The defendant insurance company has issued a policy insuring the owner of a building against direct loss and damage by fire. The policy contains the usual mortgagee clause providing that "Loss or damage, if any, under this policy, shall be payable to Pasquale Savarese and Giacomo Savarese as mortgagee, as interest may appear, and this insurance, as to the interest of the mortgagee only therein, shall not *Page 59 be invalidated by any act or neglect of the mortgagor or owner of the within described property, * * *."
We have repeatedly pointed out that by virtue of such a mortgagee clause the insurance company assumes an independent obligation to pay to the "mortgagee, as interest may appear" theloss insured against. The mortgagee is not merely an assignee of an obligation owed to the assignor. (Goldstein v. NationalLiberty Ins. Co., 256 N.Y. 26.) None the less, the only loss which the insurance company has agreed to pay to the mortgagee is loss and damage "under this policy;" i.e., loss or damage by fire to the insured property. The independent obligation to the mortgagor is to pay that loss and no other, and that obligation, too, is subject to all the terms and conditions of the policy of insurance except in so far as such terms and conditions are rendered inoperative by the provisions of the mortgagee clause that the insurance shall not be invalidated by any act or neglect of the mortgagor or owner of the property.
The building, covered by the policy, together with the land on which it stands, constituted security for the payment of the plaintiffs' mortgage. Thus, as Judge CRANE points out, the mortgagees had an insurable interest in the building, and the insurance company might agree either directly with them or, as in this case, with the owner in their behalf, that loss or damage to the property should be payable to the mortgagor or mortgagees, as interest may appear. A fire occurred and caused damage to the mortgaged premises. The plaintiffs' security was thereby diminished. Undoubtedly at that time the plaintiffs might have insisted upon the payment to them of the amount by which the value of the property, which was subject to the lien of their mortgage, was diminished, or upon the restoration of the damage done to the property. (See Real Property Law, § 254.) That is true alike where the property, after damage, still furnished ample security for the payment of the mortgage *Page 60 debt, and where the loss endangered the security. The mortgage when given was a lien on the property in undamaged condition. The policy, including the mortgagee clause, was intended as assurance against loss or damage to the property and thus to furnish collateral security for the payment of the debt. (Kernochan v.New York Bowery Fire Ins. Co., 17 N.Y. 428.) It was intended to protect the mortgagees' interest in the property, as well as the mortgagor's, and loss was payable, in accordance to its terms, to the mortgagees as their interest might appear. The problem remains whether after repairs were made and all direct damage to the plaintiffs' interest as mortgagees in the property fully made good, the loss was payable to the owner who had made good the damage to the plaintiffs' interest or to the plaintiffs. The answer to that question depends solely upon the construction of the policy.
In arriving at the proper construction, the policy should be read as a whole, in the light of the purpose for which it was given. The policy contains provisions that it shall be optional with the insurance company to repair or rebuild the property damaged or destroyed "on giving notice of its intention so to do within thirty days after the receipt of the proof of loss." The insurance company did not exercise that option. If it had done so, then its obligations under the contract would have been met. It would not have been under any further obligation to pay any "loss or damage" to any person, either owner or mortgagee. That is the agreement which the insurance company made, and it is quite immaterial whether such agreement was made with the mortgagees or with the owner for his benefit. In either event, the stipulation would be binding. Though here the insurance company did not exercise that option, yet this clause in the agreement furnishes some indication that the purpose of the policy and the provision therein contained making the loss payable to the mortgagees as interest appears, was *Page 61 to protect the mortgagees' interest in the property by payment to them of the damage to the property only if such damage was not repaired.
It is said that no such option is given by the terms of the policy to the mortgagor, and that none should be read into the policy by implication. That is true, but may not affect the question under consideration. If the insurance company failed to avail itself of the option to rebuild and repair, the owner's right to do so remained, and was unimpaired by any terms of mortgage or policy. If the owner restored the property to its original condition, he would in that way protect the mortgagees' interest against all direct loss or damage by fire, for which the policy furnished insurance to both mortgagor and mortgagees "as interest may appear." If, under the terms of the policy, the amount of such loss or damage had been payable immediately upon the occurrence, if at that time the plaintiffs' cause of action was complete, then there could be no doubt that such cause of action could not be defeated in whole or in part by any act of the owner or other stranger to the cause of action. (Foster v.Equitable Mut. Fire Ins. Co., 68 Mass. 216.) No cause of action, however, arose at the time when the damage was caused. First there must be proof of loss, then the insurer had thirty days in which to determine whether it would exercise its option to repair. There must be compliance with all the conditions precedent to a right to demand payment before the insurance company could, even, be called upon to determine whether the plaintiffs had then such interest as mortgagees to entitle them to payment. In this case, even before the time had expired during which the company might exercise its option to repair, the loss or damage was fully repaired. The owner would be in a different position if he had delayed completion of the repairs beyond the time when a cause of action in favor of the mortgagees against the insurer was complete. The court must now decide whether at the *Page 62 time the insurer was called upon to determine to whom payment under the policy should be made, an interest in the mortgagees appeared which entitled them to such payment.
We have said in an early case: "The undertaking is that the property shall not suffer loss by fire; that is, in effect, that its capacity to pay the mortgage debt shall not be diminished. When an appreciable loss has occurred to the property from fire, its capacity to pay the mortgage debt has been affected; it is not so well able to pay the debt which is upon it. The mortgage interest, the insurable interest, is lessened in value, and the mortgagee, the insuree, is affected and may call upon the insurer to make him as good again as he was when he effected his insurance." (Excelsior Fire Ins. Co. v. Royal Ins. Co.,55 N.Y. 343, 359.) When the plaintiffs in this case called upon the insurer to make them as good as when the insurance was effected, the insurer answered that by the act of the mortgagor the plaintiffs were, already, made as good as when the insurance was effected and that consequently indemnity was due to the mortgagor and not to the mortgagees.
Policies of fire insurance have always been construed as intended to provide only indemnity for loss to an insurable interest. True, the loss insured against and the insurable interest are not always exactly co-extensive. That may be the case where the insurable interest is other than full ownership in the insured property. Nevertheless, where the language permits, policies of fire insurance have always been so construed as to exclude, so far as possible, any benefit to the insured beyond indemnity for loss. Indeed, to the extent that a policy admits of accidental profit by the insured from a fire, it ceases to be a contract of insurance and becomes a wagering contract.
Insurance of the interest of a mortgagee against loss by fire may be obtained in three forms: First, by a policy which is intended solely as insurance for the interest of *Page 63 the mortgagee and where benefit is payable to the mortgagee and no other person. Second, by assignment to the mortgagee of a policy insuring the owner. Third, by a policy which, as in this case, is intended as insurance to both mortgagor and mortgagee and provides that the loss shall be payable to the mortgagee as interest may appear. The rights of the mortgagor are often dependent upon the form in which insurance is provided, and in considering the decisions, such distinctions must be kept in mind, but it is significant that in no case in this State has the insured been permitted under any form of contract of insurance to transmute a loss by fire into a profit. Where only the mortgagee's interest is insured, and loss or damage payable to the mortgagee and no other person, the mortgagor is a stranger to the insurance contract and entitled to no benefit thereunder. In such case payment to the mortgagee does not reduce the mortgage debt, but in this jurisdiction the insurer upon payment of loss becomes subrogated to an equivalent part of the mortgage debt. (Foster v. Van Reed, 70 N.Y. 19; but cf. King v. StateMut. Fire Ins. Co., 61 Mass. 1.) Where the policy insured the interest both of mortgagor and mortgagee, but loss or damage is payable to the mortgagee as interest appears, payment to the mortgagee does reduce the mortgage debt (Waring v. Loder,53 N.Y. 581), and thus indirectly, it is said, indemnify the mortgagor as well as mortgagee.
Where at the time the insurance moneys become payable, the mortgagee to whom the loss is payable still has an interest in the mortgaged property, and the damage to his interest has not been made good, payment of the loss to the mortgagee is in accordance with both the letter and the purpose of the insurance policy. It cannot be said that in such case the mortgagee has derived a profit from payment of the insurance moneys, for in no event could the mortgagee obtain more than the amount of the debt; nor can it be said that the policy *Page 64 did not provide indemnity as intended for all interests insured when the mortgagor obtains the benefit of the payment to the mortgagor by reduction in the mortgage debt. In effect, the mortgagor in procuring a policy in that form has provided that insurance upon the mortgaged property shall be applied upon the mortgage debt whenever the mortgagee's security has been diminished by fire. It would, nevertheless, be unreasonable to hold that the language should be so construed that the mortgagor may not at his own expense repair the damage before loss is payable under the policy, and obtain indemnity under the policy, since at that time damage to the property has been restored, and the interest of the mortgagee has been made whole. Such construction would at times, as in this case, produce results contrary to the expressed purpose of the policy to have the insurance moneys paid as interest may appear.
The provision usually made in mortgages that the mortgagor shall keep the mortgaged premises insured is of particular importance whenever there is doubt whether the land without improvements would form adequate security for the mortgage. Here there was a mortgage prior in lien to the plaintiffs' mortgage upon the same property. The prior mortgage was foreclosed after the repairs were completed. There was a deficiency upon the sale held under the judgment of foreclosure, in spite of the fact that the property was then in the same condition as before the fire. If the prior mortgage contained the usual insurance clause, then under the construction urged by the plaintiffs the mortgagee was entitled to receive payment from some insurance company of the amount by which the mortgaged property was damaged by fire, and thus it would have profited to that extent by the fire. Similarly the plaintiffs would profit by the fire if in spite of the repairs, and the fact that thereafter their insurable interest in the property had been terminated by foreclosure of the prior mortgage the plaintiffs *Page 65 are entitled to payment of the loss insured against, and only the owner, who has repaired the loss at his own expense, would receive no indemnity under the policies. Thus, double payment could be required of the insurance companies for a single loss, and that payment would be made to holders of interests which at the time of payment had been made good by the holder of another interest who obtains no indemnity for the loss.
Here the result is due, perhaps, to unexpected and unusual diminution in the value of the mortgaged property caused by economic conditions. Even under other circumstances, the result of the construction urged by the appellants would still present grave practical difficulties which might defeat the clear intent of the parties that the policies should constitute protection of all interests in the property and provide indemnity for any interest injured. By the destruction or damage to the property, the owner of the equity is deprived of anticipated returns from the property until it is rebuilt or restored. If the owner uses the moneys payable under the insurance policies for the restoration of the property, then all parties are protected and obtain indemnity for the direct loss or damage caused by the fire. If he cannot apply the insurance moneys to that purpose he may be unable to rebuild, and then reduction of the mortgage debt by payment to the mortgagees of the amount of the damages caused by fire would not fully indemnify him. A careful business man would, therefore, be compelled to insure his own interest in the property independently and in addition furnish insurance to each mortgagee. Thus the mortgagor, to obtain complete protection for himself and for others interested, would be burdened with the expense of carrying multiple insurance, and if loss occurs the insurance companies would be compelled to pay multiple indemnity. Thus in effect each policy of insurance would have some of the characteristics of a wager through which profit would be made by some *Page 66 party through the occurrence of a fire. The language of the policy should not be so construed.
It has not been so construed in any court of this State or in other jurisdictions, though that question has never been directly presented in this court. Always, insurance policies have been construed to provide indemnity and nothing else, and where the interest of a mortgagee has been made whole by repair of damage before the insurance company is called upon to pay the loss under a contract of insurance covering the owner but payable to the mortgagee as interest appears, the mortgagee has no interest in such payment. See Matter of Moore (6 Daly, 541), where decision was based upon such construction even if it were true that the same decision might have been rendered on some other ground. (Friemansdorf v. Watertown Ins. Co., 1 Fed. Rep. 68; Huey Philp v. Ewell, 22 Tex. Civ. App. 638; Mathewson v. WesternAssur. Co., 10 Low. Canada, 8.)
Even the one case relied upon by the appellants to sustain their contentions (Foster v. Equitable Mut. Fire Ins. Co.,68 Mass. 216) holds nothing to the contrary. In that case the mortgagees insured their own interest against loss by fire. Under the terms of the policy the loss was payable only to them and not to the owners or to the mortgagees as interest appears. When the contingency contemplated by the contract had arisen, the insurance company was bound to pay the amount of the damage, and since it had agreed to pay that amount to the mortgagees, the insurance company could, of course, not escape performance of its own obligation by any claim that the damage to the mortgaged property had been repaired by a stranger to the insurance policy. There is nothing in the opinion which even suggests that the decision would not have been different if there had been question under the terms of the policy as to which of two parties protected by the same obligation was entitled to payment of the loss. (Cf. Gordon v. Ware Sav. Bank, 115 Mass. 588.) *Page 67
If these conclusions are correct, then, of course, the New York standard average clause, like all other clauses in the insurance policy, is applicable. In my opinion it would be applicable, even if the loss was payable to the mortgagees, at least to the extent that the insurer's liability does not include "a greater proportion of any loss or damage to the property described herein than the sum hereby insured bears to eighty per cent of the actual cash value of said property at the time such loss shall happen."
For these reasons the judgment of the Appellate Division should be affirmed.