payments may be on an annual basis for a three year policy.

(5) Unwillingness of the insurer to make provision for notice of cancellation or nonrenewal to the lender in accordance with the terms of the loan agreement.

(c) As respects title insurance, reasonable cause is defined as the failure of the title insurer to:

(1) Be licensed by the State of California to transact the line of insurance afforded.

(2) Provide the insurance in conformity with all requirements of the California Insurance Code and the Regulations issued thereunder.

(3) Establish, as disclosed by its most current annual statement on file with the Insurance Commissioner of the State of California, that the amount of any loan which is to be the subject of a title insurance policy does not exceed 30% of its “surplus as regards policyholders” (see Annual Statement, Form 9, page 3, line 22). Any reinsurance or coinsurance that may be offered by the title insurer in excess of such amount shall be in such company or companies and afford such coverage as the lender shall approve.

(4) Afford the coverage required by the lender. Notwithstanding any of the above, it is a reasonable cause for a lender to reject a policy of a title insurer if the borrower or if the seller of real property, the purchase of which is to be financed in whole or in part by the lender, is a subsidiary or affiliate (as defined in Section 1215 of the Insurance Code) of such title insurer or if such borrower or such seller is a subsidiary or affiliate of an underwritten title company (as defined in Section 12340.5 of the Insurance Code) that regularly makes the title searches or title examinations upon the basis of which the title insurance policy would be issued.

(d) Other “Reasonable Causes” for Disapproval. If a lender desires to reject a particular insurer on the grounds set forth in (b)(3) above or on reasonable grounds other than set forth above, the lender may submit the rejection, in writing, to the Commissioner with a copy to the insurer, agent and borrower, stating the grounds for the rejection. The insurer, agent or the borrower may contest the grounds, in writing, either on the basis of fact or on the basis of reasonableness, within fifteen days of the mailing of notice of rejection, which said mailing shall be by certified mail. If the Commissioner has not received contest of the grounds, in writing, for rejection within such fifteen days, then the rejection of the insurer shall stand as though the Commissioner had decided in favor of the lender. If the insurer, agent or borrower contests the rejection, the Commissioner shall notify the lender, the insurer, the agent and the borrower of his finding that the rejection is either upheld or denied within fifteen days of the receipt by the Commissioner of such contest of rejection.

(e) Notice with respect to insurance on home loans. Any association or subsidiary thereof shall notify the borrower in writing, at or prior to the time of the written commitment to make the loan, of his right to freely select the person or organization rendering the insurance services referred to in paragraph (a)(1) of this section in connection with a loan on a home occupied or to be occupied by the borrower.

HISTORY

1. Change without regulatory effect renumbering former Section 241.1 to Section 107.601 (Register 87, No. 14). For prior history, see Register 77, No. 32.

2. Amendment of subsections (a)(5), (b)(3)(A), (c)(4) and new subsection (e) filed 2-18-88; operative 3-19-88 (Register 88, No. 10).

Note

Note: Authority cited: Section 8053, Financial Code; and Section 771, Insurance Code. Reference: Sections 771, 790.03 and 12340.5, Insurance Code; and section 7650, Financial Code.