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

• Decision Date: 27 May 1981
• Citation: 430 A.2d 203,86 N.J. 159
• Parties: , 19 A.L.R.4th 767 495 CORP., a corporation of The State of New Jersey, Plaintiff-Respondent, v. NEW JERSEY INSURANCE UNDERWRITING ASSOCIATION, an Association created pursuantto P.L.1968, Ch. 129, Defendant-Appellant, and John L. Chmielewski, Defendant.
• Court: New Jersey Supreme Court

Page 159

86 N.J. 159

430 A.2d 203, 19 A.L.R.4th 767

495 CORP., a corporation of The State of New Jersey Plaintiff-Respondent, v. NEW JERSEY INSURANCE UNDERWRITING ASSOCIATION, an Association created pursuantto P.L.1968, Ch. 129 Defendant-Appellant and John L. Chmielewski, Defendant.

Supreme Court of New Jersey.

Argued Dec. 1, 1980.

Decided May 27, 1981.

Stanley W. Kallmann, Roseland, for defendant-appellant (Gennet & Kallmann, Roseland, attorneys).

Michael F. Chazkel, E. Brunswick, for plaintiff-respondent (Chazkel & Gast, E. Brunswick, attorneys).

The opinion of the Court was delivered by

PASHMAN, J.

The standard mortgage clause in an insurance policy protects the interest of a mortgagee in the insured real property. This case presents the question whether a standard mortgage clause entitles a mortgagee to recover the full amount of a loss incurred after it acquired title to the insured property by a conveyance from the owner. The trial court held that the insurer is liable only for the amount of the outstanding mortgage debt. The Appellate Division reversed, finding that the mortgagee may recover the full amount of loss, subject to the policy limits and the rights of superior mortgagees. 173 N.J.Super 114, 413 A.2d 630 (1980). Having granted the petition for certification of defendant New Jersey Insurance Underwriting Association, 84 N.J. 431, 420 A.2d 338 (1980), we now affirm the judgment of the Appellate Division.

I

The trial court decided the question of liability on the basis of stipulated facts. Defendant John L. Chmielewski owned an apartment building in Newark. When he purchased the building, he assumed an existing first mortgage and gave a second mortgage to plaintiff securing a debt of $12,100. Defendant New Jersey Insurance Underwriting Association (Insurance Underwriting) issued to Chmielewski a fire insurance policy with $100,000 coverage on the building. The policy contained a standard mortgage clause naming Mohawk Savings & Loan Association as first mortgagee and plaintiff 495 Corporation as second mortgagee. During the term of the policy, Chmielewski conveyed the property to 495 Corporation in satisfaction of the second mortgage but subject to the first mortgage. Plaintiff took title to the property and recorded the deed, but did not cancel the mortgage or note, ¹ nor did it notify Insurance Underwriting of the change in the ownership of the building and in its interest in the property.

After this conveyance to 495 Corporation but during the term of the policy, the building was damaged by a fire and subsequent vandalism. Plaintiff filed a claim for these losses under the insurance policy. When Insurance Underwriting declined to pay, plaintiff instituted this action.

The trial court granted judgment for defendant Insurance Underwriting, limiting its liability to any undischarged mortgage debt owed by Chmielewski. Relying on Whitestone Savings & Loan Association v. Allstate Insurance Co., 28 N.Y.2d 332, 270 N.E.2d 694, 321 N.Y.S.2d 862 (1971), the court reasoned that the conveyance of the property extinguished defendant's obligation to insure plaintiff at the same time as it discharged the mortgage debt.

The Appellate Division reversed the judgment for defendant. ² It distinguished Whitestone as involving a loss prior to foreclosure and, relying upon Nationwide Mutual Fire Insurance Co. v. Wilborn, 291 Ala. 193, 279 So.2d 460 (1973), held that "where, as here, a mortgagee acquires title to the mortgaged premises by a conveyance from the defaulting mortgagor in lieu of foreclosure, and a fire occurs thereafter, the mortgagee-owner is entitled to be compensated for its loss, to the extent of available insurance moneys after payment has first been made to the superior mortgagee, if there is one." ³ 173 N.J.Super. at 128-29, 413 A.2d 630. The court found this result "equitable, realistic and entirely consistent with the intent and purpose of the independent contract between mortgagee and insurer created by the standard mortgage clause." Id. at 128, 413 A.2d 630. We agree and, accordingly, affirm.

II

The standard mortgage clause included in defendant Chmielewski's insurance policy is an independent agreement between the insurer and the mortgagee. Power Building & Loan Association v. Ajax Fire Insurance Co., 110 N.J.L. 256, 257, 164 A. 410 (E & A 1933). Under the agreement, a mortgagee may recover for damages to the insured property regardless of any defenses that the insurer may have against the named insured. The clause provides that:

Loss, if any, under this policy, shall be payable to the mortgagee (or trustee), named on the first page of this policy, as interest may appear under all present or future mortgages upon the property herein described in which the aforesaid may have an interest as mortgagee (or trustee) in order of precedence of said mortgages, and this insurance, as to the interest of the mortgagee (or trustee) only therein, shall not be invalidated by any act or neglect of the mortgagor or owner of the within described property, nor by any foreclosure or other proceedings or notice of sale relating to the property, nor by any change in the title or ownership of the property....

The issue presented in this appeal is whether such a clause affords to a mortgagee coverage for losses occurring after it has acquired title to the property.

The defendant, emphasizing the phrase "as interest may appear under all present or future mortgages upon the property ... in which the (mortgagee) may have an interest as mortgagee," contends that a mortgagee is covered only to the extent that some portion of the mortgage debt remains unpaid. Because an insured's interest in property is fixed at the time of loss, e. g., P. R. DeBellis Enterprises, Inc. v. Lumbermen's Mutual Casualty Co., 77 N.J. 428, 436, 390 A.2d 1171 (1978), defendant reasons that under the "plain language" of the policy 495 Corporation was no longer covered when the fire occurred because its interest at the time of loss was no longer that of a mortgagee, but that of an owner.

If the standard mortgage clause were written in "plain English," the defendant's invocation of the "plain language" rule would be more apt. As it is, the language of the clause, far from being "clear and unambiguous," as the defendant claims, ⁴ may fully and accurately be understood only by careful analysis. Rather than seize upon a single phrase, whose meaning is less than certain, we choose to follow the more circumspect approach to contract interpretation laid out by Professor Corbin:

If, after a careful consideration of the words of a contract, in the light of all the relevant circumstances, and of all the tentative rules of interpretation based upon the experience of courts and linguists, a plain and definite meaning is achieved by the court, a meaning actually given by one party as the other party had reason to know, it will not disregard this plain and definite meaning and substitute another that is less convincing. Such a statement may be a mere truism; but it is not likely to lead to cocksure erroneous judgments. (3 Corbin on Contracts § 535 at 19-21 (1960))

Following this method, we are unable to derive a plain and definite meaning from the language of the standard mortgage clause itself. However, we are convinced that the interpretation offered by the plaintiff is consistent with the contractual language and is supported by the better reasoned precedents in this and other states. Furthermore, this result is dictated by the well-settled doctrine that, where the controlling language in an insurance policy "will support two meanings, one favorable to the insurer, and the other favorable to the insured, the interpretation sustaining coverage must be applied." Mazzilli v. Accident & Casualty Insurance Co. of Winterthur, 35 N.J. 1, 7, 170 A.2d 800 (1961).

The terms of the contract, read as a whole, refute defendant's view of the contract. The mortgage clause explicitly states that a mortgagee's interest in the insurance is not invalidated by foreclosure. This provision must refer to a foreclosure resulting in the purchase of the property by the mortgagee. Employers' Fire Insurance Co. v. Ritter, 112 N.J.Eq. 418, 421, 164 A. 426 (Ch. 1933); Guardian Savings & Loan Association v. Reserve Insurance Co., 2 Ill.App.3d 77, 79, 276 N.E.2d 109, 111 (1971). If a third party purchased the property at a foreclosure sale, the mortgagee's insurable interest in the property would terminate, since title would pass free of the mortgagee's security interest. See Sears, Roebuck & Co. v. Camp, 124 N.J.Eq. 403, 410, 1 A.2d 425 (E & A 1938).

Because the standard mortgage clause applies to circumstances where a mortgagee's interest in the property has increased to ownership through purchase at a foreclosure sale, coverage is not limited to the security interest of a mortgagee, as defendant contends, but is necessarily broader. E. g., Employers' Fire Insurance Co. v. Ritter, supra; Nationwide Mutual Fire Insurance Co. v. Wilborn, supra; Guardian Savings & Loan Association v. Reserve Insurance Co., supra; Federal National Mortgage Association v. Great American Insurance Co., 157 Ind.App. 347, 300 N.E.2d 117 (1973); Federal National Mortgage Association v. Ohio Casualty Insurance Co., 46 Mich.App. 587, 208 N.W.2d 573 (1973). The contractual language on which defendant relies only specifies that the protected interest must originate in a mortgage. In view of the standard mortgage clause as a whole, the quoted phrase does not strictly define the kind of insurable interest covered by the clause. The extent of coverage depends on the extent of the mortgagee's interest at the time of loss, not on the continued existence of a mortgage relationship.

It is possible that, when the standard clause was first adopted early in this century, the industry intended that a mortgagee's coverage would cease after it became the owner of the insured property. But if ...