Imperial Bldg. & Loan Ass'n v. Aetna Ins. Co.

• Decision Date: 22 November 1932
• Docket Number: 7372.
• Parties: IMPERIAL BUILDING & LOAN ASS'N v. ÆTNA INS. CO.
• Court: West Virginia Supreme Court

166 S.E. 841

113 W.Va. 62

IMPERIAL BUILDING & LOAN ASS'N v. ÆTNA INS. CO.

No. 7372.

Supreme Court of Appeals of West Virginia.

November 22, 1932

Submitted November 2, 1932.

Rehearing Denied Dec. 29, 1932.

Syllabus by the Court.

In absence of estoppel or fraud, insurer's obligation to mortgagee under standard mortgage clause attached to fire policy is prospective.

Where mortgagee had no interest in insured property not owned by mortgagor, standard mortgage clause attached to fire policy held invalid.

The insured under a fire insurance policy was the owner of a town lot No. 7. Her husband erected a house for her on the adjoining lot No. 6 to which she had no title, under the erroneous impression that the structure was being erected on lot No. 7. After the completion of the building, it was insured against loss by fire. Insured also executed a deed of trust on lot No. 7, and some time later the insurer under the fire policy attached a standard mortgage clause to the policy in favor of the mortgagee.

1. When there is no conduct of an insurance company constituting estoppel or fraud, the obligation assumed by it to a mortgagee upon attaching the "standard mortgage clause" to an insurance policy is prospective.

2. When the mortgagee has no interest in the insured property, the "standard mortgage clause" attached to the insurance policy in its favor is invalid.

Error to Circuit Court, Kanawha County.

Action by the Imperial Building & Loan Association against the Ætna Insurance Company. To review a judgment in favor of the plaintiff, the defendant brings error.

Judgment reversed, and the case remanded.

Steptoe & Johnson, of Clarksburg, Stanley C. Morris, of Charleston and J. Hornor Davis, 2d, of Clarksburg, for plaintiff in error.

Thomas Coleman, of Charleston, for defendant in error.

HATCHER P.

The defendant protests a judgment against it based on the standard mortgagee clause, upon the ground of "no insurable interest."

Mrs Joanne Melton was the owner of a town lot No. 7. Her husband erected a house for her on the adjoining lot, No. 6, to which she had no title, under the impression that the structure was on lot No. 7. The building was completed about April, 1926 and was insured for her with the defendant on April 3d, for $2,000, against loss by fire. She executed a deed of trust on lot No. 7, dated July 1, 1926, to secure payment of $1,000 borrowed from plaintiff upon an application dated June 16th. Some time later in July, the defendant attached the mortgagee clause to the policy, in favor of plaintiff. The house was destroyed by fire during the term of the policy.

Mrs Melton brought an action against defendant, which failed because of a provision in the policy that it should be void "if the subject of insurance be a building on ground not owned by the insured in fee simple." See Melton v. Ætna Ins. Co., 110 W.Va. 73, 157 S.E. 33, 34. The plaintiff takes the position, however, that the mortgagee clause conferred on it an independent and absolute right of recovery in case of loss by fire.

The parts of the clause which are pertinent here follow:

"Loss or damage, if any, under this policy, shall be payable to Imperial Bldg. & Loan Association of Charleston, W.Va. 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. ***

"Whenever this Company shall pay the mortgagee (or trustee) any sum for loss or damage under this policy and shall claim that, as to the mortgagor or owner, no liability therefor existed, this Company shall, to the extent of such payment, be thereupon legally subrogated to all the rights of the party to whom such payment shall be made, under all securities held as collateral to the mortgage debt, or may at its option, pay to the mortgagee (or trustee) the whole principal due or to grow due on the mortgage with interest, and shall thereupon receive a full assignment and transfer of the mortgage and of all such other securities; but no subrogation shall impair the right of the mortgagee (or trustee) to recover the full amount of their claim.

"Attached to and forming a part of Policy No.--."

The plaintiff relies on the following statement of law made in the opinion of Fayetteville Bldg. & Loan Ass'n v. Mutual Fire Ins. Co., 105 W.Va. 147, 150, 141 S.E. 634, 635: "Although there are decisions to the contrary, the great weight of authority in this country supports the view that when there is attached to a policy of fire insurance the so-called 'standard' or 'union' mortgage clause providing that the insurance shall not be invalidated by any act or neglect of the mortgagor or owner of the insured property, an independent contract between the insurance company and the mortgagee is created, and no act or omission of the mortgagor, of which the mortgagee is ignorant, will invalidate the policy, whether it occurs before, at the time of, or subsequent to, the issuance thereof."

That statement is the one generally made by annotators and text-writers. It is questionable, though, whether "the great weight of authority" supports every section of the statement either separately or jointly. The statement is the sum of several leading decisions, each of which was moulded by the particular clause involved and the particular facts presented, and was never designed to be applied to all cases indiscriminately. To do so in cases where the mortgagor had no insurable interest in the insured property would be to open wide the door for collusion and fraud between policy holder and mortgagee. In a thoughtful discussion of some of the very decisions referred to in the Fayetteville Ass'n Case, the Supreme Court of New York said in Young Men's Lyceum v. National Ben Franklin Ins. Co., 177 A.D. 351, 163 N.Y.S. 226, 231: "When an insurance company contracts with a mortgagor and with a mortgagee, and makes the contract with the latter a part of the policy, it cannot be the intention to nullify the essential stipulation upon which its validity depends, leaving a mere provision to pay absolutely in case of loss." Lest the bar accept the statement quoted from the Fayetteville Ass'n Case as a rule of thumb to which we have become committed, it is necessary to consider decisions of which the statement is the composite. Research has found nothing supporting the statement except repetitions of the reasons propounded in the following three groups of leading cases: (1) N.H. Fire Ins. Co. v. Bohn (C.C.A.) 65 F. 165, 174, 177, 178, 27 L.R.A. 614, and Germania Fire Ins. Co. v. Bally, 19 Ariz. 580, 585, 173 P. 1052, 1054, 1 A.L.R. 488; (2) Hastings v. Westchester Fire Ins. Co., 73 N.Y. 141, 148, and Reed v. Firemen's Ins. Co., 81 N. J. Law, 523, 526, 80 A. 462, 464, 35 L.R.A. (N. S.) 343; (3) Hastings v. Westchester Fire Ins. Co., supra, page 154 of 73 N. Y., and Bacot v. Ph nix Ins. Co., 96 Miss. 223, 241, 50 So. 729, 732, 25 L.R.A. (N. S.) 1226, Ann.Cas. 1912B, 262.

(1) In the Bohn Case the scope of the words "shall not be invalidated by any act or neglect of the mortgagor" was extended to apply to acts prior to the attachment of the mortgagee clause, on the ground of estoppel. The opinion states that the insurance companies "tendered" to the mortgagee their own policies running to third parties, with the agreement that the policies should not be invalidated by any act or neglect of those parties; that the policies could not be invalidated "unless they were then valid"; and that the tender of them to the mortgagee "was a clear representation to the latter that those policies were then valid," and the insurers "are estopped to deny the truth of their statement to the manifest injury of the mortgagee." That opinion has little, if any, bearing on the instant case. Here there was no tender by the defendant in any fair sense of the word. It initiated no proposal of any kind, and did nothing to induce the loan to Mrs. Melton. The loan preceded instead of followed defendant's recognition of the mortgagee. The plaintiff had changed its position to its prejudice, before whatever representation the mortgagee clause implied was made. So estoppel does not properly arise in this situation.

The Bally decision, in making the same extension of the clause as the Bohn Case, supplemented the latter as follows: "As is well known, many insurance policies are issued, primarily, to protect mortgagees. *** We think the mortgagee, when a policy is presented to him with a standard mortgage clause attached thereto in his favor, is justified in assuming that the insurance company has satisfied itself that the policy is valid and free from impeachment for any conduct or act of the assured at its inception or prior to the attachment of the mortgage clause." That decision is equally inapropos here, because (a) the policy was not issued primarily to protect the plaintiff but to protect Mrs. Melton; (b) the clause did not induce, but followed, the loan; (c) the policy afforded the defendant full protection in case Mrs. Melton's interest was not that of sole and unconditional ownership, so that there was no occasion for the defendant to examine her title or even be concerned about it; and (d) the plaintiff was charged with notice (from the policy itself) of the defendant's lack of concern in that respect. In the face of such notice, the plaintiff could not rest on the above assumption. Colonial Trust Co. v. Firemen's Fund Ins. Co., 35 Ga.App. 467, 468, 133 S.E. 652.

Both the Bohn and the Bally decisions take no notice of the innumerable times the policyholder, at the instance of the mortgagee, has the insurer to execute the mortgagee clause. The Supreme...