Nationwide Mut. Fire Ins. Co. v. Wilborn

• Decision Date: 21 June 1973
• Citation: 291 Ala. 193,279 So.2d 460
• Parties: NATIONWIDE MUTUAL FIRE INSURANCE COMPANY, a Corporation, v. Ethel B. WILBORN and State Farm Fire and Casualty Insurance Company, a Corporation. SC 15.
• Court: Alabama Supreme Court

Page 460

279 So.2d 460

291 Ala. 193

NATIONWIDE MUTUAL FIRE INSURANCE COMPANY, a Corporation, v. Ethel B. WILBORN and State Farm Fire and Casualty Insurance Company, a Corporation.

SC 15.

Supreme Court of Alabama.

June 21, 1973.

Marshall H. Fitzpatrick, Birmingham, for appellant.

Robert B. Propst, Anniston, for appellee, Ethel B. Wilborn.

C. William Gladden, Jr., Birmingham, for State Farm Fire & Casualty Co.

HEFLIN, Chief Justice.

This is an appeal from a final decree rendered by the Circuit Court of Calhoun County, Alabama, in Equity, denying appellant-respondent's (Nationwide) motion for a rehearing and fixing the amount of damages at $26,105. Appellee-complainant, Ethel Wilborn (Wilborn), filed a bill seeking a declaration of her rights of recovery for a fire loss to a residence on which fire insurance policies had been issued by Nationwide, and appellee-respondent, State Farm Fire and Casualty Insurance Company (State Farm). In addition to the two insurance companies mentioned above, Wilborn joined Robert and Katie Stewart (Stewarts) and the First National Bank of Anniston, Alabama (First National), as parties respondent. Of the four original respondents, only the two insurance companies have appeared in this appeal. At the time the State Farm policy was issued the Stewarts held an equitable interest in the insured property; however, it is not contested that they have no interest in this litigation. First National, although originally joined as a party respondent because it appeared as mortgagee in the Nationwide policy, has consented to the declaratory relief sought by Wilborn.

The chain of events which gave rise to this controversy began on March 27, 1970, when Wilborn and the Stewarts entered into a contract whereby the Stewarts agreed to buy, and Wilborn agreed to sell, certain property known as 21 Mont Camille Drive in Anniston for a purchase price of $27,500. The Stewarts were obligated, as a part of the agreement, 'to keep the property insured . . . in an amount not less than $25,500, loss payable to the party of the first part (Wilborn) as his interest may appear.' Pursuant to this provision the Stewarts took out a policy of fire insurance with State Farm in the amount of $27,500, which went into effect on April 30, 1970. The State Farm policy contained what is known as the New York Standard Mortgage Loss Payable clause, usually referred to as the New York Standard Mortgage clause, naming Wilborn as mortgagee, which clause reads as follows:

'12. Mortgage Clause-Coverage A only: (This entire clause is void unless name of mortgagee (or trustee) is inserted in the Declarations) Loss, 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, 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 or ownership of the property, nor by the occupation of the premises for the purposes more hazardous than are 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.'

Wilborn, prior to April 20, 1970, had procured on the same premises through Nationwide, a fire policy which also contained the New York Standard Mortgage clause naming First National, the institution through which Wilborn had originally financed the construction of the house in question, as mortgagee.

The sale of the insured property was cancelled on May 26, 1970, for reasons not here pertinent, and the Stewarts were relieved of any further liability to the vendor, Wilborn. On July 2, 1970, the fire loss made the basis of this suit occurred. Wilborn's bill sought recovery for this loss. The trial court rendered its amended final decree on September 3, 1971, declaring that 'no coverage for the loss made the subject of this suit existed under the policy of insurance issued by State Farm' and that 'Wilborn have and recover of Nationwide . . ., the sum of $28,795.' The court's decree of November 4, 1971, denying Nationwide's motion for a rehearing, affirmed its former decree of September 3, 1971, except as to the amount of damages, which was reduced to $26,105. It is from this decree that Nationwide has appealed.

The principal point of dissension in the instant case is presented by Nationwide's assignment of error number 5 under which it argues that the trial court erred in holding that no coverage existed under the State Farm policy. Nationwide maintains that the New York Standard Mortgage clause in the State Farm policy constitutes a separate contract between State Farm and Wilborn, which is enforceable in favor of Wilborn, who occupied, in effect, the position of mortgagee, notwithstanding the fact that her interest in the insured property had increased or ripened into full ownership prior to the fire loss.

The question thus presented is whether the mortgagee may recover insurance proceeds under a policy containing a New York Standard Mortgage clause after the mortgage debt has been fully satisfied by foreclosure or otherwise.

From the language of the New York Standard Mortgage clause it is clear that the parties contemplated the possibility of foreclosure and that protection should be afforded the mortgagee or its assigns. National Fire Ins. Co. v. Finerty Investment Co., 170 Okl. 44, 38 P.2d 496 (1934). The concept was that the insurance should follow the property. In Alabama there have developed two distinct (and distinguishable) lines of cases. One line allows the insurance to follow the property past foreclosure and may be classified as the 'loss after foreclosure' concept. The other line of cases makes a difference if the debt owing to the mortgagee has been fully satisfied by foreclosure or otherwise following loss. This can be classified as the 'foreclosure after loss' principle.

The first line of cases applies where the foreclosure occurs prior to the loss, and allows the mortgagee to recover the proceeds under the policy. Continental Insurance Company of New York v. Rotholz, 222 Ala. 574, 133 So. 587 (1931). In that case, Rotholz brought suit against Continental. The policy contained the New York Standard clause in which Rotholz was designated as mortgagee.

Within the policy coverage time and prior to the loss by fire the mortgagee, Rotholz, foreclosed and purchased the property at the foreclosure sale. The defendant, insurer, contended that there had been a change of ownership or occupancy by virtue of the mortgagee's foreclosure and purchase of the property at the sale; that the policy provided that the policy should be void in the event that the mortgagee fail to notify the insurer of such a change of ownership or occupancy; that no such notice was given, and, hence, the policy was void. This court, in answering these contentions and allowing recovery by the mortgagee, commented on the nature of the New York Standard Mortgage clause as follows:

'. . . the New York Standard clause operates to create a Separate and independent insurance of the mortgagee's interest in the property, and his acquisition of title to the insured property is generally regarded as an increase of interest rather than a change of ownership.' (Emphasis added)

The fact that the mortgage debt had been satisfied prior to suit did not preclude recovery by the mortgagee under the policy where the loss occurred subsequent to satisfaction of the mortgage debt. The Rotholz holding was reaffirmed in Hartford Fire Insurance Co. v. Aaron, 226 Ala. 430, 147 So. 628 (1933), by way of dicta.

In Rotholz, the mortgagee had foreclosed prior to the fire loss and immediately before the loss in question occupied the position of owner, not mortgagee. The former mortgagee, the owner at the time of loss, had an insurable interest in protecting his property from loss by fire. The elevation of the mortgagee to the position of owner by foreclosure prior to the fire loss did not affect the operation of the New York Standard Mortgage clause which provided that:

'. . . this insurance (the separate and individual insurance provision of the New York Standard clause), as to the interest of the mortgagee (or trustee) only therein, shall not be invalidated by . . . any foreclosure . . ..'

This provision has the effect of transferring the payment of the proceeds in the event of a fire loss to the owner where the mortgagee has foreclosed prior to the loss. Other jurisdictions which have considered the issue have interpreted this clause in the same manner as this court did in Rotholz. Union Central Life Ins. Co. v. Codington County Farmers Fire & Lightning Mutual Ins. Co., 66 S.D. 561, 287 N.W. 46 (1939); Guardian Savings & Loan Association v. Reserve Ins. Co., 2 Ill.App.3d 77, 276 N.E.2d 109 (1971); National Fire Ins. Co. v. Finerty Investment Co., 170 Okl. 44, 38 P.2d 496 (1934); Prudential Ins. Co. v. German Mutual Fire Ins. Association, 231 Mo.App. 699, 105 S.W.2d 1001 (1937); Haskin v. Greene, 205 Or. 140, 286 P.2d 128 (1955); 5A Appleman, Insurance Law and Practice, Section 3403 (1970). Where there is a New York Standard Mortgage clause the rationale of these cases protects the mortgagee after foreclosure or other change of ownership or title. In other words, the insurance follows the property even if foreclosure has occurred before loss.

Where, on the other hand, the loss precedes the foreclosure, the rule is different since the mortgagee has an election as to how he may satisfy the mortgage indebtedness by two different...