Consolidated Mortg. Corp. v. American Sec. Ins. Co.

• Decision Date: 28 May 1976
• Docket Number: Docket No. 23953
• Citation: 69 Mich.App. 251,244 N.W.2d 434
• Parties: CONSOLIDATED MORTGAGE CORPORATION, and Paul Revere Insurance Company, Plaintiffs-Appellants, v. AMERICAN SECURITY INSURANCE COMPANY, Defendant-Appellee.
• Court: Court of Appeal of Michigan — District of US

Page 434

244 N.W.2d 434

69 Mich.App. 251

CONSOLIDATED MORTGAGE CORPORATION, and Paul Revere Insurance Company, Plaintiffs-Appellants, v. AMERICAN SECURITY INSURANCE COMPANY, Defendant-Appellee.

Docket No. 23953.

Court of Appeals of Michigan.

May 28, 1976.

Released for Publication Aug. 11, 1976.

Bacalis & Associates by James C. Klemanski, Detroit, for plaintiffs-appellants.

Hyman & Rice by Jefferson F. Riddell, Southfield, for defendant-appellee.

Before V. J. BRENNAN, P.J., and MAHER and BRITTEN, ^* JJ.

V. J. BRENNAN, Presiding Judge.

Plaintiffs, Consolidated Mortgage Corporation and Paul Revere Insurance Company, appeal from an order of the Wayne County Circuit Court affirming a grant of defendant's motion for a directed verdict entered in the Common Pleas Court for the City of Detroit.

On October 1, 1970, defendant, American Security Insurance Company, issued a fire insurance policy to one Mary Lee Harris, insuring her residence at 5738 Hurlbut Avenue, Detroit, Michigan. The policy was endorsed so as to show the interest of plaintiff Paul Revere Insurance Company as mortgagee and contained the Standard Mortgage Clause protecting plaintiff's interest. The clause provided as follows:

'Loss or damage, 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, 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, nor by the occupation of the premises for purposes more hazardous than are permitted by this policy; provided, that in the case the mortgagor or owner shall neglect to pay any premium due under this policy, the mortgagee (or trustee) shall, on demand, pay the same.

'Provided also, that the mortgagee (or trustee) shall notify this Company of any change of ownership or occupancy or increase of hazard which shall come to the knowledge of said mortgagee (or trustee) and, unless permitted by this policy, it shall be noted thereon and the mortgagee (or trustee) shall, on demand, pay the premium for each such increased hazard for the term of the use thereof; otherwise this policy shall be null and void.'

Sometime late in the year of 1970, plaintiff, Paul Revere Insurance Company, initiated foreclosure proceedings by publication. Mary Lee Harris abandoned her home sometime thereafter. Plaintiff's records show that it discovered that the property was vacant on December 9, 1970, and a notation on the record suggested that the property should be boarded. The records show further that the property was boarded up and secured on January 1, 1971. The records show inspection by an agent of the plaintiff on May 6, 1971, and on June 7, 1971. The mortgagor's period of redemption expired on July 14, 1971. On July 30, 1971, the property was severely damaged by fire. An agent of plaintiff inspected the property again on August 4, 1971, and noted the fire damage in the attic. The Detroit Fire Department opined that the fire was caused by a trespasser who either intentionally or accidentally caused the fire. The identity of the person or persons responsible has not been discovered.

A few weeks later, defendant was informed of the fire by a public adjuster acting as agent for plaintiff. The defendant denied liability on the grounds that Paul Revere Insurance Company failed to fulfill its obligations under the Standard Mortgage Clause quoted above. This suit was filed in Common Pleas Court to test defendant's denial of liability. The trial judge in Common Pleas Court granted defendant's motion for a directed verdict which was subsequently affirmed on appeal to the Wayne County Circuit Court. Thereafter we granted leave to appeal.

The dispositive issue on appeal is whether the mortgagee breached its duty under the Standard Mortgage Clause to give notice to the insurer of 'any change of ownership or occupancy or increase of hazard' as required by the policy as a condition for maintaining insurance coverage.

This writer dealt with a very similar issue in the case of Federal National Mortgage Association v. Ohio Casualty Insurance Co., 46 Mich.App. 587, 208 N.W.2d 573 (1973), Lv. den., 390 Mich. 762 (1973). In that case, a fire caused extensive damage to an insured home after a sheriff's sale pursuant to a foreclosure but prior to the expiration of the period of redemption. Thus, this Court was called upon to decide whether a foreclosure by the mortgagee would be regarded as a 'change of ownership' such as to require notice to the insurer under the policy prior to the expiration of the period of redemption. We held in the negative, citing 43 Am.Jur.2d, Insurance, § 890, p. 852, as follows:

"Under a policy containing a union or standard mortgage clause, the mortgagee's interest is regarded as separately and independently insured, and his acquisition of title to the insured property is generally regarded as an increase of interest, rather than a change of ownership." 46 Mich.App. at 591, 208 N.W.2d at 575.

In the case at bar we are called upon once again to construe the Standard Mortgage Clause, and we are invited by plaintiff to extend the rule of F.N.M.A. v. Ohio Casualty Insurance Co. to a time frame beyond the period of redemption. We decline the invitation.

The Standard Mortgage Clause, sometimes referred to as a 'union clause', is uniformly construed by the courts as a separate contract of insurance between the mortgagee and the insurer, which serves to protect the mortgagee's interest in the property. See Booker T. Theatre Co. v. Great American Insurance Co. of New York, 369 Mich. 583, 120 N.W.2d 776 (1963), and cases cited therein. While the mortgagee does not pay a premium to the insurer for this insurance contract, he does furnish consideration therefor by promising to give notice to the insurer of changes in the status of the property which would increase the insurer's risk. By this arrangement, the mortgagee's claim is not derivative of the mortgagor's claim, and the mortgagee might be able to recover proceeds from the policy notwithstanding acts or omissions by the mortgagor which would cause the policy to be invalid as to the mortgagor.

It is elementary that an insurer cannot be held liable on a risk which it did not elect or choose to assume. See Kaczmarck v. La Perriere, 337 Mich. 500, 60 N.W.2d 327 (1953). The theory is that the insurer has a right to assess the risks attendant upon the proposed insured and adjust its rate accordingly. See Shores v. Rabon, 251 N.C. 790, 112 S.E.2d 556 (1960). Thus, if the mortgagor conveys real property to a stranger, a new contract of insurance must be negotiated or the insurer must consent to an assignment. It is clear, therefore, that failure on the part of the mortgagee to give notice to the insurer of a 'change of ownership' under such circumstances will render the insurance policy inoperative. We think this is more a technical rather than a real consideration, however. We take judicial notice of the fact that purchasers of residential real property routinely are assigned the seller's insurance policy, and 'consents' by insurers are a matter of course. Yet, in construing the Standard Mortgage Clause, courts have generally held that a transfer of title to a 'stranger' without giving notice to the insurer will invalidate the policy. See 11 Couch on Insurance (2d ed.), § 42:732, pp. 371--372.

In cases where the mortgagee acquires title to property pursuant to a foreclosure, sheriff's sale and the running of the period of redemption, however, courts have reached a different result. The acquisition of title by the mortgagee is not generally construed to be a 'change of ownership' but rather an increase of interest, on the theory that the mortgagee is not a stranger to the insurance contract, and that his change from mortgagee to fee title holder is a mere change of status. Courts have been unwilling, therefore, to allow the insurer to deny liability based on a change of the mortgagee's status. This was the view expressed by this writer in the case of F.N.M.A. v. Ohio Casualty Insurance Co., supra. We think the rule announced in that case was a good one. The period of redemption had not run, and the mortgagor had a right to reenter the property and remain therein until the period of redemption had run. We do not think it is an unfair burden upon the insurer to continue coverage at homeowner's rates as long as there was a possibility that the mortgagor would redeem the property.

In the case at bar the plaintiff was informed that the property was vacant over seven months before the fire occurred, and the property was boarded up over six months before the damage. No doubt if they had informed the insurer of this change, the insurer would have either cancelled the coverage or demanded much higher rates to insure a vacant, boarded-up property. By failing to notify insurer, plaintiff had the benefit of continued coverage at homeowners rates. The parties did not brief this issue on appeal, however, so we decline to ground our decision on the failure of the mortgagee to give notice to the insurer of the vacancy. Such a rule might not be wise policy in any event, because it might serve to discourage inspections by the mortgagee, and thus contribute to the decay of foreclosed properties, particularly urban properties. As matters now stand, however, we can see nothing which would prevent a mortgagee from negligently or intentionally failing to give notice to an insurer of a foreclosure and vacating by the mortgagor and, for an indefinitely long period of time, continue to have insurance coverage at low rates, notwithstanding the fact that the risk to the insurer would be substantially increased. We recognize...