#### ATLANTIC JOINT STOCK LAND BANK OF RALEIGH v. W. H. FOSTER and Wife, DOROTHY L. FOSTER, A. L. OSBORNE, COY ELLER, GURNEY P. HOOD, Commissioner of Banks, DEPOSIT & SAVINGS BANK, INC., JAS. McCRAW, INC., L. C. HAFER and U. L. HAFER, Doing Business Under the Firm Name of ALEXANDER MOTOR COMPANY, COLUMBIA CASUALTY COMPANY, ASHE MOTOR COMPANY, INC., MOTOR SERVICE COMPANY, JENKINS HARDWARE COMPANY, INC., THE BANK OF NORTH WILKESBORO, YADKIN VALLEY MOTOR COMPANY, GWYN-WRENN INSURANCE AGENCY, INC., C. C. WAGONER and IRA G. ROYSTER, ERNEST ELLISON and MARYLAND CASUALTY COMPANY, J. M. BROWN, Trustee and Receiver for the Use of W. B. SOMERS, W. B. SOMERS, JOHN M. YATES, THE BANK OF YADKIN, Assignee of DIXIE BOND & MORTGAGE COMPANY, HARPER MOTOR COMPANY, THE STATE OF NORTH CAROLINA, E. B. SOMERS, Trustee for W. B. SOMERS, KYLE HAYES, Trustee, and D. J. BROOKSHIRE, J. M. BUMGARNER, G. G. ELLEDGE and A. G. HENDERSON.

(Filed 10 April, 1940.)

1. Insurance § 21—

The rights of the parties under a loss-payable clause in a policy of fire insurance will he determined in accordance with the terms and provisions of the contract, which derive no extra validity by reason of the fact that the form is prescribed by law, Michie’s Code, 6437.

2. Insurance § 14—

The assignment of an insurance policy is governed by rules pertaining to other assignments as to requisites, validity, operation, and effect.

3. Insurance § 21 — Attachment of standard loss-payable clause to fire insurance policy amounts to virtual assignment of the policy.

A loss-payable clause in favor of the mortgagee, written in accordance with the statutory form, and the delivery of the policy to the mortgagee creates a separate contract between the insurer and the mortgagee upon which the mortgagee may sue to recover loss, C. S., 446, and no act or omission on the part of the mortgagor can affect the mortgagee’s right to recover, and the transaction amounts to a virtual assignment of the contract assented to by the insurer by its attachment of the loss-payable clause and delivery of the policy to the mortgagee.

*4164. Same — Whether mortgagee failed to exercise due diligence to collect proceeds of fire insurance policy held for jury.

Certain structures on the property mortgaged were insured with loss-payable clause in favor of the mortgagee, and the policy was delivered to the mortgagee in compliance with the stipulations contained in the mortgage. A structure valued at much less than the mortgage debt burned, but no notice or proof of loss was given insurer either by the mortgagor or by the mortgagee, and the evidence failed to disclose that either had knowledge that the structure had burned. Several years thereafter the mortgagee, upon the mere request of the insurer, surrendered the policy to the insurer for cancellation. Foreclosure proceedings were instituted, and the personal representative of the deceased mortgagor resisted same on the ground that the mortgagee was liable for the loss of the proceeds of the fire insurance by reason of its failure to use due diligence to collect the amount due on the policy and apply same to the debt. *Held:*Since the mortgagee had possession of the policy with the right to sue on same and apply the whole of the proceeds to the debt, mortgagor not being entitled to any part thereof, whether the mortgagee failed to exercise due diligence to collect on the policy should have been submitted to the jury, there being no evidence of estoppel by conduct on the part of the mortgagor.

*5.*Mortgages § 30e—

The foreclosure of a mortgage may be enjoined pending the determination of the question of the mortgagee’s liability for its failure to exercise due diligence to collect on a policy of fire insurance on the mortgaged premises and apply the proceeds to the mortgage debt.

6. Mortgages § 9—

It is error for the trial court to charge the jury that as a matter of law the mortgagee was entitled to add to the mortgage debt the amount of insurance premiums paid by the mortgagee when there is evidence that the mortgagee voluntarily took out the policy on property which had theretofore been destroyed by fire, and no evidence that the mortgagor had failed to pay fire insurance premiums as required by the mortgage.

Appeal by defendants, Dorothy L. Eoster, administratrix of the estate of *W.*H. Eoster, deceased, A. L. Osborne and P. E. Brown.

New trial.

The plaintiff brought this proceeding to foreclose a mortgage made to it by *~W.*H. Eoster and wife, Dorothy L. Foster, on certain lands of the defendants in Wilkes County, alleging default in the payment of the notes secured by the mortgage deed and breach of other conditions in the mortgage which accelerated the due date. The plaintiff asked for the recovery of $1,713.21 due it upon the original mortgage indebtedness, with interest, and for $144.34 alleged to have been advanced for insurance and taxes.

The plaintiff sets up that subsequently to the execution of the mortgage to it the defendants *W.*H. Foster and wife executed another mortgage on a part of the lands to P. E. Brown, and that the said P. E. *417Brown subsequently conveyed, as mortgagee, to A. L. Osborne; tbat a portion of tbe lands embraced in tbe original mortgage was subsequently conveyed in a mortgage deed from Foster and wife to Coy Eller; and sets up numerous judgments tbat were taken against tbe defendant Foster having liens upon tbe lands both before and after tbe junior mortgages referred to, but all subsequent to tbe original mortgage to plaintiff.

Various defendants other than tbe Fosters answered tbe complaint, setting up their own claims and denying material allegations of tbe complaint. From these answers it appears tbat tbe answering parties were junior encumbrancers upon tbe land, and as between Coy Eller and P. E. Brown and bis grantees their encumbrances were upon separate portions of tbe land. These answers are not material to tbe phase of tbe case which controls tbe Court in this opinion.

Mrs. Dorothy Foster answered as administratrix of W. H. Foster, who bad died pending tbe proceeding or before it commenced. Tbe record is not clear. In her answer she admitted tbe execution of tbe deed of trust, did not deny tbat tbe payments thereon were as stated in tbe complaint, but set up tbat under tbe contract with tbe Atlantic Joint Stock Land Bank her intestate, *W.*H. Foster, bad been compelled to take out a policy of fire insurance upon tbe mortgaged premises payable to tbe plaintiff in tbe sum of $1,600.00, and by tbat contract bad been compelled to surrender tbe said policy into tbe custody of the plaintiff. She alleges tbat while tbe policy was yet in force a dwelling bouse upon tbe premises of not less than $2,000.00 in value burned, and tbat it was tbe duty of tbe plaintiff to use diligence in tbe collection of tbe insurance for tbe loss thereby sustained, and tbat tbe plaintiff neglected to take any steps toward tbe collection of tbe said insurance and tbe application thereof to tbe indebtedness and, in fact, at tbe request of tbe insurance company, surrendered tbe insurance policy for cancellation. She alleges tbat by reason of tbe failure of tbe plaintiff to use due diligence in tbe collection of tbe said insurance, and its voluntary surrender of tbe policy for cancellation, plaintiff has become liable for tbe loss so sustained, and asks tbat tbe amount which should have been collected upon tbe insurance be credited upon tbe mortgage indebtedness before any foreclosure is permitted.

In an amended answer or cross action, joined in by Mrs. Foster, administratrix of W. H. Foster, and P. E. Brown, it is alleged tbat tbe plaintiff and tbe Farmers Mutual Fire Insurance Association, while tbe policy of fire insurance on defendant’s property was still in force and after liability therefor bad accrued, agreed together, for tbe purpose of defeating tbe defendant’s rights, to cancel tbe policy of insurance, and tbe allegations as to damages, and tbe counterclaim, are reiterated.

*418Tbe plaintiff replied, admitting that tbe policy of fire insurance mentioned in defendant’s pleading bad been issued and tbat it contained a mortgage clause with loss payable to tbe plaintiff, as its interest might appear.

Tbe evidence tended to show tbat tbe policy of insurance referred to was delivered to tbe plaintiff when it was taken out, and it is admitted tbat tbe buildings were burned on 14 April, 1931, and tbat tbe buildings were worth at least $1,000.00.

Tbe evidence is conflicting as to whether tbe policy of insurance bad been actually canceled. Tbe testimony of H. E. Ledford is to tbe effect tbat tbe policy of insurance bad been delivered up by tbe plaintiff for cancellation at tbe request of tbe insurance company in 1935.

T. R. Bryan, who succeeded tbe witness Ferguson as secretary-treasurer of tbe Farmers Mutual Fire Insurance Association, and who was at tbe time of trial in charge of tbe company, testified tbat be bad investigated tbe records of tbe company and found no evidence of tbe cancellation of this policy.

Tbe evidence tends to show tbat tbe Land Bank, after tbe date of tbe fire, independently procured other insurance upon tbe property, claiming as its authority to do so failure of tbe defendant Foster to keep tbe insurance up, according to the mortgage contract. Tbe amount of tbe premiums of this insurance, with tbe taxes paid upon tbe property, constitute tbe claim represented by tbe second issue.

Tbe evidence is silent as to occupation of tbe property at tbe date of tbe fire. However, it appears from tbe record tbat service of publication as to *~W.*H. Foster and Mrs. Foster was ordered, and tbat subsequently Mrs. Foster was found to be in Greensboro, Guilford County.

Tbe trial judge submitted two issues to tbe jury, one as to tbe amount which tbe plaintiff was entitled to recover upon tbe main indebtedness and one as to tbe amount which it was entitled to recover for money advanced by way of taxes and insurance premiums. He declined to submit any issue as to tbe insurance policy or as to tbe liability of tbe plaintiff thereupon. On tbe first issue be instructed tbe jury “tbat if you believe tbe evidence and find tbe facts to be as shown by tbe admissions and tbe documentary evidence introduced in this case tbat you will answer tbat first issue $1,713.21, with interest from July 1, 1933.” On tbe second issue be instructed tbe jury “tbat if you believe tbe evidence and find tbe facts to be as shown by tbe witnesses, tbe testimony of tbe witnesses, tbe admissions, and tbe documentary evidence introduced, that you will answer tbe issue $144.34.” Tbe jury answered tbe issues accordingly and judgment ensued for tbe amount so found, and a foreclosure sale of tbe premises was ordered.

*419The judgment undertook to marshal the liens upon the property and order the sale of the lands described in the P. E. Brown mortgage deed first, and provided that if this did not bring enough to settle the debt, then the lands described in the mortgage deed to Coy Eller, or so much thereof as was necessary to pay the remainder of the judgment and costs of the action and sale, be sold. Defendants appealed.

*Folger & Folger and Arch T. Allen for plaintiff, appellee.*

*Whicker & Whicker and Jones & Brown for defendants, appellants.*

Seawell, J.

The insurance policy, in the respects here considered, conforms to the requirements of the North Carolina act on the subject establishing a standard fire insurance policy. Michie’s Code, section 6437. Where loss or damage is made payable in whole or in part to the mortgagee, it is provided: “Upon failure of the insured to render proof of loss, such mortgagee shall, as if named as insured hereunder, but within sixty days after such failure, render proof of loss and be subject to the provisions hereof as to appraisal and time of payment.” As to the original insured, it is provided that “the insured shall within sixty days after the fire, unless such time is extended in writing by this company, render to this company a proof of loss, signed and sworn to by the insured,” etc. But the rights of the parties after the policy has been issued must be ascertained and determined in accordance with the terms and provisions of the contract and derive no extra validity by reason of the fact that the form is prescribed by law. *Lancaster v. Ins. Co.,*153 N. C., 285, 69 S. E., 214; *Midkiff v. Ins. Co.,*197 N. C., 139, 141, 147 S. E., 812.

The assignment of an insurance policy is governed by rules pertaining to other assignments as to requisites, validity, operation, and effect. *Hobbs v. Memphis Ins. Co.,*1 Smeed (Tenn.), 444; *Ward v. Rutland, etc., Mutual Fire Insurance Co.,*31 Vt., 552. The theory that insurance is a personal contract and, therefore, limits the assignability, has no bearing here, since the insurance company consented to its transfer and recognized it by the attachment of the standard New York mortgage clause which, indeed, is in some aspects a contract between the insurance company and the mortgagee. No inference can be drawn from that theory that the proof of loss should preferentially be made by the owner, since the question of personnel is one which applies to the risk involved in issuing the policy. The effect of an assignment upon the insurance contract is, therefore, controlled by the terms and the circumstances of the contract of assignment itself; *Cleveland v. Clapp,*5 Mass., 201; *Ainsworth v. Backus,*5 Hun. (N. Y.), 414; and we think this holds true where the mortgage contract requires the policy to be taken out for the *420benefit of the mortgagee and delivered up to him, although some question might be raised as to whether this would constitute a technical assignment.

The mortgage contract between the plaintiff and the defendants Eoster required the latter to take out insurance upon the mortgaged property, the loss, if any, payable to the mortgagee, as its interest might appear, and further required that the insurance policy so obtained should be delivered into the possession of the plaintiff, which was done. Whether the defendants kept up the premiums on the policy, as they had agreed, or did not, does not appear in the record. It does appear, however, that some time in 1935 the mortgagee independently took out other insurance, although the dwelling had been destroyed by fire in 1931. This remarkable fact, bearing alike on the Land Bank and the insurance company which issued the policy on nonexistent property, seems to indicate an unjustifiable want of business prudence on the part of both parties to the transaction and the lack of easily obtainable knowledge of the conditions existing with respect to the property. The mortgagee meanwhile delivered up the policy of insurance taken out by Foster upon the mere request of the insurance company and a statement from them that it had been canceled, and without any investigation whatever.

In some respects the duty of the land bank toward the mortgagor with respect to the collection of the insurance on the loss which occurred by the burning of the property 12 April, 1931, is a matter of first impression with us. The precise point involved in this case does not appear to have been decided here.

That the mortgagee had the right to sue in the premises — especially since it had been accepted as payee by the insurance company — cannot be questioned. *Peterson v. Mechanics T. Ins. Co.,*168 La., 850, 123 So., 596. And upon the evidence in this case it is clear that the amount of insurance was not sufficient to pay off the mortgaged debt, and the mortgagor, therefore, had no equity in the proceeds. It might well follow, since our statute requires suits to be brought by the party at interest — C. S., 446 — that the plaintiff mortgagee alone could bring such a suit. 26 C. J., p. 484, and cases cited.

If any other sort of security had been lost by the negligence or misconduct of the plaintiff, it would have been liable therefor. The question here is whether or not the plaintiff, with the policy of insurance in its possession, with the right to sue, and virtually the owner of the proceeds to be recovered, did not owe the duty to the mortgagor to proceed to its collection and application.

We think the contract between the mortgagor and the mortgagee, considered as it affected their obligations and duties to each other, was a virtual assignment of the insurance contract. This, accompanied by delivery of the policy, in a measure substituted the' mortgagee for the *421mortgagor, certainly as beneficiary under tbe immediate contract, since it and it alone was entitled to receive tbe payment from tbe insurance company. It is not unreasonable to assume tbat it was tbe duty of tbe Land Bank to carry out tbat part of tbe contract wbicb related to tbis interest, tbat is, tbe collection of tbe proceeds and tbe performance of those things wbicb were necessary and incidental thereto. A reservation was made in tbe mortgage contract as to tbe duties to be performed with reference to tbe insurance contract by tbe mortgagor, tbe defendant Foster; tbat is to say, tbat be should pay tbe insurance premiums. We consider it tbe better reasoning, and so bold, tbat it was tbe duty of tbe Land Bank to exercise due diligence in collecting tbe insurance, and tbat tbis involves due diligence also in giving notice and making proof of claim, a duty which did not devolve entirely on tbe defendant mortgagor from tbe simple fact tbat tbe responsible officers of tbe Land Bank bad never beard of tbe fire. It is quite possible, under tbe facts as we have above outlined them, tbat tbe defendant Foster also was in ignorance of tbe fire. Tbe question is one of due diligence.

We consider tbe possession of tbe policy itself by tbe plaintiff as a strong circumstance in placing upon it tbe duty of proceeding with tbe collection. Tbis was considered controlling in *Whiting v. Lane,*193 Appellate Division, 964, 184 N. Y. S., 793; Annotations, A. L. R., 1289. See, also, *Charter Oak Life Ins. Co. v. Smith,*43 Wis., 329, as to duty to collect.

There is tbe further circumstance, with wbicb we do not think tbe court was competent to deal as a matter of law, tbat tbe plaintiff surrendered tbe policy of insurance for cancellation after (as tbe evidence tended to show) a liability for loss by fire bad accrued upon it. Tbe fire bad happened some years before, it is true, and no proof of loss or demand bad been made — a circumstance we have considered — but it was not for tbe plaintiff to determine what defense tbe insurance company might make against tbe claim, if any at all. Certainly tbe failure to file proof and make demand on tbe part of either tbe mortgagor or mortgagee would not, under all circumstances, defeat tbe claim, although it might determine tbe time within wbicb suit might be brought; *Gerringer v. Ins. Co.,*133 N. C., 407, 45 S. E., 773; and there are many circumstances wbicb might excuse delay in filing proof of claim, and one of them, it has been held, is absence. 26 C. J., page 375; *Carpenter v. German American Ins. Co.,*135 N. Y., 298, 31 N. E., 1015; *Oakland Home Ins. Co. v. Davis*(Texas Civil Appeals), 33 S. W., 587.

Indeed, where tbe New York standard mortgage clause is incorporated into tbe contract, containing tbe provision tbat no failure or misconduct on tbe part of tbe mortgagor shall defeat tbe rights of tbe mortgagee— and tbat clause is in tbis policy — it is generally held tbat tbe mortgagee *422may bring suit without filing proof of claim at all. At least under this contract of insurance there was nothing which the mortgagor could do to defeat the collection of this security on the part of the mortgagee, and little he'could do to advance it. (As noted, the standard policy necessary under the North Carolina Insurance. Laws requires the affected mortgagee to make proof of claim within sixty days after a failure on the part of the original insured to do so.)

¥e are not considering any question of estoppel on the part of the intestate Foster, if there should be any estoppel involved in his conduct. That, at least, cannot be inferred as a matter of law from the evidence.

¥e think, and so hold, that the question of reasonable diligence in the collection of the item should have been left to the jury upon the issues submitted by the defendant, or other appropriate issues, with proper instruction by the court, and the failure to do so was error.

Under the circumstances of this case it was error also to instruct the jury that if they should believe the facts to be as testified by the witnesses, and as the admissions and documentary evidence tended to show, that they should find the second issue for the plaintiff. Plaintiff had no right to charge defendant’s intestate with premiums upon insurance voluntarily taken out upon nonexistent property, and no right to charge for insurance taken out upon any property without proof, which this evidence does not disclose, that said intestate had failed to pay premiums as required by the mortgage.

It is not necessary to review the judgment as to the order in which the property is required to be sold, since the defendant is entitled to have the amount due ascertained before such foreclosure takes place.

For the errors pointed out, there must be a

New trial.