Does the repair of the premises by the owner after a fire prevent the mortgagee from recovering the insurance payable to him?
On the 6th day of June, 1927, the defendant Ohio Farmers Insurance Company of Le Roy, Ohio, issued its policy of insurance whereby it insured Loretta Realty and Finance Corporation for the term of three years from the 26th day of May, 1927, to the 26th day of May, 1930, against all direct loss or damage by fire to the extent of $7,500 on the brick building No. 16 West One Hundred and Nineteenth street, New York city. The property was thereafter conveyed to Leopold Kirven, the defendant, and the change of ownership duly noted on the policy. Within the period covered by the insurance, and on the 28th day of June, 1929, a fire occurred, causing damage to the extent of $4,230.
At the time of the issuance of said policy and at the time of the fire, the plaintiffs, Pasquale Savarese and Giacomo Savarese, were the owners of a bond secured *Page 50 by a mortgage upon said premises for $7,500, upon which there was due at the time of the loss $6,500, with interest from April 1, 1929. The mortgage provided that the mortgagor should keep the premises insured against loss by fire for the benefit of the mortgagee. The policy referred to contained the usual standard mortgagee clause, reading as follows: "Loss or damage, if any, under this policy, shall be payable to Pasquale Savarese Giacomo Savarese as mortgagee, as interest may appear, and this insurance, as to the interest of the mortgagee only therein, shall not be invalidated by any act or neglect of the mortgagor or owner of the within described property," etc.
The defendants Markowitz and Grey, as contractors with the owner, repaired the premises, so that by the 6th day of September, 1929, the property was restored to the condition in which it existed before the fire. As compensation for their work, the owner transferred to Markowitz and Grey his interest in the fire insurance policy, and the defendant insurance company stands ready to pay them the sum of $1,178.64, by applying, in calculation, the pro rata provisions of the policy. Judgment for this amount has been awarded to these contractor-defendants, and they have not appealed from the amount adjudged to be due. The plaintiffs, mortgagees, have appealed, claiming the full benefit of the policy of insurance and the recovery of the full amount of the loss, $4,230, unimpaired by any act of the owner in making repairs and restoring the property to its previous good condition.
The Appellate Division has taken the position, with some force of reasoning, and with some authority to support it, that the mortgagees sustained no damage, because when this action was commenced the security for their mortgage was the same building in the same state of repair as at the time the mortgage was taken. At first blush this conclusion seems quite plausible, but upon further analysis must yield to other considerations. *Page 51
Under the mortgagee clause the policy issued by the defendant insured the mortgagees' interest as fully and to the same extent as if they had taken out a policy directly with the insurance company. In Eddy v. London Assurance Corp. (143 N.Y. 311,322), this court said: "The effect of the mortgagee clause hereinbefore set forth is to make an entirely separate insurance of the mortgagee's interest, and he takes the same benefit from his insurance as if he had received a separate policy from the company, free from the conditions imposed upon the owners."
Quoting from Hastings v. Westchester Fire Ins. Co. (73 N.Y. 141), we recognized this rule again in Goldstein v. NationalLiberty Ins. Co. (256 N.Y. 26, 32), and said: "It [the mortgagee clause] was an independent agreement partaking in no sense of the character of an assignment of a policy of insurance, but one in which the mortgagees were recognized as a separate party, having distinct rights, and entitled to receive the full amount of insurance money, without any regard whatever to the owner of the property."
And in Heilbrunn v. German Alliance Ins. Co. (140 App. Div. 557,559; affd., 202 N.Y. 610) the court said: "It [the mortgagee clause] created a new and distinct contract which places the mortgagee upon another and a different footing from that of a mere assignee or appointee to receive the loss, and removes him beyond the control or effect of any act or neglect of the owner of the property, and renders such mortgagee a party who has a distinct interest separate from the owner, embraced in another and a separate contract. The interest of the owner and of the mortgagee are regarded as distinct subjects of insurance." (See, also, McDowell v. St. Paul F. M. Ins. Co., 207 N.Y. 482.)
The plaintiffs Savarese had an insurable interest in this building to the extent of $7,500. Independent of *Page 52 the owner they could have taken out a policy of insurance against loss by fire directly payable to them, and separate and distinct from any policies taken or held by the owner. "Whether the subject-matter of insurance be a ship or a building or a life, or whatever else it may be, although in popular language it may be called an insurance upon the ship or building or life, or some other thing, yet it is strictly an agreement with some person interested in the preservation of the subject-matter, to pay him a sum which shall amount to an indemnity, or a certain sum agreed upon as an indemnity, in case his interest in the subject-matter shall suffer diminution of value, from certain specified causes, or in certain specified contingencies." (1 May on Insurance [4th ed.], § 6.)
Thus it has been held that recovery may be had by the mortgagee on his insurance policy although his security under the mortgage is perfectly good and valid. (Kernochan v. New York BoweryFire Ins. Co., 17 N.Y. 428, 435.) The court there said: "The loss against which the plaintiff [mortgagee] is insured, is, by the very language of the contract, `to the property insured;' the destruction in whole or in part of the value of the property by the total or partial burning of the property. In case of such loss it is stated that it is `to be paid within sixty days after due notice and proof thereof by the insured,' in conformity to the policy. Whether the loss, by diminishing the mortgage security, endangers the collection of the debt, or the security remains ample, is not by the contract made of any importance; in either case it is insured against and the amount of it is to be paid."
A mortgagee, therefore, who has insured his interest at his own expense, with no agreement or understanding with the mortgagor, is not required to exhaust his remedy upon the mortgage before enforcing his policy; and he can maintain an action thereon, although the property undestroyed is equal in value to the amount of the *Page 53 mortgage debt. (Excelsior Fire Ins. Co. v. Royal Ins. Co.,55 N.Y. 343.)
From these authorities we must conclude that whether the mortgagee takes out his own insurance, or whether he is insured by the mortgagor, under the usual mortgagee clause in the insurance policy, his right to recover in case of a fire is not dependent upon the sufficiency or insufficiency of the mortgage security after the fire.
May on Insurance (4th ed.), volume 2, section 424, says: "That after the loss the mortgagor replaces the property in as good condition as it was before, or the mortgagee, by selling other securities which he holds, reduces his debt, however it may affect the equities between him and the mortgagor, does not affect the terms of the contract between the mortgagee and the insurers. The contingency having arrived upon which the loss was payable, it must be paid according to the status of the interest at the time when the contingency happened; nor can the insurers require the mortgagee first to exhaust his remedy against the mortgagor before calling upon them for indemnity."
When we further analyze the terms of the policy and the situation of the mortgagee, reason also points to the conclusion that when a fire occurs the insurance company must pay the loss to the mortgagee in accordance with its contract with him. The mortgagor benefits by such payment as the insurance money reduces the amount of the mortgage debt. (Waring v. Loder, 53 N.Y. 581. ) The value taken out of the property by the fire is taken off the mortgage by the payment of the insurance money, and the parties remain in the same relative position after as before the fire.
The policy gives to the insurance company certain options which are as binding upon the mortgagee as upon the mortgagor. One of them relates to repairs and reads as follows: "It shall be optional with this Company to take all, or any part, of the articles at the *Page 54 agreed or appraised value, and also to repair, rebuild, or replace the property lost or damaged with other of like kind and quality within a reasonable time, on giving notice of its intention so to do within thirty days after the receipt of the proof of loss herein required; but there can be no abandonment to this Company of any property.
"The amount of loss or damage for which this Company may be liable shall be payable sixty days after proof of loss, as herein provided, is received by this Company and ascertainment of the loss or damage is made either by agreement between the insured and this Company expressed in writing or by the filing with this Company of an award as herein provided."
The company did not exercise this option and made no election to repair. The loss, as ascertained, $4,230, was, therefore, payable, according to the terms of the policy, to the mortgagee, sixty days after proof of loss and ascertainment of damage. This is the contract which the company has made and for which it has received a premium. The act of the owner in making repairs was not for and in behalf of the company or as its agent. He contracted for and undertook the work without the consent of the company and without the knowledge or consent of the mortgagee. The time of the fire and of the loss established the rights of the parties, and in the absence of an election by the company to repair, the amount of the loss payable to the mortgagee became fixed as of that time. No act or neglect of the owner could invalidate or impair the mortgagees' rights under their separate policy of insurance as thus vested at the time the loss occurred.
If it be that the mortgagor can wipe out the benefits to the mortgagee under a policy by repairing the premises without the knowledge or against the consent of the mortgagee, how long can the owner take in deciding to make repairs? The policy places a time limit upon all the steps to be pursued after the fire, and even states that *Page 55 the repairs, if the company makes them, must be undertaken within a reasonable time. Under the ruling below no such limit is placed upon the owner, for if he restores the property to its previous condition any time before action brought or tried, the mortgagee has sustained no loss. In the meantime the property may remain in its destroyed condition, with loss of income to the owner with which he might pay taxes and interest on prior incumbrances. Must the mortgagee litigate the extent and sufficiency of the repairs, or, if partially repaired, is his insurance to be reduced in proportion? We do not think that the insurance contract can thus be modified by the act of a third party to the material disadvantage of the mortgagee. Section 254 of the Real Property Law (Cons. Laws, ch. 50), subdivision 4, says that the mortgagee at his option may apply the insurance toward the payment of the mortgage or (at his election) "the same may be paid over either wholly or in part to the mortgagor * * * for the repair of said buildings. * * * And if the mortgagee receive and retain insurance money for damage by fire to said premises, the lien of the mortgage shall be affected only by a reduction of the amount of said lien by the amount of such insurance money received and retained by said mortgagee." This choice given to the mortgagee to apply the insurance money either to his mortgage or to the repairs excludes a like choice in the owner-mortgagor without the mortgagee's consent. Such a right is single by nature; it cannot exist in both the mortgagor and the mortgagee, otherwise the former might decide for repairs and the other for payment, and nothing would result. No; the choice is with the mortgagee alone and in this case he asks for payment of the insurance money and does not consent that it be applied to repairs.
"The general policy of the courts in passing upon questions of insurance law has been not to allow the doctrine of indemnity to obtrude itself inconveniently, *Page 56 provided the contract of insurance is free from suspicion of being a wager at the time of its inception." (Richards on Insurance [2d ed.], p. 176.)
The authorities have not been very clear or decisive upon this point, as the question apparently has seldom arisen. The earliest case cited, and frequently quoted, is Matter of Moore, Court of Common Pleas of New York City, decided in 1876 (6 Daly, 541). It was there said: "The bank [mortgagee] could not recover from the defendants, because the building has been restored by the mortgagee [meaning mortgagor], for the agreement is one of indemnity, and the bank has sustained no loss or damage." This sentence has been taken into digest and textbook without any consideration of its application. The mortgagee bank had relinquished all interest in the policy and had taken out other insurance to protect its security. The point involved was the right, therefore, of the bank, mortgagee, to consent to a cancellation of the first policy which it had relinquished. It appears from the statement of facts that the bank, mortgagee, made no claim upon the policy in suit, declaring in a written instrument that the security of its lien was fully protected by the repairs made on the property, and consenting that the amount be paid to the owner. Surely this case should not be taken as an authority for the proposition that the mortgagee cannot recover when repairs have been made to the property. No such question was presented.
Friemansdorf v. Watertown Ins. Co. (1 Fed. Rep. 68), decided by the Circuit Court in 1879, is based upon rulings as to the rights of mortgagees not now recognized by New York State.Binder v. Northern Assurance Co., Ltd., Appellate Term, First Department (140 Misc. Rep. 807), while citing Matter of Moore, fails to apply it, saying that the property was not fully repaired. On the other hand, we have Foster v. EquitableMutual Fire Ins. Co. (68 Mass. 216) for the view we have here taken. *Page 57 The court decided: "The fact, that the injury caused by fire to the property insured had been repaired by the owner of the right of redemption, before the commencement of this action, is wholly immaterial. The plaintiffs had an insurable interest in the property; the defendants agreed to insure it against a loss by fire; and a loss has occurred. The contingency contemplated by the contract has therefore arisen, and the defendants are bound to pay the amount of the damage. It is wholly immaterial to them, and constitutes no valid defence to this suit, that the property has been since repaired."
The defendant, therefore, being liable to the mortgagee on the policy, how much is it obliged to pay? The plaintiffs claim the full amount of the fire damage, $4,230, but the policy does not obligate the insurance company to pay the full amount of the loss. The contract by the New York standard average clause provides: "This Company shall not be liable for a greater proportion of any loss or damage to the property described herein than the sum hereby insured bears to eighty per cent (80%) of the actual cash value of said property at the time such loss shall happen." This is the agreement — no more, no less. Had the building been free and clear, the owner could recover no larger amount, and the terms are not changed because the loss is made first payable to a mortgagee. The co-insurance clause (so called) is not a warranty or a condition, but a statement of the amount to be paid in case of fire either to the owner or the mortgagee. The existence of the mortgage does not extend the liability. (Hartwig v. American Ins. Co., 169 App. Div. 60;Pennsylvania Co. for Insurance v. Aachen Munich Fire Ins.Co., 257 Fed. Rep. 189.)
The last phrase of the standard average clause, reading, "nor for more than the proportion which this policy bears to the total insurance thereon," has been held by this court not to be binding upon mortgagees for the reason that the total amount of insurance on a building *Page 58 depends upon the will and act of the owner, and that by the very terms of the standard mortgagee clause the insurance payable to the mortgagee "shall not be invalidated by any act or neglect of the mortgagor or owner." (Eddy v. London Assurance Corp.,143 N.Y. 311; Hastings v. Westchester Fire Ins. Co., 73 N.Y. 141. ) See same principle, Heilbrunn v. German Alliance Ins.Co. (140 App. Div. 557); Goldstein v. National Liberty Ins.Co. (256 N.Y. 26). No act or neglect of the owner, however, can vary the percentage between the sum insured for the benefit of the mortgagee and the actual cash value of the property. The mortgagee has a right to insure his own mortgage interest and keep it insured at the expense of the owner. The amount for which he insures or is insured and the actual cash value of the building are beyond impairment or reduction by any act of the mortgagor. The reasoning of the Eddy case and the others cited does not apply.
The value of the property at the time of the loss was $22,500, of which 80 per cent is $18,000. The proportion of $7,500, the sum insured, to $18,000, is as 5 to 12. The loss being $4,230, five-twelfths of this amount is $1,762.50, which the insurance company must pay the plaintiffs.
The judgment should be reversed and judgment directed for the plaintiffs in the sum of $1,762.50, with interest and costs in all courts.