Daily Development for Monday, December 11, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

INSURANCE; INSTALLMENT CONTRACTS; VENDOR'S INTEREST: A vendor is an insured party under the standard mortgage clause in a residential property policy issued to the vendee, when the vendor is listed as "contract holder."

Singer v. American States Insurance, http://www.michbar.org/opinions/home.html?/opinions/appeals/2000/120500/8683.htm l (Mich. App. 12/05/00)

Plaintiff was a land contract vendor on property under a contract that required the vendee to obtain property insurance. Vendee did so, naming herself as the insured and stating that the vendor was a "contract holder."

After five years, vendee fell behind in payments. She quitclaimed her interest to the vendor, and vendor agreed to permit her to live in the premises as a tenant. After a fire damaged the property, the vendee put in a claim for personal property damage, which the insurer paid. But the insurer denied plaintiff vendor's claim for damage was denied on the basis that plaintiff was not an "insured" under the policy and did not have an insurable interest in the property.

The court concluded that the language of the policy indicated that parties other than the named "insureds" may be entitled to proceeds. The policy at one point stated: "We will adjust all losses with you. We will pay you unless some other person is named in the policy or is legally entitled to receive payment." This suggested to the court that parties other than those named as insured could be paid. Other parts of the policy also referred to "insureds" other than the named insured.

But the court did not rely simply on the conclusion that plaintiff fit within a range of parties who might be "insureds." Instead, the court held specifically that a contract vendee is entitled to the benefit of the standard mortgage clause contained in the policy. Because the policy designated the plaintiff as a "contract holder," the court concluded that the insurer had agreed to treat the insured as a mortgagee. The policy did not define "contract holder." Under the circumstances, however, the court concluded that it was reasonable to interpret the policy's designation of plaintiff as "contract holder" as referring to his status as the land contract vendor to the insured property. Therefore the standard mortgage clause can be the mechanism by which a vendor, as a secured party, collects benefits. Under this clause, a mortgagee is protected by the policy during its term even after it acquires title to the property through foreclosure or deed in lieu of foreclosure. Plaintiff stood in a substantially similar position and, therefore, was entitled to benefits in the amount of his provable loss on the dwelling.

Comment 1: For a discussion by the editor of the various benefits and pitfalls of the standard mortgage clause for mortgagees, see P. Randolph, "The Mortgagee's Interest in Casualty Loss Proceeds; Evolving Rules and Risks," 32 ABA Real Property, Probate & Trust Law Journal, 1 (1997)

Comment 2: As a subtext, portions of the opinion indicate that the insurer suspected the plaintiff of torching his own buildings, as he had made claims on a number of his properties in the recent past, but the insured apparently couldn't, or at least, didn't attempt to, prove its suspicions, and the court dismissed them as therefore irrelevant.

Comment 3: Note that Michigan is probably the most installment contract friendly state in the nation. The device is commonly used there, both in residential and commercial transactions, with consequent need to adjust the conventions that are normally applicable to mortgage relationships. But even outside of Michigan, the editor believes that the opinion states good law where, as here, the insurer had every reason to know that there was a secured party. The insured's risk was not increased and it in fact intended to provide protection to secured parties who took title following default. What's the big deal?

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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