Opinion
April 17, 1935.
July 18, 1935.
Insurance — Prior insurance — Insurable interest — Judgment creditor — Loss made payable to third party beneficiary — Beneficiary designated as mortgagee — Condition — Knowledge of insurer — Fraudulent act of insured — Rights of judgment creditor beneficiary — Standard mortgagee clause — Separate contract — Acts of May 17, 1921, P.L. 682 and June 23, 1931, P.L. 904.
1. A judgment creditor has an insurable interest in real estate of his debtor.
2. An owner of property insured under a fire insurance policy may have the loss made payable to a creditor or other third party beneficiary.
3. A provision in a policy insuring an owner of property that the loss shall be payable to a third person as first mortgagee imports a condition that, to be entitled to receive the amount of the loss or damage, the beneficiary must have a mortgage upon the property, but where the insurer has knowledge at the time of issuance of the policy that the interest of the beneficiary is other than that of mortgagee, it is estopped from asserting a breach of such condition in an action by such third party in the right of the insured owner.
4. Where an insurance company, in writing an insurance policy, inserts therein a condition, in favor of itself, the breach of which is to invalidate its promise to pay, and the company knows at the time that this condition is inconsistent with and inapplicable to the facts of the case, and will entirely frustrate the purpose of the party or parties applying for insurance protection, the company will not be allowed to set up breaches of such condition for the purpose of avoiding its promise to pay, being estopped from so doing.
5. Such rule is not applicable where a provision is alleged to have been intended to operate in favor of the insured or one who derives his claim through the insured, by enlarging the insurer's liability.
6. Knowledge of the facts of the case by the agent who, with the authority to do so, issued the policy, is deemed knowledge by the insurance company.
7. A voluntary and intentional burning of a building by the insured under a policy of fire insurance does not create a right of action upon the policy in favor of such insured, or one whose claim is derived through him.
8. In the absence of a stipulation giving to a lien creditor, who is made a beneficiary-payee, higher rights than the insured owner, the former's right is a derivative one.
9. Where, under a policy insuring the owner of property, the loss was made payable to a named beneficiary as first mortgagee and the policy further provided that the insurance, as to the interest of the mortgagee, should not be invalidated by any act of the owner of the property, such provision was held not to create a separate and independent contract of insurance with the beneficiary, so as to preclude the insurer from setting up against the beneficiary the act of the insured in intentionally setting fire to the premises, where it appeared that the interest of the beneficiary was that of judgment creditor of the insured owner and not that of mortgagee; and this was so, although the insurer had knowledge of the interest of the beneficiary, where there was no evidence to show that the judgment creditor beneficiary ever contemplated obtaining a separate policy, insuring its own special interest as a judgment creditor, or changing its security from a judgment to a mortgage, and was dissuaded from taking such action by the acts or representations of the insurer or its agent.
10. Under the Act of May 17, 1921, P.L. 682, a standard form of fire insurance policy is prescribed, and such standard form of policy does not authorize a clause or rider to a policy insuring an owner of property, which gives to his judgment creditor an independent contract of insurance unaffected by the fraudulent acts of the insured owner, such as is expressly allowed to a mortgagee.
11. Under the Act of May 17, 1921, P.L. 682, as amended by the Act of June 23, 1931, P.L. 904, no form other than the standard form of policy may be used in this state, without the previous approval of the insurance commissioner.
Subrogation — Time of — Payment.
12. Subrogation cannot be demanded in advance of the actual discharge of the liability out of which it grows, and until payment thereof has been made in full, subrogation cannot take place upon any terms whatever.
Appeal, No. 231, April T., 1935, by plaintiff, from judgment of C.P., Washington Co., Feb. T., 1931, No. 228, in case of The First National Bank of Charleroi (Pa.) v. Newark Fire Insurance Company.
Before KELLER, P.J., CUNNINGHAM, BALDRIGE, STADTFELD, PARKER, JAMES and RHODES, JJ. Affirmed.
Assumpsit.
The facts are stated in the opinion of the lower court, BROWNSON, P.J., as follows:
On March 22, 1929, the plaintiff bank was, and for several years prior thereto had been a judgment creditor of Andrew Lombardo. It had previously been receiving protection for its judgment liens upon Lombardo's real estate by beneficiary "loss-payable" clauses annexed to fire-insurance policies issued by the defendant insurance company (or by other companies represented by the same insurance agent,) these clauses merely making the loss payable to the plaintiff as its interest might appear. On the date above mentioned, the defendant company issued a policy insuring Andrew Lombardo against fire to the extent of $2,000 upon a certain dwelling house owned by him with a clause reading as follows:
"Loss, if any, on buildings only, payable to First National Bank, Charleroi, Pa., as First Mortgagee (or Trustee), and the excess, if any, to . . . . . . as Second Mortgagee (or Trustee), subject to all the terms and conditions of the Standard Mortgagee Clause (non-contribution form) embodied in this policy."
Upon the back of the policy were printed divers stipulations and provisions, among which was the following:
"Mortgagee Clause (Non-Contribution.)
"Loss, or damage, if any, under this policy, shall be payable to the mortgagee (or trustee) heretofore specified, 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. . . . . . ."
In point of fact, the plaintiff did not, at the date of the policy or at any other time, have a mortgage upon the insured property.
The building having been injured by a fire, the bank brought this action to recover the amount of the loss payable upon this policy. The amount of the loss incurred had been agreed upon, without prejudice to the question of liability, and, there being other insurance upon the building, it was agreed that, if liable at all, the defendant would be liable for two-fifths of the agreed loss.
The defendant denied liability upon the following grounds: (a) that the plaintiff, being merely a judgment creditor, had no insurable interest in the property, and therefore could not recover; (b) that the clauses hereinabove quoted did not insure the plaintiff as a judgment creditor; and (c) that the building was intentionally burned by the insured owner, Lombardo.
1. The objection that a judgment creditor has no insurable interest and that therefore an insurance in his favor will be invalid, is manifestly untenable. Obviously, his lien on the property gives him an interest in the improvements, such as to prevent insurance in his favor from being a gambling contract; but, independently of this, when a policy insures the owner, as here, it is lawful for him to have the loss made payable to a creditor or other third party beneficiary: Glen Campbell Bk. v. Burnside Bank, 314 Pa. 536, 539. This position of the defendant the court did not sustain.
2. The clause upon which the plaintiff bases its right to sue, provided that the loss should be payable to plaintiff "as First Mortgagee." This provision imported a condition that, to be entitled to receive the amount of the loss or damage, the plaintiff must have (and continue to have at the time of the fire) a mortgage upon the property: Clarke Cohen v. Real, 105 Pa. Super. 102, more fully cited infra. But it was undisputed that the purpose of the insured and the bank in procuring a policy which named the latter as payee, was to have the bank protected against loss by reason of any diminution in the value of the security given by its judgment liens as the result of a burning of the building, and it was also shown, by uncontradicted testimony, that the agent who issued the policy (delivering it to the bank) knew this and knew that the bank did not have a mortgage and was only a judgment creditor. Here comes in the line of cases which have laid down, and firmly settled, as a part of insurance law, the rule that when (there being no fraud or misrepresentation) an insurance company, in writing an insurance policy, inserts therein a condition, in favor of itself, the breach of which is to invalidate its promise to pay, and the company knows at the time that this condition is inconsistent with and inapplicable to the facts of the case, and will entirely frustrate the purpose of the party or parties applying for insurance protection, the company will not be allowed to set up breaches of such condition for the purpose of avoiding its promise to pay, being estopped from so doing: Clymer Opera Co. v. Ins. Co., 238 Pa. 137, quoting same v. Ins. Co., 50 Pa. Super. 639, 641; Caldwell v. Fire Assn., 177 Pa. 492; Kocher v. Kocher, 300 Pa. 206, 215; Jabs v. Ins. Co., 101 Pa. Super. 498; Russell v. Ins. Co., 272 Pa. 1. And it is also settled that for the purposes of this rule knowledge of the agent who, with authority to do so, issued the policy, is to be deemed knowledge by the insurance company: Jabs v. Ins. Co., supra; Russell v. Ins. Co., supra; Kocher v. Kocher, supra, at page 215. The trial judge applied this rule of estoppel, instructing the jury that if they should find from the evidence that the agent, Brady, who wrote and issued this policy, had knowledge of the matters referred to in our statement of the rule, supra, and that proofs of loss were furnished in accordance with the policy requirements, the plaintiff would be entitled to recover unless some other grounds of defense be shown by the defendant.
3. The remaining defense was that the building had been burned by the insured owner. This the jury, upon sufficient evidence, found to be a fact; and the authorities generally agree that the voluntary and intentional burning of a building by the insured, (provided he is not insane: Showalter v. Ins. Co., 3 Pa. Super. 448, 450-452,) will not have the effect of creating a right of action upon the policy: 26 Corp. Jur. 347, sec. 443; 14 R.C.L. 1223; Rhode Island Ins. Co. v. Fallis, (Ky.), 261 S.W. 892, 37 A.L.R. 432; Matyuf v. Ins. Co., 14 Wn. Co. Rep. 110. "Nor was it necessary to stipulate," says RICE, P.J., in Showalter v. Ins. Co., supra, at pages 449, 450, "that the company should not be liable for the wilful destruction of the building by the insured. . . . . . . The contract of fire insurance is a contract of indemnity against loss by fire, and the direct burning of the building by the wilful act of the insured is not one of the risks within the contemplation of the parties to the contract."
In the absence of a stipulation giving to the lien creditor who is made a beneficiary-payee higher rights than the insured owner, the former's right is a derivative one. The policy insures the owner, against loss of or damage to his building by fire, and it is provided, by a tripartite agreement, that the amount of his loss shall be paid to his lien creditor to the extent of the latter's interest as such; in other words, the owner has the right, as Mr. Justice SIMPSON says in Glen Campbell Bank v. Burnside Bank, 314 Pa. 536, at page 539, to have his property insured by a policy making the insurance money payable to his creditor; and it follows that, when he does so, the creditor takes through him, and recovers on the policy in the right of the insured owner — only what the owner could himself have recovered, had the policy not been made so payable, unless the insurer has agreed that the creditor shall have a greater right.
It may, however, be stipulated (and it is a common practice to do so) that the interest of a mortgagee in the insurance shall not be affected by any acts of the insured owner which would prevent the latter from recovering; and in such case the stipulation so made in the encumbrancer's favor may be said to have, and has in the cases been characterized as having, operation to some extent as a separate and independent contract of insurance: Beaver Falls B. L. v. Insurance Co., 101 Pa. Super. 109, 113; Knights of St. Joseph B. L. v. Insurance Co., 66 Id. 90, 94; Reed v. Insurance Co., 67 Id. 110. In the present case, the bank claimed to have such an independent contract, and promise to pay, in its favor, by virtue of a provision, printed on the last page of the policy, that "this insurance as to the interest of the mortgagee (or trustee) therein, shall not be invalidated by any act or neglect of the mortgagor or owner of the within described property." On its face, and according to the legal meaning, force and effect of its words, this stipulation, according to the opinion of Judge KELLER in Clarke Cohen v. Real, to use of National Bank, 105 Pa. Super. 102, does not apply to a creditor, who does not have a mortgage. In that case the amount payable after a fire on a policy of fire insurance, covering both a building and personal property, was paid into court by the insurance company, (it being claimed by different persons,) and the claimants were ordered to interplead. The lower court decided that the bank was entitled to the entire proceeds of the policy under a standard mortgage clause. One of the three reasons given by Judge KELLER (at pages 114, 115) for holding that decision erroneous was as follows:
"Third. It was developed in the depositions taken by the petitioners for the rule to strike off the issue, that Stroudsburg National Bank was not a mortgagee at all; that it held no mortgage against the insured premises but was only a judgment creditor. The standard mortgagee clause is not applicable to judgment or lien creditors, apart from mortgage liens or deeds of trust similar to and partaking of the nature of a mortgage. Again this is apparent from the very language of the clause, from the provisions of the Act of Assembly which permits the insertion of the clause in the policy, (Act of 1921, [P.L. 682,] p. 737,) and from the decisions above referred to. The insurance company no more estops itself by attaching such a clause in favor of an alleged mortgagee than it does by issuing a policy in the name of an alleged owner. It is not bound to inquire whether the creditor is really a mortgagee. It may accept the situation as presented to it when application is made for the insurance. The use of the word `trustee' in the mortgage clause does not effect a different result. A judgment creditor does not secure the benefits of the independent contract of insurance created by the mortgagee clause by calling himself a trustee. The word `trustee,' which appears in parenthesis in the clause, refers to the trustee under a deed of trust similar to and of the nature of a mortgage."
The case just quoted from was followed by the trial judge in holding that the stipulation relied on by plaintiff applied and operated, on its face, only in favor of a mortgagee, and not in favor of a judgment creditor. To meet this situation, the plaintiff undertook to show that it was the understanding and intention of the parties that the bank was to be protected in the same way and to the same extent, and was to occupy the same position with reference to acts of the insured owner, as if it held a mortgage, or as if there were embraced in the policy a clause exempting it, as a judgment creditor to whom the loss was made payable, from the effect of any acts of the owner, and that the failure of the policy so to stipulate explicitly was the result of accident or mistake or misapprehension.
The only witness whose testimony went to this extent was Mr. Rush, the cashier. When the policy as written was delivered to the bank, Rush objected to it because the stipulation making the loss payable to the bank was not in the same form as the "loss payable" clause which had been embraced in prior policies, and he had a discussion with the insurance agent, Brady regarding this matter. Rush testified that Brady told him that the policy, as it was, would give the bank protection for its judgment liens equivalent to a mortgage protection, (i.e. the same protection that the standard mortgagee clause would give to the holder of a mortgage,) and that, induced by this representation to do so, he (Rush,) then accepted the policy. Brady, the company's agent, flatly contradicted Rush, saying that what he told Rush was that the bank's judgments would be protected by the policy — that the bank would have the same protection that it had had before, under the "loss payable" clauses in prior policies; and did not say that the policy would make the bank's position any stronger, or give to it anything more in the way of protection than it had had on the policy for the previous year, [Which did not contain a provision exempting the bank from being affected by acts of the owner.] The other two witnesses who testified concerning this interview, Miss Matheson and Mr. Hott, both employees of the bank, did not corroborate Rush. Miss Matheson said that Brady's statement was that the judgment liens would be protected by the policy; and this was the whole substance of what she testified to. Hott testified that Rush asked Brady whether under this policy the bank would have the same protection as it had been having under policies in different forms, and whether it would protect the judgment liens, and that Brady replied that the judgments would be protected, what the witness understood him to say being that it would get "the same protection."
Taking the view that the testimony on the subject was, as a whole, insufficient as matter of law, to reform the policy by importing into it (as having been omitted therefrom by mistake, or as having been intended to be a part of the policy contract) a provision that the bank, in the character of judgment creditor, should be unaffected by anything the owner might do, the trial judge did not submit this testimony to the jury.
The plaintiff argues that no reformation of the policy was necessary; that it was entitled to base a recovery upon the doctrine of estoppel, without any reformation.
The argument so made appears to us to confuse together two different things: (a) the case of a condition introduced into the policy, as written by the insurer, which would operate in favor of the Company by limiting, or rather destroying, its liability; and (b) a case where a provision is alleged to have been intended to operate in the plaintiff's favor by enlarging the defendant's liability.
The first mentioned case is presented by the fact that the company wrote into this policy the express provision that loss should be payable to it "as First Mortgagee," thus making it a condition that plaintiff must, to be entitled to recover, have a mortgage — a condition which the company's agent knew at the time to be inconsistent with the facts, and which, if allowed to be enforced, would entirely frustrate the conceded purpose of the parties to the contract to cause the bank to have the benefit of insurance protection for its then existing interest as a judgment lien creditor. The rule applicable to such a situation has already been stated in this opinion, under head 2, where cases laying it down are cited. Speaking of those cases, this court in Sidle v. Ins. Association, No. 250 November Term, 1931, said that they "do not put [that rule] upon the ground of reformation; they rest it upon the doctrine of estoppel, laying down the rule, specifically for insurance companies and as a part of insurance law, that such companies shall not be allowed to set up, as a defense, breach of a condition which they have inserted in a policy, and which they knew at the time did not fit the facts of the case and could not possibly be complied with." This rule the trial judge applied, by instructing the jury that the defendant was estopped from setting up a breach of the condition, not in accordance with the facts and erroneously inserted in the policy, that the bank must have a mortgage, and gave instructions that the plaintiff would be entitled to recover unless some other defense should be shown.
But, the defense that the policy was invalidated, by Lombardo's burning the building, having been set up, and the plaintiff having sought to meet this defense by showing that it was the understanding that the plaintiff should not be affected by such an act, the second situation, mentioned above under "(b)," arose. The stipulation, in another part of the policy, that a mortgagee, to whom loss may have been made payable, should not be affected by any act of the insured mortgagor or owner, was not a stipulation to operate for the defendant's benefit. Not only was it not a stipulation that would have the effect of frustrating the entire purpose of the arrangement, but it was for the sole benefit of the mortgagee, and no question of estopping the insurer from setting it up could arise. It was the plaintiff who was setting this provision up and seeking to benefit by it; and when an endeavor was made to show an understanding, and a representation by Brady, that the plaintiff should and would, notwithstanding the fact that it was only a judgment creditor, have the same rights the language of this stipulation would give to it, were it a mortgagee, (in other words, that by a mistake a mortgagee's interest was mentioned, when what should have been named was the interest of a judgment creditor,) this seems to us to be an attempt to reform the contract, so as to take the case out of the rule laid down in the Clark Cohen case, 102 Pa. Super. 102.
It is argued further that although but one witness (Rush) testified to the understanding and representation alleged by the plaintiff, circumstances appear equivalent to another witness. We do not see this. Not only is it not shown that the bank had applied for a stipulation giving it insurance protection that would be independent of and unaffected by anything that the owner might do, but the testimony shows very clearly that the bank had not been expecting to that extent, or any protection greater than the policy of the preceding year had given it. But independently of this argument, the weight of the entire testimony on the subject was to the clear effect that the understanding and representation were, merely, that the bank would have the same rights which it had had under the policy for the preceding year, when there was a simple "loss payable" claim without any stipulation relieving it from the effect of acts of the insured owner; and the testimony clearly did not come up to the standard of being sufficient to establish by clear, precise and indubitable evidence the understanding and representation which Mr. Rush says led him to accept the policy.
We are not convinced that the court erred in withdrawing this testimony from the jury, and in submitting the question whether the building was intentionally and wilfully burned by Lombardo, the insured.
What has been said above sufficiently covers, we think, every reason assigned in the plaintiff's motions for judgment n.o.v. and for new trial, except the 4th reason given in the later motion, viz. that "the court erred in declining to charge on the question of subrogation." The jury, as we see it, had nothing to do with the question of subrogating the defendant to the plaintiff's right of lien against Lombardo's property, or to any right of action against him for burning the property; any question of that kind would be premature now, but may be raised later on, if the plaintiff recovers a judgment against the insurance company and such judgment is paid. Subrogation cannot be demanded in advance of the actual discharge of the liability out of which it grows, and until payment thereof has been made in full, "subrogation cannot take place upon any terms whatever:" Forest Oil Co's Appeal, 118 Pa. 138; Insurance Co. v. Fidelity Co., 123 Pa. 523, 525; and other cases cited in Community S. L. Co. v. Hamilton, 5 Wn. Co. Rep. 95, 97, 98. In the last mentioned case we said: "It is the actual payment of the creditor (or an unconditional tender which is the equivalent thereof) that raises the equity of subrogation, and until such payment or tender the court will make no decree interfering with him." And the policy clause relating to subrogation is in accordance with this rule, for it provides therefore only "to the extent that payment [for loss or damage] is made by this Company."
And now, October 27, 1934, the motions of the plaintiff for judgment non obstante veredicto and for a new trial are dismissed.
Judgment entered for defendant on verdict. Plaintiff appealed.
Error assigned, among others, was refusal of motions for judgment n.o.v. and for a new trial.
D.M. McCloskey, with him Burnside, Moninger Burnside, for appellant.
D.I. McAlister, of Hughes, McAlister Zelt, with him H. Russell Stahlman, for appellee.
Argued April 17, 1935.
The material issues involved in this case are all satisfactorily disposed of in the clear and convincing opinion of President Judge BROWNSON of the court below. It is not necessary to add to it beyond citing, as additional authority, the cases of Banco Commerciale de Puerto Rico v. Royal Exchange Assurance Corp., 71 Fed. (2d) 933, C.C.A. 1st Circuit, and Overholt v. Reliance Ins. Co., 319 Pa. 340, 179 A. 554; and calling attention to the fact that the standard form of fire insurance policy is prescribed by statute (Act of May 17, 1921, P.L. 682, pp. 732, 733, secs. 522, 523, 40 PS secs. 657, 658) and does not authorize a clause or rider to a policy insuring an owner of property, giving to his judgment creditor an independent contract of insurance unaffected by the fraudulent acts of the insured owner, such as is expressly allowed to a mortgagee or a trustee under a deed of trust in the nature of a mortgage; and no form other than the standard form may be used in this State, (Act of May 17, 1921, supra, sec. 524, p. 739), without the previous approval of the Insurance Commissioner (Act of June 23, 1931, P.L. 904, pp. 910, 913); and further that there is no evidence at all in this case which would warrant a finding by a jury that the plaintiff bank ever contemplated obtaining a separate policy insuring its own special interest as a judgment creditor, or changing its security from a judgment to a mortgage, and was dissuaded from taking either of these steps by the acts or representations of defendant's agent. Had there been such evidence a different question would be presented.
With this additional comment, the judgment of the lower court is affirmed on Judge BROWNSON'S opinion.