Title: American Nat. Bank and Trust Co. v. Young

State: minnesota

Issuer: Minnesota Supreme Court

Document:

329 N.W.2d 805 (1983) AMERICAN NATIONAL BANK AND TRUST COMPANY, Respondent, v. Terry Robert YOUNG, Defendant, Avemco Insurance Company, Appellant. No. C9-82-258. Supreme Court of Minnesota. February 4, 1983. *806 Wolk & Jacob and Arthur Alan Wolk, Philadelphia, Pa., Dean K. Johnson, Bloomington, for appellant. Geraghty, O'Loughlin & Kenney, Terence O'Loughlin and Richard J. Thomas, St. Paul, for respondent. Heard, considered and decided by the court en banc. TODD, Justice. An individual claiming to be Terry Robert Young borrowed $225,000 from the American National Bank to purchase an airplane. Avemco Insurance Company furnished insurance coverage on the airplane, including a "Breach of Warranty Endorsement." The airplane was flown to Colombia where it was seized by the Colombian government. American National Bank, relying upon a deposition of Young in which he denied owning or financing the airplane, recovered $196,924.31 under a blanket bond. American subsequently sued Avemco seeking recovery of $221,924.31, the balance due on the note. American agreed that it would reimburse that portion of its recovery which the insurance company had paid under the bond. The trial court allowed recovery against Avemco for the full amount claimed, plus prejudgment interest. We affirm. *807 The facts are found in a written stipulation of the parties, together with exhibits received in evidence. The stipulation exclusive of attached exhibits provides: A copy of the Memorandum is attached as Exhibit "J". The breach of warranty agreement referred to in the stipulated facts provides in part. Article VIII of the Insurance Agreement's portion of the policy provides in part: Based on the stipulated facts and the exhibits in the record the trial court made its findings of fact and reached the following Conclusions of Law: Judgment was entered for plaintiff in the amount of $221,924.31 with interest from April 1, 1979. Avemco appeals. The issues on appeal are: 1. Does the evidence support the finding of the trial court that the defendant Terry Robert Young is the person who obtained the loan and insurance involved in this case? 2. Is the "Breach of Warranty Endorsement" a separate policy of insurance? 3. Do the applicable exclusions of the policy preclude recovery under the Breach of Warranty Endorsement? 4. Does the territorial limits of the insuring Agreement portion of the policy preclude recovery under the Breach of Warranty Endorsement? 1. Avemco, relying upon Young's denial of any connection with the airplane and loan, challenges the correctness of the trial court's determination that Young purchased the airplane, borrowed the money from American, procured the insurance from Avemco, and that his actions caused the airplane to be seized by the Colombian government. The test for factual findings is whether they are clearly erroneous. Minn.R.Civ.P. 52.01. An examination of the record discloses not only that the findings are not clearly erroneous, but rather, they are totally supported and are the only logical conclusion based upon the evidence. There arises a collateral issue caused by Young's deposition testimony which has become a non-issue. Upon completion of the deposition, the matter was referred to an attorney, not connected with this litigation, who handled blanket bond claims for the bank. A submission was made to the bond carrier, which for reasons not disclosed in this record, allowed the claim. Subsequently, the attorney handling this litigation determined that Young was lying. This is the identical conclusion reached by the trial court and this court. Since the bank has agreed to reimburse the bond carrier out of the proceeds of this litigation, the issues of double recovery or subrogation rights are no longer viable. 2. The trial court found the Breach of Warranty Endorsement to be a "standard mortgage clause." It stated that: The court concluded that this statement of the law was in accord with the case law in Minnesota, citing Allen v. St. Paul Fire and Marine Insurance Co., 167 Minn. 146, 149, 208 N.W. 816, 817 (1926) and Magoun v. Fireman's Fund Insurance Co., 86 Minn. 486, 490, 91 N.W. 5, 7 (1902). There are generally two types of insurance clauses between an insurer and a mortgagee. In the first form, known as "the union, standard, or New York forms, the mortgagee may become liuable to pay the premium to the insurer in return, it is free from policy defenses which the company may have against the mortgagor." 5A J. Appleman, Insurance Law and Practice § 3401, at 282 (1970 & Supp.1981). *810 The second type is known as the open form mortgage clause. Under the "open form, the mortgagee stands in the mortgagor's shoes and is usually considered subject to the same defenses." Id. Here, "the indemnity of the mortgagee is subject to the risk of every act and neglect of the mortgagor which would avoid the original policy in the mortgagor's hands. The rights of the mortgagee in that type of contract are purely derivative, and if the mortgagor would have no right to recover, neither would the mortgagee." Id. at 293. In contrast, "under a standard mortgage clause, the result has been that the courts have held that the agreement of the company with the mortgagee being separate and devisable from that with the mortgagor, the mortgagee cannot be affected by any act or default of the mortgagor, and any breach of the policy terms and conditions committed by the mortgagor is no defense to an action by the mortgagee." Id. at 289. Thus, the initial question is: What type of mortgage clause is this court presented with? The trial court found it to be a standard or union mortgage clause. Avemco conceded it was a standard clause at trial, but subject to the conditions and exclusions in the policy. Avemco is in essence arguing that this is an open mortgage clause and that American's position is derivative rather than independent of Young's. Under Minnesota case law, this is a standard mortgage clause.[1] The distinction was illustrated in Allen v. St. Paul Fire and Marine Insurance Co., 167 Minn. 146, 149, 208 N.W. 816, 817 (1926), when it stated: The Allen court quoted Circuit Judge Sanborn as to the effect of a standard or union clause: Id. at 150, 208 N.W. at 818 (citing Syndicate Insurance Co. v. Bohn, 65 F. 165, 178 (8th Cir.1894)). The Allen court concluded that "the two contracts combined in the policy and the mortgage clause are separable and independent from the beginning. When the first fails, or if it never attaches, the second begins and proceeds subject to its own conditions and limitations." Id. (citing Smith v. Union Insurance Co., 25 R.I. 260, 266, 55 A. 715, 717 (1903)). See H.F. Shepherdson Co. v. Central Fire Insurance Co., 220 Minn. 401, 19 N.W.2d 772 (1945) (arson by mortgagor cannot invalidate mortgagee's coverage under standard mortgage clause); Magoun v. Fireman's Fund Insurance Co., 86 Minn. 486, 91 N.W. 5 (1902) (standard mortgage clause is an independent contract of insurance not invalidated by act, neglect, omission or default of mortgagor). *811 The Minnesota cases which have examined this question all considered a standard mortgage clause under fire insurance policies. See Minn.Stat. § 65 A. 01, subd. 3 (1980) (Minnesota Standard Fire Insurance Policy includes standard mortgage clause which specifies that "no act or default" by any person other than mortgagee shall defeat coverage). However, no distinction appears to be made between fire insurance and chattel policies by the treatise writers, case law, or the parties; hence, the same principles apply to insurance coverage on an airplane. Under the previous analysis, it is very clear that the clause at issue is a standard mortgage clause, constituting an independent contract of insurance which cannot be invalidated by acts or neglect of the mortgagor, Young. Avemco further argues that a Breach of Warranty Endorsement is a hybrid between a standard insurance clause and an open form mortgage clause.[2] This claim appears to be based upon the language of the endorsement which provides that "nothing contained therein shall vary the terms of the underlying policy." We reject such a construction. We construe this language to mean that the issuance of a separate insurance policy to the mortgagee protecting it from the wrongful acts or neglect of the mortgagor, shall not vary the respective legal opposition of the insured and insurer under the terms of the policy. 3. Having concluded that there are two separate and independent insurance policies involved, we must construe the rights of the mortgagee under its policy of insurance as they may be affected by the actions of the insured Young. The trial court found, and we agree, that the actions of Young constituted drug trafficking within the language of the exclusion portion of the policy. Consequently, the insured Young has no coverage under his policy. However, under the bank's separate policy, the actions of Young were the very thing for which the bank's insurance was purchased to protect it against loss caused by a violation of the terms of the policy by the mortgagor. The policy of the bank precluded coverage if there were a conversion, embezzlement, or secretion by Young of the airplane. These conditions did not occur. Thus we conclude that the actions of Young, involving drug trafficking and the seizure by the Colombian government, did not preclude recovery by American under its policy of insurance. This is a majority view. Piedmont Fire Insurance Co. v. Fidelity Mortgage Co., 250 Ala. 609, 35 So. 2d 352 (1948); Underwriters at Lloyds, London v. United Bank Alaska, 636 P.2d 615 (Alaska 1981); Southwestern Funding Corp. v. Motors Insurance Corp., 59 Cal. 2d 91, 378 P.2d 361, 28 Cal. Rptr. 161 (1963); Foster v. United States Aviation Underwriters, Inc., 241 A.2d 914 (D.C.1968); Security Insurance Co. of Hartford v. Commercial Credit Equipment Corp., 399 So. 2d 31 (Fla.Dist.Ct. App.), pet. for rev. denied, 411 So. 2d 384 (1981); Americas Aviation & Marine Insurance Co. v. Beverly Bank, 229 So. 2d 314 (Fla.Dist.Ct.App.1969); Employers' Fire Insurance Co. v. Pennsylvania Millers Mutual Insurance Co., 116 Ga.App. 433, 157 S.E.2d 807 (1967); Bennett Motor Co. v. Lyon, 14 Utah 2d 161, 380 P.2d 69 (1963); Don Chapman Motor Sales, Inc. v. National Savings Insurance Co., 626 S.W.2d 592 (Tex.Civ.App. 1981). Avemco cites Avemco Insurance Co. v. Jefferson Bank & Trust Co., 613 S.W.2d 436 (Mo.App.1980), in support of its position. In Jefferson, an airplane was flown to Mexico where it crashed. Subsequently, its wreckage was seized by the Mexican government where it was further damaged. The insurer paid for the damages caused by the crash, but refused to pay the mortgagee for the damages caused by the governmental seizure. The seizure, it contended, was *812 not caused by any act or neglect of the mortgagor and fell within a policy exclusion. We find that case to be factually distinguishable. In addition, we would not adopt the finding of the Missouri court, since we would consider such damages to be readily foreseeable and causally related to the initial crash. 4. A more difficult question is posed by Avemco's challenge to the fact that the territorial limitations of the policy were violated. Article VIII of the insurance agreement, previously quoted, establishes time and territorial limitations. This occurrence fell within the time limits, but outside the territorial limitations of the policy. Again, as in the exclusion section of the policy, such a violation invalidated the insurance coverage between Avemco and Young. However, the issue before us is whether this invalidates the separate insurance agreement of the bank. As previously stated, a separate policy of insurance was purchased by the bank to prevent losses caused by the acts of the mortgagor. This is what occurred. Avemco argues that to allow recovery is to widen the scope of the coverage afforded by the contract between the parties. We disagree. Such an argument would be applicable to the insurance agreement between Young and Avemco. However, the insurance agreement between the bank and Avemco must be interpreted to effectuate its purposes. The terms and conditions of American's contract are identical to those of Young. However, when Young's act or neglect caused the violation of the territorial provisions in his policy, that identical provision in American's policy necessarily became inapplicable. The territorial provision applies to American only when it is guilty of breaching it. This conclusion is supported by the treatise writers and case law. 5 A.J. Appleman, Insurance Law and Practice § 3401, at 292 (1970 & Supp.1981) (emphasis supplied). The California case of Southwestern Funding Corp. v. Motors Insurance Corp., 59 Cal. 2d 91, 378 P.2d 361, 28 Cal. Rptr. 161 (1963), involved an automobile which was damaged in a collision in Mexico. The insurance policy covering the car had a territorial limitation which excluded Mexico. The contract included a standard mortgage clause protecting the mortgagee. The mortgagee sought recovery under its policy of insurance claiming that the mortgagor's act or neglect of taking the automobile to Mexico could not defeat its coverage. The California court agreed with the mortgagee in finding coverage. 59 Cal. 2d at 95-96, 378 P.2d at 362, 28 Cal. Rptr. at 163. Further support is found in Couch on Insurance: 11 G. Couch, Couch on Insurance § 42:686, at 345 (1963 & Supp.1976). Additionally, Robert Keeton in his insurance treatise states: R. Keeton, Insurance Law § 6.5(e)(2), at 403 n. 7 (1971). Finally, a case which is illustrative of the principle that a third party cannot defeat the insured's coverage under his policy of insurance is the analogous case of Sunny South Aircraft Service v. American Fire and Casualty Co., 140 So. 2d 78 (Fla.App. 1962), aff'd sub nom. American Fire and Casualty Co. v. Sunny South Aircraft Service, 151 So. 2d 276 (Fla.1963). Sunny South involved an aircraft which was hijacked to Cuba. Upon its return to the United States it was overtaken by Cuban military aircraft which damaged the airplane by gunfire. The applicable insurance policy covered all loss caused by theft. However, it had a territorial restriction which excluded losses outside the United States. The insurer argued that even though the theft occurred in Florida, the loss occurred in Cuba, therefore the territorial exclusion barred recovery. The Florida court rejected this argument, holding that when an airplane is insured against theft and it "is subsequently damaged under circumstances which, but for the theft, would fall within an exclusionary provision, the loss represented by such damage is recoverable under the provision against theft, and the exclusionary clause is inapplicable." 140 So. 2d at 80. A similar argument could be made that the act or neglect of the mortgagor in not paying premiums would cause the policy to lapse, effectively denying the mortgage coverage. However, the contrary is true. The failure to pay the premium may result in loss of coverage to the insured, but doesn't necessarily invalidate coverage to the mortgagee under the standard insurance clause. That clause provides that in case the owner shall neglect to pay any premiums due under this policy the lienholder shall on demand pay the same. Thus, as part of the consideration for the issuance of the separate policy of insurance to the mortgagee the insurance company has exacted the right to collect the premium on its other policy with the mortgagee in the event the insured fails or neglects to pay the premium. This contractual right would preclude invalidation of the policy absent some notice by Avemco to the bank of its intent to invalidate the policy against it based on its failure to pay the premium on the policy of insurance existing between Avemco and the insured. Similarly, affirmative cancellation by a mortgagor absent notice to the mortgagee, does not invalidate a mortgagee's rights to coverage under a standard mortgage clause. Employers' Fire Insurance Co. v. Pennsylvania Millers Mutual Insurance Co., 116 Ga.App. 433, 157 S.E.2d 807 (1967). See 60 A.L.R.3d 164, 168-69 (1974 & Supp.1982) (fire insurance-notice of expiration). We conclude that coverage exists for American under the policy. Two separate contracts of insurance were issued by Avemco. Young by his acts or neglect breached the conditions and exclusion of his policy. He may not recover under his policy of insurance. However, his conduct cannot defeat American's right to coverage. It is only acts by American which violate the terms of its contract that could preclude coverage. Any other result destroys the concept of the standard mortgage clause and transforms it into an open mortgage provision. That result would be inconsistent with the language of the endorsement and case law. Since this is a standard mortgage clause and it is undisputed that American is not guilty of any breaches under its policy of insurance, it follows that the bank is entitled to recover from Avemco in accordance with the terms of the policy. We affirm the decision of the trial court in all respects.[3] [1] "The standard mortgage will specify in some form of language that the insurance with respect to the mortgagee shall not be invalidated by the mortgagor's acts or neglect. The words `any acts' as used in a standard mortgage clause do not refer merely to acts prohibited by the contract or to failure to comply with the terms thereof, but literally embrace any act of the mortgagor." 11 G. Couch, Couch on Insurance 2d § 42:685, at 344-345 (1963 & Supp. 1976). [2] This case could have been decided under the universal principle that ambiguities found in an insurance contract are resolved against the insurer in favor of coverage. Caledonia Community Hospital v. St. Paul Fire and Marine Insurance Co., 307 Minn. 352, 239 N.W.2d 768 (1976); Northwest Airlines, Inc. v. Globe Ind. Co., 303 Minn. 16, 225 N.W.2d 831 (1975). However, under the facts as presented we need not reach this question. [3] Avemco has raised other issues which we have considered and find to be without merit.