Clemons v. American Cas. Co.

• Decision Date: 08 December 1993
• Docket Number: Civ. No. JFM-93-35.
• Citation: 841 F. Supp. 160
• Parties: James Lee CLEMONS, Sr., et ux. v. AMERICAN CASUALTY COMPANY.
• Court: U.S. District Court — District of Maryland

841 F. Supp. 160

James Lee CLEMONS, Sr., et ux. v. AMERICAN CASUALTY COMPANY.

Civ. No. JFM-93-35.

United States District Court, D. Maryland.

December 8, 1993.

William C. Littleton, Sr., Littleton and Wald, Glen Burnie, MD, for plaintiff.

V. Timothy Bambrick, George E. Reede, Jr., Baltimore, MD, for defendant.

Clarence M. Thomas, Timonium, MD, for intervenor.

MEMORANDUM

MOTZ, District Judge.

This case arises out of a dispute over a fire insurance claim. On May 20th, 1992, American Casualty Company (hereinafter "defendant") denied a claim made by James Lee Clemons (hereinafter "plaintiff") under a homeowners insurance policy it had issued after concluding that plaintiff had made material misrepresentations when he applied for the policy.¹

On November 27, 1992, plaintiff instituted this action in the Circuit Court for Baltimore City, alleging that defendant had breached its insurance contract by denying his claim. Defendant subsequently removed the action to this court. James Eurice (hereinafter "intervenor"), the mortgagee of the insured property, moved to intervene on February 3, 1993, and this motion was granted on March 23. Intervenor claims that, as the mortgagee, he is entitled to the insurance proceeds. Intervenor and defendant have each filed motions for summary judgment, both against one another and against plaintiff. Defendant's motions will be granted. Intervenor's motion with respect to plaintiff will be granted. His motion with respect to defendant will be denied.

I.

In August of 1990, intervenor sold a piece of improved property, known as 180 Waldo Drive in Pasadena, Maryland, to Wayne Brumwell. To finance the sale, intervenor loaned Brumwell $135,000 secured by a mortgage on the property. The Deed of Trust between intervenor and Brumwell required Brumwell to acquire "Hazard Insurance" for the property. Brumwell purchased the necessary insurance.

Shortly thereafter, Brumwell's financial difficulties led him to ask his brother-in-law, plaintiff, to take over payment on the property. Although plaintiff initially sought to have the property deeded to him in full, intervenor insisted that Brumwell remain liable for the mortgage payments. Thus, in December of 1990, plaintiff and Brumwell entered into a land installment contract under which Brumwell would transfer title to plaintiff when payments to intervenor had been completed. For the first several months plaintiff made payments to Brumwell, but upon learning that the money was not being promptly forwarded to intervenor, plaintiff began making payments directly to him.

In December of 1990, when plaintiff entered into the installment contract and moved onto the property, he also took over Brumwell's insurance obligations, buying a dwelling fire policy from the Continental Casualty Company. In October of 1991, plaintiff, wishing to have his personal property covered, switched to a homeowners policy with defendant. At this point there is some dispute about the facts. Plaintiff claims that he told the insurance agent that both Brumwell and intervenor were lienholders. Int. Ex. 7 at 9-10. Defendant denies that plaintiff mentioned intervenor at all. In any event, the agent listed Brumwell on the application as a mortgagee. Intervenor was not listed anywhere on either policy. On December 7, 1991, the premises at 180 Waldo Drive were destroyed by fire, and this litigation ensued.

II.

The threshold issue posed by the cross-motions for summary judgment that intervenor and defendant have filed against one another is whether intervenor may recover under the plaintiff's insurance contract directly as plaintiff's mortgagee. That contract contains a clause that reads: "If a mortgagee is named in this policy, any loss payable ... will be paid to the mortgagee and to you, as interests appear.... If we deny your claim, that denial will not apply to a valid claim of the mortgagee...." Def. Ex. B at tab 2.

The purpose of this type of clause, known to the initiated as a "standard", "union" or "New York" mortgage clause, is to insulate the mortgagee from acts of the mortgagor that would invalidate the policy. 5A Appleman, Insurance Law and Practice § 3401; 10A Couch on Insurance 2d § 42:716. It does this by creating a separate contractual relationship between the insurer and the mortgagee. United States v. Commercial Union Insurance Cos, 821 F.2d 164, 166 (2d Cir.1987) (New York law); Ingersoll-Rand Financial Corp. v. Employers Insurance of Wausau, 637 F.Supp. 642, 644-45 (E.D.La.1984) (Louisiana law); Leigh v. Western Fire Insurance Co., 575 F.Supp. 1192 (E.D.Mo.1983) (Missouri law); see also, 5A Appleman § 3401 ("... under a union or standard mortgage clause, it is considered that ... the insurer has entered into a separate contract with the mortgagee just as if the later had applied for the insurance entirely independently of the mortgagor.") This separate contractual relationship protects the mortgagee from defenses that the insurer can raise against the insured. Rent-A-Car Co. v. Globe & Rutgers Fire Insurance Co., 158 Md. 169, 179-80, 148 A. 252 (1930). Thus, if this clause applies, defendant's subsequent argument that plaintiff made material misrepresentations by listing Brumwell as a mortgagee and failing to mention intervenor at all is moot as to intervenor.

Resolution of the issue turns upon the interpretation of the first phrase of the mortgage clause: "If a mortgagee is named in this policy...." The parties have not cited any cases directly on point. Of course, if the mortgagee is mentioned by name, the clause applies and the named mortgagee can recover regardless of the insured's actions. Green v. Juneja, 337 Pa.Super. 460, 487 A.2d 36 (1985); Allstate Insurance Co. v. Howard Savings Institution, 127 N.J.Super. 479, 317 A.2d 770 (1974); Aetna State Bank v. Maryland Casualty Co., 345 F.Supp. 903 (N.D.Ill. 1972) (Illinois law). On the other hand, if no mortgagee is named, courts refuse to read in the name of the actual mortgagee, holding instead that the mortgagee holds nothing more than an equitable lien on the insurance proceeds, thus subjecting him to the same defenses as the insured. Del-Remy Corp. v. Lafayette Insurance Co., 616 So.2d 231 (La. Ct.App.1993), Hatley v. Payne, 25 Ark.App. 8, 751 S.W.2d 20 (1988), Nationwide Mutual Fire Insurance Co. v. Dungan, 818 F.2d 1239 (5th Cir.1987) (Mississippi law); Cottrell v. Clark, 126 Mich.App. 276, 337 N.W.2d 58 (1983). This case falls between these two extremes. The mortgagee was neither named nor left unnamed; instead he was misnamed.

Intervenor argues that the language "if a mortgagee...." (intervenor's emphasis) should be read to mean that if any person is listed as a mortgagee, even erroneously, then the actual mortgagee should be paid because the insurer was on notice that there was an additional interest to be protected. The burden is on the insurer, intervenor argues, to inform the public if the policy was intended only to cover the named mortgagee.² Defendant argues that the independent contractual relationship created by a standard mortgage clause cannot exist when the proper mortgagee is not named in the policy.

Plaintiff's argument is premised on the principle, well established under Maryland law, that an ambiguity in an insurance contract should be resolved against the party that drafted the policy. Collier v. MD-Individual Practice Ass'n., 327 Md. 1, 607 A.2d 537 (1992). However, courts are not to construe the policy against the insurer until after they have determined from the face of the entire policy and from extrinsic factors what the intent of the parties was. Id.; see also, W.M. Schlosser Co. v. Insurance Company of North America, 325 Md. 301, 600 A.2d 836 (1992). Intervenor is asking this court to read the mortgage clause as if it were an open clause, designed to benefit a party not named in the policy. In construing similar open clauses, courts in other jurisdictions have held that in order to be held liable, the insurer must be shown to have intended to insure the class of unnamed people. Grain Processing Corp. v. Continental Insurance Co., 726 F.2d 403, 404 (8th Cir.1984), ("Although the policy provides for the possibility of extending coverage to other than the insured, i.e. `1. For account of whom it may concern.', the policy holder ... must intend the unnamed party to be covered."); McKenzie v. New Jersey Transit Rail Operation, Inc., 772 F.Supp. 146, 149 (S.D.N.Y. 1990) ("the intention to provide coverage for the benefit of a party not named in an insurance policy `must appear from the four corners of the instrument.'", quoting Stainless, Inc. v. Employers Fire Insurance Co., 49 N.Y.2d 924, 428 N.Y.S.2d 675, 406 N.E.2d 490 (1980)).

Here, intervenor has offered no evidence, either within the policy or extrinsic to it, demonstrating that defendant intended to insure him or the open class of any presently unnamed mortgagees who might be identified later. All that he points to is a statement by defendant's underwriter that it "was in the company's interest" to discover who the mortgagee of the property was. Int. Ex. 19 at 84, line 1. While this may well be true, it is not the same as establishing defendant's intent to insure a particular mortgagee or an unnamed mortgagee, whomever that turned out to be. Since intervenor bears the burden of proof on the issue, the absence of probative evidence supporting his contention is fatal to his cause. See, e.g., Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).

III.

Intervenor argues that even if he is not entitled to the insurance proceeds under the mortgage clause as written, the court should use its equitable powers to reform the insurance contract in order to name him as the mortgagee.

A court may reform a contract when "there is a mutual mistake of fact, or a mistake made by one of the parties accompanied...