It appears this may not have gone out on Tuesday, as I had intended. Sorry if it's a repeat.
Daily Development for Tuesday, October 18, 2005
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
VENDOR/PURCHASER; INSTALLMENT LAND CONTRACTS; INSURANCE; PROCEEDS: Purchaser under installment contract is entitled to entire proceeds of insurance policy carried by vendor, even though proceeds exceed balance owing on the contract.
Estes v. Thurman, 2005 WL 2046008 (Ky.Ct.App. Aug. 26, 2005).
Thurman entered into an installment contract sale of a house to Estes for $17,000. (Sounds as though the "housing bubble" hadn't hit that part of Kentucky.) The contract, which called for payments over a seven-year period, included a covenant by the purchaser to carry casualty insurance. The purchaser took possession and began making payments, but did not buy insurance. Instead the vendor, Thurman, carried insurance on the property. There is no clear explanation in the opinion as to why the insurance was purchased and paid for by the vendor rather than the purchaser.
Six months later the house burned down through no fault of either party. The balance owing on the contract was about $16,000 at that time, but the insurance company paid Thurman $34,000. Thurman, the vendor, then filed a suit to forfeit the purchaser's rights under the contract on account of the purchaser's default in failing to carry insurance. The purchaser filed a counterclaim for (1) a deed to the property (on the ground that the insurance proceeds had paid off their contract balance in full, and (2) the remaining $18,000 in insurance proceeds!
The court found for the purchasers! It held that the insurance proceeds were held by the vendor in a "constructive trust" for the benefit of the purchasers. It would be unjust, the court held, for the vendor to benefit from the insurance by more than the value of the vendor's security interest, which was $16,000. So the purchasers got the rest of the money.
Reporter’s Comment 1: There is nothing unusual about a court giving a purchaser credit, as against the purchase price, for the insurance proceeds collected by the vendor on the vendor's insurance policy. Numerous cases uphold this principle, although they sometimes deduct from the credit the amount of the premiums that the vendor paid (on the ground that if the purchaser is going to benefit from the insurance, the purchaser at least ought to pay the cost of it). See, e.g., New Hampshire Ins. Co. v. Vetter, 326 N.W.2d 723 (S.D.1982); Fellmer v. Gruber, 261 N.W.2d 173 (Iowa 1978); Chapline v. North American Acceptance Corp., 25 Ariz.App. 465, 544 P.2d 682 (1976). A court that refused to grant this sort of credit would put the vendor in the position of being able to both (1) collect on the insurance, and (2) collect the full remaining purchase price from the purchaser – a pretty clear case of unjust enrichment of the vendor.
Reporter’s Comment 2: In the present case, however, the court goes far beyond merely giving the purchaser a credit to avoid unjust enrichment of the vendor. Here the purchasers not only got their land paid for, but (if the $17,000 price they agreed to was equivalent of fair market value) also got another $17,000 as a pure windfall. And they got it as a result of an insurance policy they had no part in obtaining or paying for, and despite the fact that they breached the contract by failing to obtain their own insurance – an act that surely would have been wise, as well as being a contractual duty. The vendor, on the other hand, had his contract paid off, but nothing further to show for the insurance he paid for.
Reporter’s Comment 3: It appears that there is inevitably a windfall for someone here, since the insurance company seems to have paid out about twice what the property was worth. Shouldn't that windfall go to the party who had the gumption to buy the insurance?
The Reporter for this item was Dale Whitman of the Missouri, Columbia, Law School.
Editor’s Comment 1: Let us assume that there had been no fire, but the seller acquired the insurance. Would the seller have been able to charge the buyer for the insurance as damages for the buyer’s nonperformance of the contract? The answer, of course, is “yes.” In fact, the typical contract provides that the party to be benefitted by the insurance may buy the insurance and collect the cost as part of the next installment, backed up by whatever remedies exist for default of an installment.
I would assume that if the seller were buying insurance on the buyer’s account as described above, the seller would be obligated to treat the insurance as the buyer’s insurance, and itself as a “mere trustee” of the proceeds to the extent they exceeded the protection of the seller’s security interest
Thus, the editor is bemused, but not shocked, at the result
Editor’s Comment 2: The above certainly would be true in a mortgage, where the mortgagee’s sole interest is in being paid. Is it any different in an installment land contract, where the seller is still technically the legal owner of the property and has a potential right to forfeit the contract? Maybe.
Items reported here and in the ABA publications
are for general information purposes only and
should not be relied upon in the course of
representation or in the forming of decisions in
legal matters. The same is true of all
commentary provided by contributors to the DIRT
list. Accuracy of data and opinions expressed
are the sole responsibility of the DIRT editor
and are in no sense the publication of the ABA.
Parties posting messages to DIRT are posting to
source that is readily accessible by members of
the general public, and should take that fact
into account in evaluating confidentiality
DIRT is an internet discussion group for serious
real estate professionals. Message volume varies,
but commonly runs 5 15 messages per work day.
Daily Developments are posted every work day.
subscribe, send the message
subscribe Dirt [your name]
To cancel your subscription, send the message
signoff DIRT to the address:
for information on other commands, send the
Help to the listserv address.
DIRT has an alternate, more extensive coverage that includes not only
commercial and general real estate matters but also focuses specifically upon
residential real estate matters. Because real estate brokers generally find
this service more valuable, it is named “BrokerDIRT.” But residential
specialist attorneys, title insurers, lenders and others interested in the
residential market will want to subscribe to this alternative list. If you
subscribe to BrokerDIRT, it is not necessary also to subscribe to DIRT, as
BrokerDIRT carries all DIRT traffic in addition to the residential discussions.
To subscribe to BrokerDIRT, send the message
subscribe BrokerDIRT [your name]
To cancel your subscription to BrokerDIRT, send the
signoff BrokerDIRT to the address:
DIRT is a service of the American Bar
Section on Real Property, Probate & Trust Law and
the University of Missouri, Kansas City, School
of Law. Daily Developments are copyrighted by
Patrick A. Randolph, Jr., Professor of Law, UMKC
School of Law, but Professor Randolph grants
permission for copying or distribution of Daily
Developments for educational purposes, including
professional continuing education, provided that
no charge is imposed for such distribution and
that appropriate credit is given to Professor
Randolph, DIRT, and its sponsors.
DIRT has a WebPage at:
Your e-mail address will only be used within the ABA and its entities. We do not sell or rent e-mail addresses to anyone outside the ABA.
To change your e-mail address or remove your name from any future general distribution e-mails you can call us at 1-800-285-2221, or write to: American Bar Association, Service Center, 321 N Clark Street, Floor 16, Chicago, IL 60610
If you are an ABA member, log in to the ABA Web site at https://e2k.exchange.umkc.edu/exchweb/bin/redir.asp?URL=http://www.abanet.org/abanet/common/MyABA/home.cfm to edit your member profile. Otherwise, complete the form located at https://e2k.exchange.umkc.edu/exchweb/bin/redir.asp?URL=https://www.abanet.org/members/join/coa2.html
To review our privacy statement, go to https://e2k.exchange.umkc.edu/exchweb/bin/redir.asp?URL=http://www.abanet.org/privacy_statement.html.
If you have any problems, please contact the list owner