Often protection against fire hazards is as essential to a mortgagee's security as the bond and mortgage which the mortgagee holds. That protection is secured in different ways as stated in the opinions of my associates. A common way is by the attachment of a New York standard mortgagee clause to a policy as was done in this case. The effect of attaching a standard mortgagee clause to a policy is to make an independent contract between the insurance company and the mortgagee. In fact, there are two contracts embodied in the policy, one between the company and the mortgagor owner and the other between the company and mortgagee. (Hastings v. Westchester Fire Ins. Co., 73 N.Y. 141; Eddy v. London Assur. Corp., 143 N.Y. 311; Hardy v. LancashireIns. Co., 166 Mass. 210; Goldstein v. National Liberty Ins.Co., 256 N.Y. 26.) Neither the owner nor the mortgagee, by act or failure to act, can nullify or decrease the amount of protection offered to the other except as provided by the terms of the policy and the mortgagee clause. Notice of cancellation given by the company to the owner which is sufficient to cancel the policy as to the owner, will not affect the interest of the mortgagee or abrogate or reduce the liability of the company to the mortgagee in case of loss or damage.
The converse is true. Notice of cancellation given to *Page 68 the mortgagee will not have the effect of canceling the policy as against the owner mortgagor.
The owner cannot enter into an agreement of settlement with the company after a loss and bind the mortgagee by such agreement.
Under a New York standard mortgagee clause, alienation of the property by the mortgagor will not void the policy as to a mortgagee.
In fact, none of the forfeiture conditions contained in a policy, the violation of which voids the policy as to the owner mortgagor, has that effect as against a mortgagee under a New York standard mortgagee clause, except those which are restated in the mortgagee clause. The mortgagee clause provides: "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."
The eighty per cent co-insurance clause attached to the policy provides that the company shall not be liable for a greater proportion of any loss or damage than the sum insured bears to eighty per cent of the cash value of the property at the time such loss shall happen.
It is true that the clause limits the liability of the company in case of damage from the inception of the policy and remains in force so long as the obligation remains in existence, only, however, I think as against the owner mortgagor.
If there is conflict between the provisions of the mortgagee clause quoted and the provisions of the eighty per cent co-insurance clause, that conflict must be resolved in favor of the mortgagee under well-settled principles.
True it is that the exact question here involved has not been passed upon by this court. It has, however, I think charted the course which we should follow in deciding the question. (Hastings v. Westchester Fire Ins. Co., supra; Eddy v.London Assur. Corp., supra.)
It should be borne in mind that the amount of insurance *Page 69 required to be carried under the eighty per cent co-insurance clause is a variable amount and that the obligation to carry a sufficient amount rests upon the owner, not upon the mortgagee.
The clause provides that the standard for determining the basis for the operation of the eighty per cent clause shall be "the actual cash value of said property at the time such loss shall happen." At the time when the insurance is written, it may represent eighty per cent of the actual cash value, but at the time of a loss it may fall far short of such percentage of cash value for various reasons. Alterations and repairs may have been made by the owner without the knowledge of the mortgagee; and many other illustrations will be readily thought of which may radically increase the value of the property. Such increased value under respondents' contention would impair the mortgagee's security without his knowledge or consent. How can it be successfully contended, therefore, that the actual cash value of the property is beyond impairment by the act of the mortgagor, or that no act or neglect of the owner can vary the percentage between the sum insured for the benefit of the mortgagee and the actual cash value of the property?
Assume that a person owning a building of the value of $10,000, places a mortgage thereon for $4,000 and takes out two policies of insurance, each for $4,000. One policy for $4,000 is delivered to the mortgagee and the other retained by the mortgagor. Each policy contains an eighty per cent co-insurance clause and a New York standard mortgagee clause and are concurrent in form. The two policies amounting to $8,000 constitute eighty per cent of the value of the property insured and fully comply with the eighty per cent co-insurance clause. For some reason the mortgagor permits the $4,000 policy in his possession to lapse. Thereafter the property is damaged by fire to the extent of $4,000. Under the contention of the defendant, the mortgagee, without his knowledge or consent has become a co-insurer for fifty *Page 70 per cent of the damage or his security has been reduced fifty per cent by the failure of the mortgagor to keep in force insurance for $8,000. "Any act or neglect of the mortgagor or owner," within the meaning of the mortgagee clause under the contention of the defendant, has invalidated the mortgagee's security to the extent of fifty per cent. The clause provides, however, that "any act or neglect of the mortgagor or owner" shall not invalidate the policy as against the mortgagee.
It is difficult for me to understand how the act of the owner in procuring additional insurance cannot affect the rights of the mortgagee under a New York standard mortgagee clause where the policy contains an apportionment clause as was decided in Eddy v. London Assur. Corp. (supra), and still that the act of the owner in failing to maintain insurance for eighty per cent of the value of the property insured can injuriously affect the rights of the mortgagee. It seems to me that the decisions in cases involving the apportionment or pro rata clause in principle determines the question involved in this case.
If the contract with the mortgagee is a separate contract with the insurance company, as it is conceded to be, how can a third party, the owner, nullify or diminish the rights of the mortgagee under such contract except as therein provided. A mortgagee has an insurable interest, the mortgagee clause constitutes a separate contract between the mortgagee and the insurance company, whereby the company agrees to insure that interest. When a loss occurs, the contract requires the company to pay the loss to the other party to the contract, the mortgagee, and the right of the mortgagee to recover the loss cannot be impaired by the owner's failure to carry out an agreement made with the insurance company.
The object and intent of the insurance company, the owner and the mortgagee seems clear. It was by issuing and delivering the policy to the mortgagee intended to secure the mortgagee against loss or damage in case of a fire. That intent should be given effect. *Page 71
Such conclusion is strengthened by considering the provision of the policy which gives the company the right to subrogation in the event that it is compelled to pay to the mortgagee more than the owner could recover in his own right. The effect of that provision was clearly stated in the case of Hastings v.Westchester Fire Ins. Co. (supra); Richards on Insurance (3d ed.), section 291.
The case of Hartwig v. American Ins. Co. (169 App. Div. 60,63) is relied upon by respondents. That case proceeds upon the principle that "Before a mortgagee has any right of recovery under such clause, he must establish the amount the insurer is liable for under its contract with the owner, and his recovery cannot in any event exceed that amount."
The law is well settled to the contrary. Under the New York standard mortgagee clause, a mortgagee may often recover, when there can be no recovery by the owner. The owner by his conduct, may afford an insurance company a complete or partial defense as against himself without affecting the right of the mortgagee to recover. That case should be disapproved and overruled.
When several mortgagees hold separate policies covering the same mortgaged property payment to the mortgagees would not pay the mortgage debt as the insurance companies would be subrogated to the rights of the several mortgages, for any amounts paid over and above the amount which the owner could have recovered if there had been no mortgages. (Richards on Insurance [3d ed.], section 291.)
The judgment should be reversed and judgment granted the plaintiffs for the sum of $4,230, with interest and costs in the Appellate Division and in this court.
POUND, Ch. J., KELLOGG and CROUCH, JJ., concur with CRANE, J.; LEHMAN, J., dissents in opinion in which O'BRIEN J., concurs; HUBBS, J., dissents in opinion and votes for reversal and judgment in favor of plaintiffs for the full amount of the loss.
Judgment accordingly. *Page 72