Conrad Brothers v. John Deere Ins. Co.

Decision Date19 December 2001
Docket NumberNo. 00-0694.,00-0694.
Citation640 N.W.2d 231
PartiesCONRAD BROTHERS, Appellee, v. JOHN DEERE INSURANCE COMPANY, Appellant.
CourtIowa Supreme Court

Gregg Geerdes, Iowa City, for appellant.

Mark McCormick of Belin Lamson McCormick Zumbach Flynn, P.C., Des Moines, for appellee.

CADY, Justice.

In this appeal, we must decide if the rights of an insured to the replacement costs of damaged property covered under a casualty insurance policy were properly assigned by the insured to a mortgagee, and whether an assignee is required to make the repairs or replace the property before the insurer is obligated to pay replacement costs. The district court and court of appeals found the assignment was valid and that the intent to rebuild by the assignee triggered the insurer's obligation to pay. We agree that the assignment was valid and conclude the assignee was relieved of the condition precedent to repair or replace the property based upon a repudiation of the insurance contract by the insurer. We affirm the decision of the court of appeals and the judgment of the district court.

I. Background Facts and Proceedings.

R.L. Schott Implements, Inc. (Schott) operated a John Deere implement dealership in Sigourney, Iowa. The dealership was operated on land owned by Schott. There were two buildings on the premises—a storage and maintenance building, and an office building which housed the retail portion of the business.

On August 26, 1997, Schott executed a mortgage on the property to Conrad Brothers Partnership (Conrad Bros.) to secure a $300,000 promissory note. Pursuant to the mortgage, Schott was required to maintain insurance which provided replacement cost coverage on the buildings to protect against windstorm loss and other commercially reasonable hazards.

The mortgage agreement additionally delineated the parties' rights in the event of a default on the note by Schott. Upon default, Conrad Bros. was permitted to immediately record a deed in lieu of foreclosure. The deed constituted complete satisfaction of Schott's obligations under the mortgage. Furthermore, the mortgage provided that the deed would result in the assignment of Schott's rights to any insurance proceeds.

Schott obtained a casualty insurance policy from John Deere Insurance Company (John Deere) in March 1998. The policy insured the two buildings against windstorm loss. It permitted the insured to make a claim for the actual cash value of the property, as well as an additional claim for the replacement costs. However, the policy posed several conditions on a claim for replacement costs. First, the insured was required to replace or repair the damaged property within a reasonable time after the loss or damage. If the insured rebuilt on a different premises, it was entitled to no more than the cost to replace the building on the same premises using similar material as the original building. In addition, the insured was required to notify the insurer within 180 days of loss of the insured's intent to seek replacement costs.

John Deere included a standard loss payable provision in the insurance policy. It provided for the payment of damages to a mortgagee named in the policy. Conrad Bros. was not named as a loss payee or a mortgage holder. Moreover, the policy prohibited the assignment of rights and duties under the policy without John Deere's written consent. Schott did not request John Deere's approval of the assignment clause contained in its mortgage agreement with Conrad Bros. Prior to the incidents giving rise to this action, John Deere was unaware of Conrad Bros.'s interest in the insured property.

After losing its dealership license in May 1998, Schott terminated its business operations. On June 29, 1998, a windstorm extensively damaged the office building and completely destroyed the storage and maintenance building. Schott promptly filed a proof of loss with John Deere. Conrad Bros. then informed John Deere of its mortgage interest. Not long after the windstorm loss, Schott defaulted on the mortgage. Conrad Bros. elected to file the deed in lieu of foreclosure on July 14, 1998.

The full cost to replace the buildings totaled $120,075. The actual cash value of the loss equaled $60,037.50. John Deere issued a joint check to Schott and Conrad Bros. for the actual cash value, minus the deductible. Schott subsequently endorsed the check to Conrad Bros.

Conrad Bros. then made a claim for the replacement costs from John Deere. John Deere informed Conrad Bros. it was not covered by the policy because it was not listed as a mortgage holder. Thus, it informed Conrad Bros. that any claim under Schott's insurance policy would be denied.

Conrad Bros. filed a petition at law requesting replacement cost damages of $60,037.50, plus interest. John Deere responded by claiming Conrad Bros. extinguished its insurable interest when it filed the deed in complete satisfaction of the mortgage, and further contested the validity of the assignment. Alternatively, John Deere pled the affirmative defense of lack of compliance with the condition precedent requiring actual replacement before an insured is entitled to replacement costs.

Conrad Bros. moved for summary judgment. It claimed it held a valid assignment and John Deere's refusal to acknowledge any responsibility for coverage excused the performance of any condition precedent under the insurance agreement to rebuild. It further claimed it was ready and able to rebuild but wanted assurance from John Deere that it would pay the replacement costs before rebuilding.

The district court granted summary judgment for Conrad Bros. It found the assignment was valid and Conrad Bros. was entitled to receive the replacement costs under the policy without first repairing or replacing the buildings. The court found it would be unreasonable to require Conrad Bros. to comply with the condition when John Deere was disputing the coverage.

The court later held a trial to determine whether Conrad Bros. was entitled to a damage award. Following the evidence, the district court found Conrad Bros. had complied with the provision requiring notice of intent to seek replacement costs within 180 days of the loss and it was reasonable for it not to perform the condition requiring the repairs to be made because John Deere had denied any coverage. The district court entered judgment for Conrad Bros. in the amount of $60,037.50.

John Deere appealed. We transferred the case to the court of appeals. It affirmed the district court's conclusions regarding the validity of the assignment and Conrad Bros.'s right to replacement cost coverage. It determined Conrad Bros. complied with the policy provision requiring actual replacement before the insured is entitled to replacement costs under the circumstances based on its intent to replace the property.

John Deere petitioned for further review. It claims the deed in lieu of foreclosure filed by Conrad Bros. extinguished the debt and eliminated any insurable interest. Alternatively, John Deere claims that its denial of coverage did not excuse the condition precedent requiring the buildings to be rebuilt before it was obligated to pay replacement costs.

II. Standard of Review.

Initially, we must determine our standard of review. John Deere contends our review is limited to the summary judgment ruling. Conversely, Conrad Bros. counters we must also review the post-trial ruling, as the district court's conclusions further supported the summary judgment decision. In either case, our standard of review is the same. We review for errors at law. See Pierce v. Farm Bureau Mut. Ins. Co., 548 N.W.2d 551, 553 (Iowa 1996). Instead, the question presented goes to the scope of our review. This case proceeded to final judgment and the issues presented at the summary judgment hearing were revisited at trial. Accordingly, we review the entire record and are bound by the findings of the district court if supported by substantial evidence., Id.

III. Insurable Interest.

It is a well-established rule of insurance law that a person must possess an insurable interest in the insured property in order to recover under a policy of insurance. See 44 C.J.S. Insurance § 219, at 419 (1993). John Deere advances two reasons in support of its argument that Conrad Bros. had no insurable interest in the two damaged buildings insured by Schott. First, John Deere contends the purported assignment was invalid because the insurance policy expressly prohibited assignments and, alternatively, because the assignment was executed before the loss had been incurred. Second, John Deere claims the filing of the deed extinguished Conrad Bros.'s equitable lien on the insurance proceeds because the deed was accepted as full satisfaction for Schott's debt.

A. Assignment.

At common law, an insured was prohibited from assigning its insurance policy and underlying rights. 43 Am.Jur.2d Insurance § 789, at 851 (1982). However, the law now generally favors the assignability of choses in action, and courts have permitted the assignment of insurance policies under statutes providing for the assignment of contracts in exchange for a money payment. Id. Iowa Code section 539.1 is such a statute. See Iowa Code § 539.1 (1997) (assignment of nonnegotiable instruments).

Notwithstanding, insurers may impose conditions in the terms of the policy on an insured's ability to assign its rights under the insurance policy. 43 Am. Jur.2d Insurance § 790, at 852. One common condition imposed on insureds is the requirement to obtain the insurers' consent before granting an assignment. Id. § 810, at 865. Generally, insurance policies, particularly those regarded as personal contracts, such as fire insurance and liability policies, are not assignable prior to loss without the insurer's consent. Id. § 789, at 852; see Antal's Restaurant, Inc. v. Lumbermen's Mut. Cas. Co., 680 A.2d 1386, 1388 (D.C.1996). In fact, we have previously invalidated the assignment of an...

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