Vermont Inv. Capital, Inc. v. GRANITE MUT. INS.

• Decision Date: 08 February 1989
• Docket Number: Civ. A. No. 88-152.
• Parties: VERMONT INVESTMENT CAPITAL, INC., (SBA, Receiver) v. GRANITE MUTUAL INS. CO.
• Court: U.S. District Court — District of Vermont

705 F. Supp. 1019

VERMONT INVESTMENT CAPITAL, INC., (SBA, Receiver) v. GRANITE MUTUAL INS. CO.

Civ. A. No. 88-152.

United States District Court, D. Vermont.

February 8, 1989.

Patti R. Page, McNeil, Murray & Sorrell, Burlington, Vt., for plaintiff.

Robert V. Simpson, Jr., Richard Davis Associates, Barre, Vt., for defendant.

OPINION AND ORDER

BILLINGS, Chief Judge.

On April 1, 1986, Joseph Flanagan telephoned the Bouffard Insurance Agency in St. Johnsbury, Vermont to obtain a fire insurance policy covering premises in Lunenberg, Vermont. Flanagan was to purchase the property from Vermont Investment Capital ("VIC") the next day. Pursuant to a purchase and sale agreement between the parties, VIC was to obtain a purchase money mortgage from Flanagan at the closing in the amount of $86,000 and Flanagan was to obtain insurance naming VIC as mortgagee. At about 9:00 a.m. the following morning, the policy was delivered to Flanagan. Sometime before the scheduled afternoon closing on the property, the house burnt to the ground. The closing did not take place.

The day after the fire, on April 3, 1986, Flanagan phoned the insurance agency to request that the policy be cancelled and to have the check he had written to cover the first premium returned to him. Apparently, Flanagan never returned the policy to the agent and the check was neither returned to Flanagan nor presented for payment. Nonetheless, the agent purported to cancel the policy at that time.

The policy states that it is effective as of 12:01 a.m. on April 2, 1986, and contains a "standard" or "union" mortgage clause naming VIC as mortgagee.¹ VIC made a written claim on the policy which was initially denied by Granite Mutual on the ground that VIC did not have an insurable interest. The Small Business Administration, as receiver, filed suit on behalf of VIC seeking both a declaratory judgment that defendant is liable to it under the policy, and damages. Since the material facts were not in genuine dispute, both sides moved for summary judgment. Hearing was held on January 11, 1989, after which both parties submitted supplemental memoranda.

In its memoranda, and at oral argument, defendant now admits that VIC did have an insurable interest. Defendant argues, however, that VIC failed to insure whatever interest it had. VIC contends that it had insured its interest as of 12:01 a.m. on April 1, 1986, by virtue of the fact that defendant had issued a policy effective at that time with full knowledge that VIC was an owner under contract to sell, whose interest would become that of mortgagee at the time of closing. Alternatively, VIC argues that it was specifically covered under the policy because the mortgage clause explicitly defined "mortgagee" to include "trustee" and VIC was a "trustee" under some uses of the term, particularly under the doctrine of equitable conversion. Defendant counters that VIC was never a mortgagee in any sense of the word because the mortgage relationship was never consumated due to the cancelled closing. It argues that neither Flanagan nor the insurance agent intended to insure the property prior to the closing, and that Vermont law does not support VIC's claim as a trustee.

DISCUSSION

Summary judgment may be granted only if the moving party can show that there is "no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ. P. 56(c). In its current posture, this case is particularly appropriate for resolution on summary judgment. No material facts are disputed; rather, disposition rides solely on the interpretation of the insurance policy issued to Flanagan.

Insurable Interest

As a preliminary matter, the Court agrees that VIC had an insurance interest at the time of the loss. It was the owner of the property under a contract to sell that placed the risk of loss on the seller prior to closing. VIC clearly could insure that risk; the question is whether it did. While it is true that Flanagan lacked an insurable interest at the time of loss, that fact alone would not preclude VIC's recovery. Smith v. Union Ins. Co., 25 R.I. 260, 55 A. 715 (1903); 43 Am.Jur.2d Insurance § 940 at 965.

Effect of Flanagan's Cancellation

In addition, we agree with the parties statements at argument that Flanagan's purported cancellation of the policy has no effect on the outcome here. The "standard" or "union" mortgage clause creates an independent contract of insurance between the insurer and the mortgagee. United States v. Commercial Union Ins. Cos., 821 F.2d 164, 166 (2d Cir.1987) (interpreting Vermont law); 43 Am.Jur.2d Insurance § 1045 at 1046. The purpose of the clause is to protect the mortgagee's interest from any act or omission of the mortgagor that might prevent the mortgagor's recovery. Commercial Union, 821 F.2d at 166; Christopher & John, Inc. v. Maryland Casualty Co., 484 F.Supp. 609, 611 (S.D.N.Y.1980); 43 Am.Jur.2d Insurance § 1046 at 1048-51. Thus, the clause provides that denial of a claim to the insured shall not apply to a valid claim by the mortgagee if, inter alia, the mortgagee "pays any premium due under the policy on demand." Further, the mortgagee is entitled to at least ten days notice before the policy can be cancelled.

Here, it is undisputed that VIC did not receive the requisite notice of cancellation, nor was it given opportunity to pay the premium due. Thus, VIC's interest in the policy, if any, can not be avoided by Granite Mutual on account of Flanagan's unilateral act of cancellation. In any event, Flanagan purported to cancel the policy after the loss. If the policy was effective at the time of the fire, Flanagan's later cancellation would not affect a valid interest in the policy at the time of the loss.

To determine whether VIC's interest in the property was insured at the time of loss, we must first determine whether the insurance policy was in effect prior to the closing. Second, we must determine whether VIC was a mortgagee within the meaning of the policy.

Effective Time of Policy

The first question would seem to be answered by the policy itself. It states that it is effective as of 12:01 a.m. on April 2, 1986, and thus by its terms was effective at the time of loss. Granite Mutual argues that the parties did not intend the policy to be effective until the scheduled afternoon closing. Notwithstanding that possibility, however, we believe that the parol evidence rule bars extrinsic evidence concerning the effective time of the policy.

The parol evidence rule aims to ensure some measure of stability in commercial relations by preventing one party "`to substitute his view of his obligations for those clearly stated.'" Garza v. Marine Transport Lines, Inc., 861 F.2d 23, 26-27 (2d Cir.1988) (quoting Eskimo Pie Corp. v. Whitelawn Dairies, Inc., 284 F.Supp. 987, 994 (S.D.N.Y.1968)). Unless a contract term is ambiguous, in which case extrinsic evidence may be received for the purpose of interpretation, see, e.g., Garza, 861 F.2d at 27, evidence of prior understandings or negotiations may not be received "for the purpose of varying or contradicting the writing." 3A Corbin, Contracts, § 573, at 357 (1960).

The parol evidence rule is operative in Vermont in the context of insurance contracts. Williams Mfg. Co. v. Insurance Co. of North America, 95 Vt. 134, 135, 113 A. 781 (1921). In this case, were we to entertain extrinsic evidence regarding the effective time of the policy, we would vary an unambiguous term in an integrated contract. "12:01 A.M. Standard Time at the described location" is simply not capable of more than a single meaning "viewed objectively by a reasonably intelligent person." See Walk-In Medical Centers, Inc. v. Breuer Capital Corp., 818 F.2d 260, 263 (2d Cir.1987). Had the parties wanted the policy to become effective at some other time, they could have said so in the policy. Thus, we conclude that the policy was effective at the time of the loss and turn to the question whether VIC was a "mortgagee" within the meaning of the policy.

VIC as "Mortgagee"

Defendant is correct that VIC was not a "true" mortgagee at the time of the loss. Closing had not occurred and no mortgage deed was exchanged. The mortgage relationship between the parties never came into existence. Nonetheless, by including the "standard" or "union" mortgage clause in its policy, Granite Mutual must impliedly accept current judicial interpretations of the clause, refined over nearly a century of the clause's use in similar policies. "If the defendant intended to provide coverage contrary to these interpretations, it should have drafted a new provision that would have removed any uncertainty about the extent of coverage offered." 495 Corp. v. New Jersey Underwriting Ass'n, 86 N.J. 159, 430 A.2d 203, 207 (1981).

In the 495 Corp. case, the New Jersey Supreme Court found that the standard mortgage clause was far from clear and unambiguous. It was unable, after "careful analysis," to derive a plain and definite meaning of the clause or of the term "mortgagee". Relying on authority from New Jersey and other states, the court concluded that the standard mortgage clause entitled the mortgagee to recover for a loss after it acquired title to the insured property by conveyance from the owner. "The extent of coverage depends on the extent of the mortgagee's interest at the time of loss, not on the continued existence of a mortgage relationship." Id. The Court continued, "The clause can be read as insuring any interest that the mortgagee has in the insured property at the time of loss." Id.

Of course, in 495 Corp. the question was whether the mortgagee could recover after the termination of the mortgage relationship. Here, the question is whether the mortgagee can recover before the mortgage relationship came into being, and thus the question is whether VIC ever was a "mortgagee" at all. In this regard, some courts have stated that the standard mortgage clause...