108 F.3d 651 (6th Cir. 1997), 95-6699, Lee v. Royal Indem. Co.

Docket Nº:95-6699.
Citation:108 F.3d 651
Party Name:David N. LEE, Plaintiff-Appellant, v. ROYAL INDEMNITY COMPANY, Defendant-Appellee.
Case Date:March 11, 1997
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

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108 F.3d 651 (6th Cir. 1997)

David N. LEE, Plaintiff-Appellant,



No. 95-6699.

United States Court of Appeals, Sixth Circuit.

March 11, 1997

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Brian O. Bowhan (argued and briefed), Charles C. Morrow Associates, Nashville, TN, for plaintiff-appellant.

John W. Wagster (argued and briefed), Hollins, Wagster & Yarbrough, Nashville, TN, for defendant-appellee.

Thomas N. Bateman, Clarksville, TN, for intervenor-appellee.

Before: CONTIE, RYAN, and BOGGS, Circuit Judges.

BOGGS, J., delivered the opinion of the court, in which RYAN, J., joined. CONTIE, J. (at 657-58), delivered a separate dissenting opinion.

BOGGS, Circuit Judge.

David Lee's home in Dickson County, Tennessee was destroyed by fire, while insured by Royal Indemnity Co. ("Royal Indemnity"). Royal Indemnity refused to pay and Lee sued to collect on the insurance policy. A jury returned a verdict in favor of Lee in the amount of $157,500. After judgment was entered for Lee, Royal Indemnity moved to set off the amount of an extinguished mortgage. The district court granted the motion because the court concluded that allowing the entire judgment to stand would unjustly enrich Lee. We reverse. We believe that the full amount of the judgment accurately reflects the loss to Lee and does not result in a double recovery or unjust enrichment. In fact, to uphold the district court order would allow Royal Indemnity to escape paying anyone for most of the value of the insurance policy on the dwelling, a result that is clearly at odds with the fact that premiums were paid to insure the full value of the dwelling.


A fire destroyed Lee's home in Dickson County, Tennessee on February 9, 1992, along with most of his personal belongings. At the time of the fire, Lee's home was subject to a mortgage held by National Mortgage

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Company ("National Mortgage") in the amount of $75,284.65. Also in effect at the time of the fire was an insurance policy issued by Royal Indemnity on the home. The policy was a "valued policy," which valued the mortgaged "dwelling" at $90,000. Royal Indemnity refused to pay on the policy because it believed that the fire had been set either by Lee or someone under his direction.

Following the fire, Lee stopped making mortgage payments. National Mortgage demanded that Royal Indemnity pay off the mortgage pursuant to the insurance contract. But, before any payment could be made, National Mortgage foreclosed on the property and erroneously bid it in for the full amount of the mortgage. This resulted in the extinguishment of the mortgage. About two years later, National Mortgage sued Lee, seeking to void the foreclosure sale. The Chancery Court of Dickson County, Tennessee, granted Lee's motion to dismiss for failure to state a claim. The court found that National Mortgage was entirely responsible for the mistake and that Lee had had nothing to do with National Mortgage's actions.

In the meantime, Lee sued Royal Indemnity to recover the losses he sustained as a result of the fire. Although Royal Indemnity raised the defense of arson, the jury returned a verdict in favor of Lee and judgment was entered in the amount of $157,500. After judgment was entered, Royal Indemnity sought to set off against the judgment the amount of the extinguished mortgage. Its motion was granted.

On appeal, Lee claims that the district court erred in granting Royal Indemnity's motion for a set off because, pursuant to the terms of the policy, he was entitled to be paid the full amount of the policy, including the $90,000 jury award for the loss of the dwelling. We agree.


Initially we note that the issue of whether a defendant is entitled to a set off is a question of law, and thus, we review the district court's order de novo. See Benson v. Tennessee Valley Elec. Coop., 868 S.W.2d 630 (Tenn.Ct.App.1993).

Under the insurance contract, it is undisputed that National Mortgage would have had the right to receive payment from the insurer for the amount of its interest, i.e., the mortgage, were it not for the foreclosure sale. 1 However, due to its error in bidding the full amount of the mortgage at the foreclosure sale, it no longer has any interest under the policy. See First Inv. Co. v. Allstate Ins. Co., 917 S.W.2d 229, 230 (Tenn.Ct.App.1994) ("mortgagee had no insurable interest under the mortgagor's insurance policy after it purchased the property at the foreclosure sale for the remaining amount of the mortgage"); Benton Banking Co. v. Tennessee Farmers Mut. Ins. Co., 906 S.W.2d 436, 439 (Tenn.1995) ("it is well settled that full or partial extinguishment of the debt itself, whether prior to the loss or subsequent to the loss, precludes to the extent thereof, any recovery by the loss-payable mortgagee"). Thus, the issue becomes how to measure Lee's loss and the insurer's obligation, given National Mortgage's error.

Royal Indemnity claims that the definition of insurance 2 mandates that the measure of the loss be determined by the interest Lee had in the property at the time of the fire, because otherwise, he would be collecting on a loss that did not occur since Lee no longer owes National Mortgage any money. We disagree. Royal Indemnity has simply

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measured the loss in a manner most favorable to it. While this is a possible measure of the loss, it is not the only one. The loss can also be measured by the value of the property itself, which was $90,000 under the policy. We believe the second measure of the loss is more appropriate in this instance since the premiums Lee paid to Royal Indemnity reflect the $90,000 value for the dwelling. Moreover, the insurance policy provides for payoff "as interests appear." Since under the case law, National Mortgage no longer has any interest under the policy, its interest must necessarily revert to Lee, the holder of the policy.

We also disagree with Royal Indemnity's argument that Benton Banking supports its position that it was entitled to the set off. While some language in...

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