Grady v. Utica Mut. Ins. Co.

• Citation: 419 N.Y.S.2d 565,69 A.D.2d 668
• Parties: James H. GRADY, as Trustee, Appellant, v. UTICA MUTUAL INSURANCE COMPANY, also known as Utica Fire Insurance Company of Oneida County, Respondent, et al., Defendants.
• Decision Date: 06 August 1979
• Court: New York Supreme Court Appellate Division

Page 565

419 N.Y.S.2d 565

69 A.D.2d 668

James H. GRADY, as Trustee, Appellant, v. UTICA MUTUAL INSURANCE COMPANY, also known as Utica Fire Insurance Company of Oneida County, Respondent, et al., Defendants.

Supreme Court, Appellate Division, Second Department.

Aug. 6, 1979.

Munley, Meade, Burns & Nielsen, P. C., Great Neck (James G. Meade and William J. Nielsen, Great Neck, of counsel), for appellant.

Gwertzman & Pfeffer, New York City (Ellen Lefkowitz, New York City, of counsel), for respondent.

Before DAMIANI, J. P., and SUOZZI, LAZER and RABIN, JJ.

DAMIANI, Justice Presiding.

In this case, the assignee of a mortgage obtained a judgment of foreclosure upon the default of the mortgagors, but before a foreclosure sale could be held the property was destroyed by fire. The assignee was the named beneficiary of a policy of fire insurance covering the premises and he therefore made a claim to the insurer for payment in the amount of the judgment of foreclosure. The insurer agreed to pay only the amount of the outstanding principal of the mortgage debt plus the interest due thereon as of the date of the fire. On this appeal we are called upon to decide whether the interest of the mortgagee's assignee under the New York standard mortgagee clause should be measured by the judgment of foreclosure or should be limited to the outstanding mortgage debt plus interest. The specific facts of the case are as follows:

On October 18, 1972 the defendants Dominick and Josephine DiMartino executed and delivered a bond and mortgage to one Louis A. Droesch. The bond acknowledged an indebtedness of $26,500 to be amortized over a period of 20 years, bearing interest at the rate of 71/2% Per annum. The mortgage granted a lien on real property owned by the DiMartinos as tenants by the entirety in Richmond Hill, Queens County, as collateral security for payment of the loan.

The bond contained the usual acceleration clause which provided that:

"the said principal sum shall at the option of the obligee become due on the happening of any default or event by which, under the terms of the mortgage securing this bond, said principal sum may or shall become due and payable; also, that all of the covenants, conditions and agreements contained in said mortgage are hereby part of this instrument."

The mortgage provided, Inter alia :

"4. That the whole of said principal sum and interest shall become due at the option of the mortgagee: after default in the payment of any instalment of principal or of interest for fifteen days; or after default in the payment of any tax, water rate, sewer rent or assessment for thirty days after notice and demand;

"6. That the mortgagor will pay all taxes, assessments, sewer rents or water rates, and in default thereof the mortgagee may pay the same.

"12. * * * In any action or proceeding to foreclose this mortgage, or to recover or collect the debt secured thereby, the provisions of law respecting the recovering of costs, disbursements and allowances shall prevail".

On March 15, 1975 Droesch assigned the bond and mortgage to plaintiff James Grady, as trustee. The assignment was recorded on May 15, 1975.

The defendant Utica Mutual Insurance Company (hereinafter Utica Mutual) issued its homeowner's policy which, among other coverages, insured the dwelling on the premises for $40,000 for the period from October 18, 1975 to October 18, 1978. As initially drawn the named beneficiaries of the policy were the DiMartinos as owners, and Droesch as mortgagee. On October 3, 1975 Utica Mutual issued an endorsement to the policy changing the name of the insured mortgagee to James H. Grady, as trustee for Louis A. Droesch. The policy provided, Inter alia :

"4. New York Standard Mortgagee Clause: If a mortgagee is named in the Declarations, loss or damage, if any, on buildings under this policy, shall be payable to the aforesaid as mortgagee (or trustee) 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 * * * " (emphasis added).

The DiMartinos made monthly payments totaling $3,842.82 against principal and interest but upon their default in making the monthly payment due on December 1, 1976, the plaintiff exercised his right under the acceleration clause to declare the unpaid balance due and owing. On January 31, 1977 plaintiff instituted an action to foreclose the mortgage by causing the DiMartinos to be personally served with a summons and verified complaint. The DiMartinos defaulted in appearing and answering and on March 16, 1977 the matter was referred to a referee to compute the amount due to the plaintiff and report. The referee's report, dated April 4, 1977, found that the amount due the plaintiff was $34,036.48, representing outstanding principal and interest, and real estate taxes and assessments paid by the mortgagee to protect his security. ¹

Plaintiff moved for entry of a judgment of foreclosure and sale against the defendants. The clerk taxed costs in the sum of $225 and disbursements in the sum of $207.98. The judgment as entered granted an additional award of $300 costs to plaintiff, apparently under authority of CPLR 8303 (subd. (a), par. 1), for a total award of costs and disbursements of $732.98. The judgment directed, Inter alia, that the property be sold and that from the proceeds of the sale the plaintiff be paid $34,036.48, with interest thereon at the legal rate from December 1, 1976, ² plus costs and disbursements of $732.98 with legal interest thereon at the legal rate from April 20, 1977, making a total award to plaintiff of $34,769.46 plus interest. The judgment also authorized the referee to deduct his statutory fees for conducting the sale from the proceeds thereof in a sum not to exceed $200.

On May 1, 1977 before the foreclosure sale could be held, the dwelling on the property was damaged by fire. Plaintiff asserts that the building was a total loss, whereas defendant Utica Mutual claims that the loss was $33,600.

After the fire plaintiff demanded that Utica Mutual pay the sum of $34,969.46 awarded in the judgment of foreclosure. By letter dated September 26, 1977, Utica responded:

"according to our calculations the original amount of the mortgage was $26,500. There were payments on account of $3,842.82 for amortization and interest. The net amount therefore was $22,657.18. My clients are prepared to pay to your client the sum of $22,657.18 with interest from the date of the last payment to the date of the loss, which was May 1st, 1977."

Plaintiff found Utica Mutual's offer unacceptable and on or about September 29, 1977 he instituted this action against Utica Mutual and the DiMartinos to recover the sum of $34,969.46 on the policy. In its answer Utica Mutual asserted that plaintiff's interest under the mortgage was merely the outstanding principal of the mortgage loan plus interest thereon to the date of the fire, which sum it calculated to be $22,657.18.

Plaintiff then moved for summary judgment. Special Term adopted the reasoning of defendant Utica Mutual and held that plaintiff's mortgage interest in the property was the outstanding mortgage debt with interest. Plaintiff has appealed.

We turn first to an examination of the contract of insurance. By that contract, Utica Mutual agreed, among other coverages, to pay any loss up to a limit of $40,000 occasioned by fire damage to the dwelling on the premises. The policy also contained a provision known as the New York "standard" or "union" mortgagee clause. This clause in effect provided that in the event of fire damage to the dwelling, Utica Mutual was bound to pay the actual value of the loss, not exceeding the policy limit, directly to the named mortgagee to the extent of his interest (see 5 Couch, Insurance 2d, § 29:68). The standard mortgagee clause differs from the so-called "loss-payable" clause in that under the former, the interest of the mortgagee in the proceeds of the policy cannot be invalidated by any act or neglect of the mortgagor or owner of the insured property (38 N.Y.Jur., Mortgages and Deeds of Trust, § 142). In this respect the standard mortgagee clause has been said to create a separate and independent insurance of the mortgagee's interest, free from the conditions imposed upon the mortgagor or owner (Eddy v. London Assur. Corp., 143 N.Y. 311, 322, 38 N.E. 307, 309; 6A Appleman, Insurance Law and Practice, § 4164). However, this does not mean that a policy containing the standard mortgagee clause permits two complete recoveries for the same loss. It merely requires that the insurer first make payment of the loss to the mortgagee to the extent of his interest in the property and then pay the balance of the loss, if any, to the mortgagor, so long as the latter is not in default of any of the conditions of the policy (Hartwig v. American Ins. Co. of City of Newark, 169 App.Div. 60, 62-63, 154 N.Y.S. 801, 803). An insurance policy containing the standard mortgagee clause "accomplishes an insurance of the property and not of the debt, and the only importance of the debt is that it gives the mortgagee an insurable interest in the property" (Fields v. Western Millers Mut. Fire Ins. Co., 290 N.Y. 209, 213, 48 N.E.2d 489, 491).

Thus, a homeowner's insurance policy containing a New York standard mortgagee clause requires the insurer to make but one payment for any loss, up to the face amount of the policy. The effect of the standard mortgagee clause is simply to require that payment of the loss be first made to the mortgagee up to the extent of his interest and that the balance be remitted to the mortgagor. Where the insurer is not entitled to subrogation under the terms of the policy, payment to the mortgagee works a Pro tanto reduction of the mortgage lien (se...