Property Owners Ins. Co. v. Hack

Decision Date13 September 1990
Docket NumberNo. 73A01-9004-CV-142,73A01-9004-CV-142
Citation559 N.E.2d 396
PartiesPROPERTY OWNERS INSURANCE COMPANY and Auto-Owners Insurance Company, Defendants-Appellants, v. Joseph T. HACK and Jean K. Hack, Plaintiffs-Appellees, D. Rex Lacey and Betty J. Lacey, Non-Participants On Appeal.
CourtIndiana Appellate Court

Donna H. Fisher, Jennings & Maas, Carmel, for defendants-appellants.

Robert L. Dalmbert, Dalmbert, Marshall & Perkins, Columbus, for plaintiffs-appellees.

BAKER, Judge.

This case comes before us on appeal from Judge Charles O'Connor's grant of partial summary judgment to plaintiff-appellees Joseph and Jean Hack, husband and wife (the Hacks), in their action to recover sums under a policy of fire insurance issued by defendant-appellant Property Owners Insurance Company (Property Owners). 1 We affirm.

The case is one of first impression, and calls on us to rule on the nature and extent of a real estate installment contract seller's interest in fire insurance proceeds. The specific issue before us is whether a contract seller that requests insurance from an insurance company is entitled to recover the value of its interests under the contract in the event of a loss, notwithstanding the insurer's payment of the seller's mortgage to the seller's mortgagee.


The Hacks owned a restaurant and tavern known as The Lounge in Edinburg, Indiana. Irwin Union Bank and Trust Company held the Hacks' mortgage on the property. On October 1, 1985, the Hacks sold the business, its equipment and fixtures, the building in which it was housed, and the land on which it was situated to Rex Lacey (a defendant in this action not party to this appeal) and Carl and Betty Whittington. They also transferred a retail liquor permit to Rex Lacey for use at The Lounge. The method of sale was installment land contract, with a purchase price of $300,000. The Whittingtons subsequently assigned their interest to Betty Lacey, who is also a defendant not party to this appeal.

The contract required the buyers to maintain fire, casualty, and extended insurance coverage on the property for the benefit of the sellers. In June of 1987, the insurance carrier notified Mr. Hack that the Laceys had allowed the required coverage to lapse for failure to pay premiums. Mr. Hack then contacted Victor McGill, an insurance broker for Property Owners, and explained the situation. He told McGill there were three interested parties; the bank as mortgage holder, the Hacks as sellers, and the Laceys as buyers. McGill and Property Owners then prepared a policy which listed the Laceys as the insureds. The policy also contained an "additional interest schedule" wherein the Hacks were listed as contract holders and Irwin Union Bank was listed as mortgagee under a standard mortgage clause. Recovery under the standard mortgage clause was limited to building losses only, but with the exception of this exclusion, the policy covered personal property as well as real property.

On May 8, 1988, The Lounge was destroyed by fire. Rex Lacey was later convicted of arson for the fire. Property Owners paid $186,000 to Irwin Union Bank in discharge of the Hacks' mortgage, but refused to make any payments to the Hacks.

Judge O'Connor granted the Hacks' motion for partial summary judgment, ordering Property Owners to pay the Hacks the lesser of the amount due under the contract or the policy limits. Property Owners now appeals.


Property Owners argues its payment of the mortgage balance of $186,000 to Irwin The dispute arises because the policy at issue is ambiguous. An insurance contract is ambiguous if "it is susceptible to more than one interpretation and reasonably intelligent persons would honestly differ as to its meaning...." Landis v. American Interinsurance Exchange (1989), Ind.App., 542 N.E.2d 1351, 1353, trans. denied. Insurance contracts found to be ambiguous are strictly construed against the insurer. Meridian Mut. Ins. Co. v. Cox (1989), Ind.App., 541 N.E.2d 959, trans. denied. Here, while the contract contains specific provisions for recovery by the mortgagee under the standard mortgage clause, the mortgage clause does not include contract sellers or describe their rights in any way. Record at 32. Similarly, the additional interest schedule merely lists the Hacks as contract holders; it says nothing about the extent of their coverage. Record at 37. In such a case, when the contract lists but does not define the extentof a given interest, reasonably intelligent persons could easily differ. Indeed, as we have already noted, Property Owners itself appears unsure how to view the Hacks' interests. In its original brief, Property Owners states the Hacks have been compensated as mortgagees under the standard mortgage clause. Appellant's Brief at 8. In its reply brief, however, Property Owners argues the Hacks should be treated as nominees of the Laceys. Appellant's Reply Brief at 10. If an insurer interprets its own policy language in more than one way, that language is ambiguous by definition, and we will construe that language strictly against the insurer.

                Union Bank discharges its obligations to the Hacks.  In essence, Property Owners makes two rather inconsistent arguments.  First, Property Owners argues that the Hacks are simply nominees of the named insureds, the Laceys, and as such, have no greater right to recovery than do the Laceys. 2  Its second and more vigorous argument is that the Hacks are analogous to a mortgagee, and are entitled to recover jointly with their mortgagee only the amount of the outstanding mortgage debt.  In either event, Property Owners urges us to find the Hacks are not entitled to any further recovery.  The Hacks counter that the insurance, which the Laceys were required to maintain under the installment contract, was purchased to protect their interests under the contract, which included both the real property and the personal property conveyed to the Laceys

Because the question of the extent of the Hacks' interest under the ambiguous language of the policy is a novel issue juxtaposed with several well settled rules of law, we begin with a review of the law applicable to the distribution of insurance proceeds.


To be entitled to insurance proceeds, a recipient must have an insurable interest in the property insured. Erie-Haven, Inc. v. Tippmann Refrigeration Const. (1985), Ind.App., 486 N.E.2d 646. An insurable interest in property exists if the possessor of the interest benefits from the property's existence or would suffer a loss from its destruction. United Farm Bureau Mut. Ins. Co. v. Blanton (1983), Ind.App., 457 N.E.2d 609; International Ins. Co. v. Melrose Park Nat'l. Bank (1986), 145 Ill.App.3d 286, 99 Ill.Dec. 462, 495 N.E.2d 1197. It is possible for several parties to have an insurable interest in real estate, and their interests need not arise from ownership. See Dewitt v. American Family Mut. Ins. Co. (1984), Mo., 667 S.W.2d 700, 707. Both mortgagees and mortgagors have insurable interests in real estate, Tech Land Development v. South Carolina Ins. (1982), 57 N.C.App. 566, 291 S.E.2d 821, review denied, 306 N.C. 563, 294 S.E.2d 228, as do installment contract sellers, Meade v. North Country Co-op. Ins. Co. (1986), 120 A.D.2d 834, 501 N.Y.S.2d 944 and installment contract buyers. See West Bend Mut. Ins. Co. v. Salemi (1987), 158 Ill.App.3d 241, 110 Ill.Dec. 608, 511 N.E.2d 785, appeal denied, 116 Ill.2d 577, 113 Ill.Dec. 320, 515 N.E.2d 129.

A seller's insurable interest alone, however, does not guarantee entitlement to the proceeds of a buyer's insurance. This is so because, absent a buyer's or mortgagor's First, the seller's name may appear on the policy under one or more of several designations. As a loss payee, the seller has no contract with the insurer, its rights are derivative of the named insured's rights, and it is subject to the same defenses as is the named insured. See Posner v. Firemen's Insurance Co. (1964), 49 Ill.App.2d 209, 199 N.E.2d 44; Fields v. Western Millers Mutual Fire Insurance Co. (1943), 290 N.Y. 209, 48 N.E.2d 489; Cary Mfg. Co. v. Acme Brass & Metal Works (1934), 215 Wis. 585, 254 N.W. 513; Grosvenor v. Atlantic Fire Ins. Co. (1858), 17 N.Y. 391. Accordingly, if the named insured commits arson, thereby excluding himself from coverage, any loss payees are also denied coverage. Conversely, if the mortgagee is listed under a New York, or standard, or union, mortgage clause, it is universally held that the mortgagee has entered into a separate contract with the insurer and is entitled to payment regardless of the mortgagor's acts or omissions. Neises v. Solomon State Bank (1985), 236 Kan. 767, 696 P.2d 372; Iowa Nat. Mut. Ins. Co. v. Central Mortgage & Inv. Co. (1985), Colo.App., 708 P.2d 480; Hartford Fire Ins. Co. v. Merrimack Mut. Fire Ins. Co. (1983), Me., 457 A.2d 410; Cole v. Michigan Mut. Ins. Co. (1982), 116 Mich.App. 51, 321 N.W.2d 839; Fields, supra. Sellers may also obtain protection under a contract of sale clause. See West Bend Mut. Ins. Co., supra; Root v. Republic Ins. Co. (1978), 82 Mich.App. 446, 266 N.W.2d 842.

                covenant to insure for the benefit of the seller or mortgagee, the seller/mortgagee has no right to the proceeds of the buyer/mortgagor's insurance, even though the buyer/mortgagor remains liable on the debt. 3  Lakeshore Bank & Trust Co. v. United Farm Bureau Mut. Ins. Co.  (1985), Ind.App., 474 N.E.2d 1024;  Bodwitch v. Allen (1983), 91 A.D.2d 1177, 459 N.Y.S.2d 148.   Entitlement to proceeds arises in one of three ways

Second, if a buyer covenants to keep the property insured for the seller's benefit and takes out insurance without assigning it or making it payable to the seller, the covenant creates an equitable lien in the seller's favor upon the proceeds held by the buyer after a loss. See Downing v. Stiles (1981), Wyo., 635 P.2d 808, 816, citing 5 Couch on Insurance 2d, ...

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