495 Corp. v. New Jersey Ins. Underwriting Ass'n

• Decision Date: 04 March 1980
• Citation: 173 N.J.Super. 114,413 A.2d 630
• Parties: 495 CORPORATION, a corporation of the State of New Jersey, Plaintiff-Appellant, v. NEW JERSEY INSURANCE UNDERWRITING ASSOCIATION, Defendant-Respondent, and John L. Chmielewski, Defendant.
• Court: New Jersey Superior Court — Appellate Division

Page 114

173 N.J.Super. 114

413 A.2d 630

495 CORPORATION, a corporation of the State of New Jersey Plaintiff-Appellant, v. NEW JERSEY INSURANCE UNDERWRITING ASSOCIATION, Defendant-Respondent and John L. Chmielewski, Defendant.

Superior Court of New Jersey, Appellate Division.

Submitted Jan. 28, 1980.

Decided March 4, 1980.

Chazkel & Gast, East Brunswick, for plaintiff-appellant (Michael F. Chazkel, East Brunswick, on brief).

Gennet & Kallmann, East Orange, for defendant-respondent (Stanley W. Kallmann, East Orange, on brief).

Defendant John L. Chmielewski did not file a brief.

Before Judges SEIDMAN, MICHELS and DEVINE.

The opinion of the court was delivered by

SEIDMAN, P. J. A. D.

The issue here, on which we have found no reported decision in this State precisely in point, and none has been cited to us by counsel, is whether a mortgagee, named as such in the mortgage clause of a fire insurance policy, who acquires title to the property prior to a fire loss by a conveyance from the owner in lieu of foreclosure, retains an insurable interest under the policy entitling it to recover for its loss. The insurance company rejected the mortgagee's proof of loss and refused payment on the ground that when the mortgagee accepted the deed in full satisfaction of the debt, it no longer had such insurable interest.

In the suit instituted by the mortgagee, plaintiff herein, the trial judge held on stipulated facts that coverage was afforded by the policy only to the extent of plaintiff's interest as mortgagee and thus it was entitled to be paid no more than the amount, if any, that was still due and owing on the mortgage after the conveyance. ¹ Judgment was entered accordingly and plaintiff appealed, contending that the insurer was obligated to pay it, within the policy limit, the full loss sustained.

Defendant John L. Chmielewski owned an apartment building in Newark. The fire insurance policy in question was issued to him by defendant New Jersey Insurance Underwriting Association on that building and on another one not involved in this litigation. The policy contained a standard mortgage clause naming Mohawk Savings & Loan Association as first mortgagee and plaintiff 495 Corporation, as second mortgagee. As indicated, during the term of the policy and prior to the loss Chmielewski, to avoid a foreclosure, conveyed the property to plaintiff in satisfaction of the second mortgage, but subject to the first mortgage. Chmielewski makes no claim to any part of the insurance proceeds.

The standard mortgage clause ² provided, among other things, that the loss, if any, under the policy would be payable to the named mortgagee "as interest may appear under all present or future mortgages upon the property," and that the insurance, as to the interest of the mortgagee, would not be invalidated by any act or neglect of the mortgagor or owner, or any foreclosure or other proceeding or notice of sale, or by any change in the title or ownership of the property. The clause also required the mortgagee to notify the insurer "of any change of ownership . . . which shall come to the knowledge of said mortgagee . . . otherwise this policy shall be null and void."

In reaching his conclusion that the insurer was not liable to plaintiff except possibly for the amount that might still be owed by the mortgagor, the trial judge relied upon Whitestone S. & L. Ass'n v. Allstate Ins. Co., 28 N.Y.2d 332, 321 N.Y.S.2d 862, 270 N.E.2d 694 (Ct.App.1971), as "compelling authority." He held in his letter opinion that while under the mortgage clause the insurer's obligation to plaintiff would have survived a conveyance to a third party, a foreclosure proceeding or a foreclosure sale that did not satisfy the mortgage debt, the insurer's obligation here, according to Whitestone, was extinguished by the conveyance which discharged the mortgage debt. He concluded that "plaintiff stands no higher than a third party grantee of the insured would, that is, it is not an insured and is barred under the terms of the policy . . . ." We do not agree.

Whitestone proceeds from the premise that "(b)ecause a mortgagee is entitled to one satisfaction of his debt and no more, the bidding in of the debt to purchase the mortgaged property, thus cutting off other lower bidders, has always constituted a satisfaction of the debt." 28 N.Y.2d at 335, 321 N.Y.S.2d at 864, 270 N.E.2d at 696. According to the Whitestone court, the theory of recovery by a mortgagee is indemnity against an impairment of the mortgaged property which adversely affects the mortgagee's ability to resort to the property as a source for repayment. Thus, where the debt has been satisfied in full subsequent to a fire "neither reason nor precedent suggest recovery on the policy by the mortgagee." 28 N.Y.2d at 337, 321 N.Y.S.2d at 866, 270 N.E.2d at 697. The court added by way of caveat, however, that this did not necessarily mean that the insurer would not be obligated to pay the mortgagor or some other person under the policy. See Moke v. Whitestone S. &. L. Ass'n, 82 Misc.2d 396, 370 N.Y.S.2d 377 (Sup.Ct.1975), aff'd, 51 A.D.2d 1005, 382 N.Y.S.2d 289 (App.Div.1976), aff'd 41 N.Y.2d 954, 394 N.Y.S.2d 881, 363 N.E.2d 587 (Ct.App.1977), which held that since a post-fire foreclosure and purchase by the mortgagee is deemed to be a full satisfaction of the mortgage debt and a termination of the mortgagee's insurable interest, the property owner and not the mortgagee is entitled to the fire insurance proceeds.

Mention should also be made of the single reported New Jersey case on the subject, Power B. & L. Ass'n v. Ajax Fire Ins. Co., 110 N.J.L. 256, 164 A. 410 (E. &. A. 1932), which is cited in Whitestone. Although it is not clear whether the mortgage provision in that case was the standard one or the "open loss payable clause," it appears that the mortgagee foreclosed the mortgage after a fire had occurred, purchased the property at the foreclosure sale, and later sued the fire insurance company when its claim to be compensated for the fire loss was rejected. The court ruled against the mortgagee, holding that "if the sale brought enough to pay the plaintiff's debt in full, that wiped out any liability on the part of the insurance company, for, clearly, the plaintiff could not recover at the foreclosure suit the full amount of its mortgage, thereby having the debt for which the mortgage was given as security entirely satisfied, and then in addition recover from the insurance company the amount of money provided for in the policy." 110 N.J.L. at 258, 164 A. at 410-411. See, also, Lutheran Brotherhood v. Hooten, 237 So.2d 23 (Fla.Ct.App.1970); Lembo v. Parks, --- Mass.App. ---, 372 N.E.2d 1316 (Ct.App.1978); Ben-Morris Co. v. Hanover Ins. Co., 3 Mass.App. 779, 333 N.E.2d 455 (Ct.App.1975); Hellman v. Capurro, 92 Nev. 314, 549 P.2d 750 (Sup.Ct.1976).

Whitestone and other cases like it are clearly distinguishable from the one involved here in that in those cases the fire loss occurred before the mortgagee acquired title to fire-damaged property by purchase at foreclosure sale or otherwise for the full amount due on the mortgage. The interests of the parties with respect to fire insurance are to be fixed at the time of the casualty. Cf. P. R. DeBellis v. Lumbermen's Mut. Cas. Co., 77 N.J. 428, 435 (1978); Wolf v. Home Ins. Co., 100 N.J.Super. 27, 241 A.2d 28 (Law Div. 1968), aff'd o. b. 103 N.J.Super. 357, 247 A.2d 345 (App.Div.1968). There can be no doubt that at the time of the fire loss a mortgagee can make claim under the fire insurance policy and receive payment, within the policy limits, up to the amount of the mortgage debt, with the excess, if any, going to the mortgagor or, if there is one, a second mortgagee also named in the policy. But, as explained in Chicago v. Maynur, 28 Ill.App.3d 751, 755, 329 N.E.2d 312, 315 (Ct.App.1975), the theory of such cases as Whitestone, where there is a post-fire foreclosure and purchase for the full amount of the debt, "is that the value of the security in its damaged condition was at least equal to the amount of the indebtedness, and therefore by taking the damaged property the mortgagee received the amount owed it, the debt was extinguished and the mortgage had no further insurable interest." See, also, Calvert Fire Ins. Co. v. Environs Develop. Corp., 601 F.2d 851, 856 (5 Cir. 1979).

Thus, Whitestone and other cases of like import, by reason of their factual difference, have diminished value as precedents in determining whether the trial judge here correctly ruled as he did, in view of the mortgagee's acquisition of title in lieu of foreclosure before the fire loss. It is a fact, however, that a holding similar to that reached in Whitestone is found in cases in some jurisdictions where the mortgagee has taken title through foreclosure or otherwise in full satisfaction of the mortgage debt, and a fire loss occurs thereafter. But other courts have held that in such instances the mortgagee may nonetheless recover under the standard mortgage clause of a fire insurance policy. The divergence stems largely from the construction courts have given to the provision in the standard mortgage clause that the loss shall be payable to the mortgagee "as interest may appear." One view, of which Rosenbaum v. Funcannon, 308 F.2d 680 (9 Cir. 1962), is a leading exponent, derives from the concept that "interest" refers to the debt owed to the mortgagee, so that the satisfaction of the debt terminates the interest. See Northwestern Nat'l Ins. Co. v. Mildenberger, 359 S.W.2d 380 (Mo.Ct.App.1962). The other, espoused in Nationwide Mut. Fire Ins. Co. v. Wilborn, 291 Ala. 193, 279 So.2d 460 (Sup.Ct.1973), and its progeny, is that the word refers to the mortgagee's interest in the property itself and the protection of the policy does not cease with the foreclosure sale or other method of acquiring title, even though the debt is satisfied thereby.

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