Burritt Mut. Sav. Bank of New Britain v. Transamerica Ins. Co.

• Decision Date: 11 March 1980
• Court: Connecticut Supreme Court
• Parties: BURRITT MUTUAL SAVINGS BANK OF NEW BRITAIN v. TRANSAMERICA INSURANCE COMPANY.

Page 333

428 A.2d 333

180 Conn. 71

BURRITT MUTUAL SAVINGS BANK OF NEW BRITAIN v. TRANSAMERICA INSURANCE COMPANY.

Supreme Court of Connecticut.

Argued Dec. 11, 1979.

Decided March 11, 1980.

John W. Lemega, Hartford, with whom, on brief, were Joseph G. Lynch and Richard C. Tynan, Hartford, for appellant (defendant).

Harold J. Eisenberg, New Britain, for appellee (plaintiff).

Before COTTER, C. J., and LOISELLE, SPEZIALE, PETERS and HEALEY, JJ.

PETERS, Justice.

This case concerns the liability of an insurance company under a mortgage loss payable clause after the mortgagee's foreclosure on the insured property. The plaintiff mortgagee, Burritt Mutual Savings Bank, brought an action against the defendant, Transamerica Insurance Company, to recover $15,000, which was the amount of the adjusted value of the loss insured by the defendant. The defendant filed an answer, several special defenses, and a third-party complaint against three third-party defendants, Richard V. Pizzuto, Ricky's Restaurant, Inc., and the Connecticut Bank and Trust Company. The Connecticut Bank and Trust Company in turn filed a cross complaint against the other two third-party defendants, Pizzuto and Ricky's Restaurant Inc. After trial to the court, Missal, J., judgment was rendered in the plaintiff's favor against the defendant Transamerica, and in the third-party plaintiff Transamerica's favor against Pizzuto; no judgment was rendered either for or against Connecticut Bank and Trust Company. Although notices of appeal were originally filed by all of the interested parties, only the appeal of the defendant Transamerica has been pursued in this court. ¹

There is little dispute about the underlying facts as contained in the findings of the trial court. Burritt Mutual Savings Bank (hereinafter Burritt Mutual) lent Richard V. Pizzuto $30,000 on January 7, 1971, and received in return a promissory note and a mortgage on real property located at 209-211 Whitney Street, Hartford. This property was then covered by a multiperil insurance policy issued by the defendant Transamerica Insurance Company (hereinafter Transamerica); Burritt Mutual's name was duly entered upon the insurance policy as first mortgagee, replacing previously designated mortgagees. Five months later, on June 17, 1971, while the policy was in full force and effect, a fire occurred on the premises causing substantial damage. Richard Pizzuto, the named insured and the mortgagor, hired a firm of insurance adjusters, and on October 15, 1971, the loss was adjusted in the amount of $15,000. Transamerica then issued a negotiable instrument ² for $15,000 payable jointly to Pizzuto, to the adjustment firm that had represented Pizzuto, and to Burritt Mutual. This instrument was delivered by the adjusters, with their indorsement, to Pizzuto, who indorsed his own name, and that of Ricky's Restaurant (an establishment that Pizzuto owned). The instrument also came to have the indorsement of Burritt Mutual without the authorization of Burritt Mutual or any of its officers, employees or agents. The instrument was deposited by Pizzuto in the Connecticut Bank and Trust Company, which duly forwarded it for collection and payment. The instrument was in fact paid but Burritt Mutual never received any of the proceeds.

Burritt Mutual did not discover that the mortgaged property had been damaged until July 28, 1971. Although it promptly notified A. T. Lindquist Agency, Transamerica's local agent, it did not communicate with Transamerica itself until July 21, 1972. When Burritt Mutual learned, in the process of this communication, that it had been designated as a payee on an instrument that it had not received, it repeatedly demanded payment of the fire loss from Transamerica.

The fire loss resulted in a marked deterioration in the relationship between the value of the mortgaged property and the amount of the outstanding indebtedness, since the insured did not use the insurance proceeds received from Transamerica to repair the mortgaged property. ³ Before the fire, when the mortgage loan was first executed in the amount of $30,000, the property had been valued at $42,000. After the fire, the indebtedness never fell below $29,500, while the value of the property diminished substantially, so that when foreclosure proceedings were instituted after default in September of 1972 the property was assessed at only $27,000. The foreclosure proceedings led to a judgment of strict foreclosure in December of 1972, and the property was thereupon resold, the following April, at a price of $21,300, which, after deduction of costs, gave Burritt Mutual a net recovery of $19,826.53. Although Pizzuto's indebtedness at the time of foreclosure was adjudicated to have been $35,186.01, Burritt Mutual never made any effort to initiate a deficiency claim against Pizzuto. The fire in effect destroyed the lender's cushion of security and the debtor's equity of redemption. Transamerica's failure to get the insurance proceeds to Burritt Mutual in turn led to the foreclosure. Had Burritt Mutual been paid, it is not likely that Pizzuto would have permitted the foreclosure to proceed as it did.

Burritt Mutual's cause of action is a suit for $15,000 on the basis of rights emanating from the multiperil insurance policy issued by Transamerica. It is not a suit on the negotiable instrument in that amount that was drawn by Transamerica. Presumably this choice of actions was determined by the fact that Burritt Mutual has consistently maintained, as the trial court found, that it had never received possession of this instrument. Burritt Mutual could not sue on an instrument on which it was neither holder nor transferee. Cf. General Statutes § 42a-3-804.

The insurance clause that is at issue is a "standard" or "union" mortgage loss payable clause. ⁴ This clause, in contradistinction to an "open" loss payable clause, creates a direct contractual relationship between the mortgagee and the insurer. Savings Bank of Ansonia v. Schnacupp, 108 Conn. 588, 594-95, 144 A. 36 (1928); Collinsville Savings Society v. Boston Ins. Co., 77 Conn. 676, 680, 60 A. 647 (1905); 5A Appleman, Insurance Law and Practice § 3401 (Rev.Ed.1970).

Transamerica does not dispute that at the time of the fire loss, the mortgage clause created rights in Burritt Mutual, and that this loss was thereafter appropriately adjusted in the amount of $15,000. Indeed Transamerica's issuance of its negotiable instrument in that amount, payable to Burritt Mutual as one of the joint payees, confirms its acknowledgement of the legitimacy of Burritt Mutual's initial claim. Transamerica argues instead that Burritt Mutual's subsequent procurement of a decree of strict foreclosure, without timely reservation of a deficiency claim against Pizzuto, extinguished both the mortgage debt and Burritt Mutual's entitlement to recovery as mortgagee under the mortgage clause. By contrast, Burritt Mutual maintains, as the trial court concluded, that its rights under the insurance contract vested when the fire loss was adjusted, and that those rights, in the amount of $15,000, were not subject to divestment. Although each position has some merit and some support in the case law, we have decided, under the facts of this case, to adopt an intermediate stance.

Difficulties created by the language of the standard loss payable clause are, not surprisingly, at the heart of the claims that we must resolve. On the one hand, the clause states that "(l)oss ... shall be payable to the mortgagee ... as interest may appear under all present or future mortgages," and this wording indicates that extinction of its mortgage would be fatal to the mortgagee's claim. On the other hand, the clause goes on to state that "as to the interest of the mortgagee," the insurance shall not be invalidated "by any foreclosure ... nor by any change in the title or ownership of the property," (emphasis added) and that wording lends support to the mortgagee's continued right to the insurance proceeds so long as it retains any interest, even ownership, in the insured property. Needless to say, if the wording is open to two or more reasonable constructions, the clause must, by familiar principles, be construed against the insurance company that was its draftsman. Roby v. Connecticut General Life Ins. Co., 166 Conn. 395, 402, 349 A.2d 838 (1974); Scranton v. Hartford Fire Ins. Co., 141 Conn. 313, 315, 105 A.2d 780 (1954); Restatement (Second), Contracts § 232 (Tentative Draft, 1973). Insurance companies have had ample opportunity to note and to respond to the extensive and confusing case law that this clause has generated.

It is useful first to examine the line of cases that has upheld the mortgagee's right to recover insurance proceeds despite foreclosure proceedings that discharged the mortgage indebtedness. The cases emphasize the independence of the contract created by the standard mortgage clause; some rely on language in 8 Couch on Insurance 2d (1961), § 37:1162, p. 670, that, under a standard mortgage clause, the mortgagee's "acquisition of title to the insured property is generally regarded as an increase of interest, rather than a change of ownership," to buttress their conclusion that the mortgagee continues to have an insurable interest. See, e. g., Nationwide Mutual Fire Ins. Co. v. Wilborn, 291 Ala. 193, 197, 279 So.2d 460 (1973); Federal National Mortgage Assn. v. Hanover Ins. Co., 243 Ga. 609, 255 S.E.2d 685 (1979); City of Chicago v. Maynur, 28 Ill.App.3d 751, 754, 329 N.E.2d 312 (1975); Federal National Mortgage Assn. v. Great American Ins. Co., 157 Ind.App. 347, 350, 300 N.E.2d 117 (1973); Federal National Mortgage Assn. v. Ohio Casualty Ins. Co., 46 Mich.App. 587, 590, 208 N.W.2d 573 (1973); Haskin v. Greene, 205 Ore. 140, 147-48, 286 P.2d 128 (1955). Although in the cited cases the underlying facts about the relationship between the debt and the foreclosure sale are not always entirely clear, at...