Federal Ins. Co. v. Century Federal Sav. & Loan Ass'n

• Decision Date: 10 January 1992
• Docket Number: No. 19409,19409
• Parties: FEDERAL INSURANCE COMPANY, Plaintiff-Appellee, v. CENTURY FEDERAL SAVINGS & LOAN ASSOCIATION, Defendant-Appellant.
• Court: New Mexico Supreme Court

Page 302

824 P.2d 302

113 N.M. 162

FEDERAL INSURANCE COMPANY, Plaintiff-Appellee, v. CENTURY FEDERAL SAVINGS & LOAN ASSOCIATION,

Defendant-Appellant.

No. 19409.

Supreme Court of New Mexico.

Jan. 10, 1992.

[113 NM 163] Carpenter, Crout & Olmsted, Michael R. Comeau, Stephen J. Lauer, and Jones, Snead, Wertheim, Rodriguez & Wentworth, James E. Snead, III and Francis J. Mathew, Santa Fe, for defendant-appellant.

Bosson & Canepa, Richard C. Bosson and Brian E. Fitzgerald, Santa Fe, for plaintiff-appellee.

OPINION

MONTGOMERY, Justice.

This is an insurance coverage dispute between a bank and an insurance company. The bank, Century Federal Savings & Loan Association ("Century") in Santa Fe, New Mexico, was the insured under a "Financial Institutions Insurance Coverage" policy ("the policy") issued by Federal Insurance Company ("Federal"). The dispute centers primarily around the portion of the policy entitled "Mortgage Holder's Insurance," which insured against loss by Century, as a mortgage holder, resulting from damage or destruction to mortgaged property. Century claimed to have suffered such a loss when property on which it held a mortgage was destroyed by fire. Century demanded that Federal assume coverage, and Federal filed suit for a declaratory judgment that the policy did not afford coverage under the facts surrounding the particular loss. The trial court granted Federal's motion for summary judgment and denied Century's cross-motion, construing the policy as affording no coverage. We reverse and remand with instructions to enter judgment in favor of Century.

I.

The loss in question arose from a fire on January 11, 1989, in which a house under construction by its owner and Century's mortgagor, William Shepherd, was destroyed. Century and Shepherd had entered into a construction loan agreement in May of 1988, under which Century was to lend Shepherd $225,000 for construction of the residence. The agreement required Shepherd to provide builder's risk insurance and include Century as a loss payee. The loan closing, which included Shepherd's execution of the agreement and a mortgage on the property to Century, took place on May 27, 1988, though no actual disbursements of money were made at the time. Contrary to the requirement in the loan agreement, Shepherd failed to provide hazard insurance on the property, and no employee of Century checked to be sure that such insurance was in fact provided. Century thereafter made disbursements of construction loan funds totaling $196,525.

After the fire, Century discovered that Shepherd had failed to provide the insurance required by the loan agreement, and Shepherd discovered that Century had disbursed funds without establishing that insurance was in place. So Shepherd sued Century for breach of contract, negligent disbursement of loan funds, constructive fraud, and breach of fiduciary duty. Century tendered defense of this suit to Federal, and Federal assumed the defense under a reservation of rights. Federal then commenced the present lawsuit, seeking a declaratory judgment that it was not obligated to defend the suit or reimburse Century for the loss of its interest in the mortgaged property.

The policy consisted of several sections providing different forms of insurance: a section insuring Century against loss from damage to its own property; a section, entitled "General Liability Insurance," insuring against various forms of liability to which Century might be exposed; the section referred to above entitled "Mortgage Holder's Insurance"; and other sections not pertinent to this appeal. Included within the Mortgage Holder's Insurance, as we read the policy, is a form entitled "Mortgaged Property Covered Causes of Loss"; the parties disagree over whether this form provides an independent source of coverage or merely defines the causes of loss insured against in the Mortgage Holder's Insurance section.

The principal issue on this appeal relates to the scope of coverage under the Mortgage Holder's Insurance section of the policy. That section contains four insuring clauses, three of which--Coverage A, Coverage B, and Coverage D--are at issue in this appeal.¹ The basic insuring agreement preceding these three coverage clauses reads:

We will pay for loss of your mortgage holder's interest resulting from a direct physical loss or damage to mortgaged property by a Covered Cause of Loss. The loss you incur must be due to:²

This insuring clause is then completed by a clause defining each of the three coverages, respectively entitled "Mortgage Errors and Omissions" (Coverage A), "Mortgage Impairment" (Coverage B), and "Mortgage Holder's Liability" (Coverage D).

Coverage A (Mortgage Errors and Omissions) is defined as follows:

An accidental error or omission by you or your representative in the operation of your customary procedure in procuring and maintaining valid insurance on mortgaged property when you obtain, retain and/or make premium payments on insurance policies to protect your mortgage holder's interest[.]

Coverage B (Mortgage Impairment) covers:

Failure of the mortgagor to provide valid insurance as described in the mortgage agreement on mortgaged property to protect your mortgage holder's interest.

This insurance applies only:

* * * when insurance to protect your mortgage holder's interest is non-existent, invalid, insufficient or uncollectible * * * *

Coverage D (Mortgage Holder's Liability) insures against:

Damages you are legally obligated to pay due to your accidental error or omission in the operation of your customary procedure in procuring and maintaining insurance for the benefit of the mortgagor as required by the mortgage agreement against the Covered Causes of Loss. We will have the right and duty to defend any suit seeking such damages and may investigate and settle any claim or suit at our discretion.

Each of these coverage provisions is qualified by the following "Additional Conditions" appearing shortly after the coverage provisions:

You agree to institute and maintain the following procedures in connection with mortgaged property covered by this insurance. Coverage does not apply on any mortgaged property for which you fail to follow these procedures.

There then follow statements of the five Additional Conditions. The first makes coverage conditional on Century's including in its

mortgage agreement a requirement that at least fire and extended coverage insurance shall [be] maintained by the mortgagor in which you are named as the mortgagee for the amount of the mortgage balance * * * *

The second Additional Condition reads in its entirety:

VERIFY THE MORTGAGOR'S COMPLIANCE.

You will at the mortgage closing when you pay on behalf of the mortgagor, verify the actual existence of valid insurance and record the amount, name of insurance company, policy number, and agent.

The remaining three Additional Conditions require Century to notify Federal of a change of escrow procedures; to send its mortgagors, at least annually, written reminders of their obligation to keep the required insurance in force; and to prevent insurance from lapsing by procuring insurance if Century receives information that a mortgagor's insurance is about to terminate.

Federal's primary basis for declining coverage was Century's failure to verify, at the mortgage closing, Shepherd's compliance with the requirement in the loan agreement that he obtain hazard insurance on the property. There is no dispute that Century did not "verify the actual existence of valid insurance[,]" either at the closing or at any time thereafter, when making disbursements.

As noted previously, the trial court granted summary judgment to Federal. Its primary reason for doing so was: "A fair reading of the policy is that Federal agreed to insure Century in the event of a loss because of a loss or lapse of insurance and not in the event a loss occurred because of the failure to obtain insurance in the first place." As for the condition that Century verify Shepherd's compliance with the requirement that he obtain hazard insurance, the court said in its order: "The condition corroborates the court's view that the failure of Century to obtain or confirm insurance coverage on the mortgaged premises was not a risk to be covered by Federal but a fundamental premise for insurance coverage."

On appeal, Century attacks these conclusions, arguing that the verification condition irreconcilably conflicts with the insuring clauses or at least creates such an ambiguity that the policy should be construed in favor of the insured so as to afford coverage for the loss of its "mortgage holder's interest." Century also asserts (though its briefs are not clear whether this is an additional or an alternative contention) that the policy, either through Coverage D quoted above or through the "General Liability" provisions, obligates Federal to defend the Shepherd lawsuit and indemnify Century for any damages ultimately imposed in that lawsuit. We consider first the availability of coverage for Century's loss of its mortgage holder's interest due to the perils described in Coverages A and B of the Mortgage Holder's Insurance section of the policy.

II.

We agree with Century that Coverage B is applicable and affords coverage for Century's loss of its mortgage holder's interest. This conclusion makes it unnecessary to decide the applicability of Coverage A, although, for the reasons stated in connection with Coverage D discussed below, we are inclined to doubt that Coverage A applies.

If one parses the wording in the insuring clause of the Mortgage Holder's Insurance, focusing on Coverage B and relating it to the facts of this case, the clause may be paraphrased as follows: "We will pay for loss of your interest in the mortgage resulting from fire, due to Shepherd's failure to provide valid insurance as described in the loan agreement, when insurance to protect your interest is nonexistent." As so...