Hartford Fire Ins. Co. v. Merrimack Mut. Fire Ins. Co.

• Decision Date: 02 March 1983
• Parties: HARTFORD FIRE INSURANCE COMPANY v. MERRIMACK MUTUAL FIRE INSURANCE CO.
• Court: Maine Supreme Court

Page 410

457 A.2d 410

HARTFORD FIRE INSURANCE COMPANY v. MERRIMACK MUTUAL FIRE INSURANCE CO.

Supreme Judicial Court of Maine.

Argued Sept. 9, 1982.

Decided March 2, 1983.

Hewes, Culley, Feehan & Beals, Martica F. Sawin (orally), Portland, for defendant.

Before McKUSICK, C.J., and GODFREY, NICHOLS, ROBERTS, CARTER and VIOLETTE, JJ.

GODFREY, Justice.

This is an appeal by the plaintiff Hartford Fire Insurance Company ("Hartford") from a grant of summary judgment by the Superior Court for the defendant Merrimack Mutual Fire Insurance Company ("Merrimack"). We vacate the judgment.

On November 15, 1977, Merrimack issued a fire insurance policy for a three-year term to James and Loree Stewart as owners of a house and barn located in East Windham. The policy contained a standard mortgage clause providing for payment upon fire loss to the named mortgagee, Portland Savings Bank ("Bank"), as interest might appear.

On June 27, 1978, the Bank began foreclosure proceedings against the Stewarts. On or about June 1, 1979, the Bank sent a written "notice to quit" to the tenants residing in the Stewart premises. On June 27, 1979, the Stewarts' statutory redemption period expired and the Bank became owner by operation of law. The tenants vacated the premises in mid-July, 1979. The Bank then placed the property on the market for sale. The premises remained vacant until the November 10, 1979, fire loss which gave rise to this action. The Bank did not notify Merrimack of either the foreclosure proceedings, the vacancy, or its sole ownership of the premises at any time before the fire.

On December 28, 1979, Merrimack notified the Bank that the policy would be cancelled as of January 21, 1980. On February 8, 1980, Merrimack denied coverage for the fire on the ground that the Bank had breached the provisions of the mortgage clause by not notifying Merrimack of the change in ownership or of the vacancy.

The Bank had also arranged in April, 1979, to have the premises insured under its master policy with the plaintiff Hartford. Hartford paid the Bank for the loss and became subrogated to the Bank's rights under the Merrimack policy.

Hartford instituted this suit to recover Merrimack's share of liability for the loss, plus interest and costs. The Superior Court granted Merrimack's motion for summary judgment and denied Hartford's motion for summary judgment. In doing so, the court found the Bank's change in status from mortgagee to owner was insufficient, by itself, to cut off the Bank's right to recover under the policy. However, it also found that the Bank's failure to notify Merrimack of the vacancy operated as a breach of the policy, relieving Merrimack of any obligation to pay.

The "standard" or "union" mortgage clause in an insurance policy protects the interest of a mortgagee in the insured real property. See 6A J. Appleman, Insurance Law and Practice § 4164 (1972). It provides that the policy is payable to the mortgagee (here the Bank), whose interest shall not be invalidated or affected by any act or neglect of the mortgagors (here the Stewarts). The clause provides, in pertinent part, as follows:

Loss, if any, under this policy, shall be payable to the aforesaid as mortgagee (or trustee) as interest may appear under all present or future mortgages upon the property herein described in which the aforesaid may have an interest as mortgagee (or trustee) in order of precedence of said mortgages, 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 of ownership of the property, nor by the occupation of the premises for purposes more hazardous than permitted by this policy; provided, that in 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.

However, the mortgage clause also required the Bank to notify the insurer, Merrimack, of any change in ownership, occupancy, or increase in hazard which came to the Bank's attention:

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 such increased hazard for the term of the use thereof; otherwise this policy shall be null and void.

The issue before the Court is whether the standard mortgage clause permits Hartford, as the Bank's subrogee, to recover despite the Bank's failure to notify Merrimack of either the vacancy or the foreclosure of the insured premises.

I. Failure to Notify Merrimack of the Vacancy.

At the outset, we reject Hartford's argument that the notice requirements of the mortgage clause did not apply because the Bank was not a mortgagee at the time of the loss. The Bank became owner of the premises on June 27, 1979, when the Stewarts' statutory redemption period expired, about two weeks before the premises became vacant and more than four months before the fire. Hartford contends that the Bank was no longer bound to give notice of vacancy once its interest changed from mortgagee to outright owner.

Such a narrow reading of "mortgagee", when used to identify the party bound to give notice of vacancy, is inconsistent with the meaning of "mortgagee" elsewhere in the mortgage clause, where the term is also used to identify the party entitled to recover upon loss. In that context, "mortgagee" is used as a convenient designation rather than as importing a continuing condition of coverage. That the mortgagee no longer has the status of mortgagee because it has foreclosed on the mortgage does not alone bar it from recovery. 10A Couch on Insurance § 42:722 (M. Rhodes rev. 2d ed. 1982); see, e.g., 495 Corp. v. New Jersey Insurance Underwriting Association, 86 N.J. 159, 430 A.2d 203 (1981); Federal National Mortgage Association v. Hanover Insurance Co., 243 Ga. 609, 255 S.E.2d 685 (1979); Shores v. Rabon, 251 N.C. 790, 112 S.E.2d 556 (1960). Indeed, Hartford itself, in arguing that foreclosure did not bar recovery, urged the Superior Court to adopt this broader reading of "mortgagee." Hartford cannot have it both ways--reading the mortgage broadly to gain the benefits of mortgagee status but narrowly to avoid the responsibilities that go with such a status.

In the alternative, Hartford argues that even if its duty as mortgagee to give notice survived foreclosure, such notice was excused because certain language in the Merrimack policy permitted vacancy of unlimited duration. Hartford thereby raises two issues: first, whether the policy permitted unlimited vacancy; and, second, whether permission for unlimited vacancy excused notice by the Bank of that vacancy.

It is unclear whether the policy does indeed permit unlimited vacancy. On the one hand, the standard vacancy and increase-in-hazard provision, which is required by 24-A M.R.S.A. § 3002 (1974), states: "Unless otherwise provided in writing added hereto this Company [Merrimack] shall not be liable for loss occurring ... while a described building, whether intended for occupancy by owner or tenant, is vacant or unoccupied beyond a period of sixty consecutive days ...." On the other hand, paragraph 11 of a section of the policy entitled "Additional Conditions" contains the statement: "Permission granted for vacancy or unoccupancy without limit of time except as otherwise provided in this policy." ¹ Thus, the language of the policy is circular; the basic policy limits vacancy to sixty days, subject to paragraph 11, which allows unlimited vacancy subject to the basic policy. However, it is not necessary to resolve this paradox, because counsel for Merrimack conceded at oral argument that the net effect of the policy is to allow unlimited vacancy. Instead, we focus attention on the second issue: whether permission for unlimited vacancy excused notice by the Bank of the long vacancy that the Bank knew about.

Merrimack argues that the Bank's contract with Merrimack consists solely of the mortgage clause, which imposes the duty to give notice. Thus, the argument goes, the Bank may not rely on paragraph 11 of the "Additional Conditions," which permits unlimited vacancy but is not contained in the standard mortgage clause, to absolve itself of its duty to notify the insurer. We reject the argument. It is true that the insurance of the mortgagee's interest under the standard mortgage clause is in many respects a separate and independent contract of insurance. Union Trust Co. v. Philadelphia Fire and Marine Insurance Co., 127 Me. 528, 533, 145 A. 243, 246 (1929). Nevertheless, the standard mortgage clause could not represent the entire independent contract of insurance between the Bank and Merrimack. It attains meaning only by reference to the underlying policy:

The rule that the standard loss clause creates a separate contract between the mortgagee and the insurer cannot be literally applied, to the exclusion of other provisions of the policy, for without those other provisions there would be no definition of the terms of the insurance, such as the property covered, the amount, and so on. Rather the standard mortgagee clause creates an independent contract of insurance for the mortgagee's separate benefit, engrafted upon the main contract of insurance contained in the policy itself, which is rendered certain and understood by reference to the policy which makes it complete.

10A Couch on Insurance, supra, § 42:731 (footnotes omitted).

We conclude that the Bank's contract includes by reference paragraph 11, permitting unlimited vacancy. But the inquiry is not complete: permission for unlimited vacancy does...