Syracuse Savings Bank v. Yorkshire Insurance

Dye, J.

These two actions, which were tried together although never formally consolidated, are here pursuant to our leave on the question whether, under the New York standard mortgagee clause as incorporated into a standard fire insurance policy, a mortgagee — here the Syracuse Savings Bank, plaintiff-appellant in action No. 1 (hereinafter referred to as the Bank) — may be bound by an appraisal of loss conducted by the owner — here Isadore Blumberg, plaintiff-appellant in action No. 2 — and the insurer — here Yorkshire Insurance Company, Ltd., defendant-respondent in both actions (hereinafter referred to as Yorkshire) — without the mortgagee’s participation in either the selection of the appraiser or the formulation of the award.

The essential facts are undisputed. Blumberg is the owner of a building upon which the Bank holds a $44,000 mortgage executed by Blumberg and his wife, which contained a provision that they would keep the premises insured for the mortgagee’s benefit. Blumberg as owner procured from four different insurance companies — of which the defendant, Yorkshire, was one — New York standard fire policies in the total, amount of $27,000 all of which included a New York standard mortgagee clause. While the policies were in effect a fire in an adjacent building caused extensive smoke and water damage to the Blumberg property. Blumberg and Yorkshire, failing to agree as to the amount of the loss, proceeded in accordance with the terms of the policy to the appointment of appraisers to fix the sound value of the building and the amount of the loss. Blumberg selected the J. D. Taylor Construction Corporation, a domestic corporation, and Yorkshire nominated an individual, F. T. Delaney. The Taylor corporation, acting through its vice-president, R. D. Cragg, and the said Delaney found a sound value of $20,000 and fixed the loss at'$4,366 which amount they awarded to Blumberg. Yorkshire’s prorata share under its policy amounted to the sum of $808.52, which was tendered to the Bank and Blumberg by a check drawn to both their names. The plaintiff Bank rejected the tender and advised Blumberg to refuse also. It is conceded by a stipulation entered into on the trial that the Bank had no notice of, and did not participate in, the appraisal. Furthermore, it is conceded by the Bank that there was present no element of fraud or bad faith nor is there any claim by any party that the policy conditions were not fully complied with by Blumberg and Yorkshire,

The controversy turns on the meaning of the standard mortgagee clause as used in the policy when read in connection with the appraisal provisions, viz.: “ Loss or damage, if any, under this policy, shall be payable to Syracuse Savings Bank, as first mortgagee (or trustee), as interest may appear, and this insurance, as to the interest of the mortgagee (or trustee) only therein, shall not be invalidated by any act or neglect of the mortgagor or owner ”. (Emphasis supplied.)

It is well settled in this and most other States that a mortgagee clause in a standard form policy creates an independent insurance of the mortgagee’s interest just as if he had received a separate policy from the company but without any inconsistent or repugnant conditions imposed upon the owner and free from invalidation by the latter’s “ act or neglect ” (Savarese v. Ohio Farmers Ins. Co., 260 N. Y. 45; Goldstein v. National Liberty Ins. Co., 256 N. Y. 26; McDowell v. St. Paul Fire & Marine Ins. Co., 207 N. Y. 482; Heilbrunn v. German Alliance Ins. Co., 140 App. Div. 557, affd. 202 N. Y. 610; Eddy v. London Assur. Corp., 143 N. Y. 311; Hastings v. Westchester Fire Ins. Co., 73 N. Y. 141; Browning v. Home Ins. Co., 71 N. Y. 508).

This principle of the mortgagee’s separate independent interest in the proceeds of the policy has been conclusive of earlier problems arising under this and similar clauses. Thus, failure of the owner to render proof of loss as required by provisions of the policy within the policy time limit, may not prevent a mortgagee’s recovery (McDowell v. St. Paul Fire & Marine Ins. Co., supra), the interest of the mortgagee and owner being regarded as distinct subjects of insurance (Heilbrunn v. German Alliance Ins. Co., supra). The mortgagee, we have held, is a necessary party to any suit to recover for a fire loss brought by the owner against the company (Lewis v. Guardian Fire & Life Assur. Co., 181 N. Y. 392), if a judgment rendered in such an action is to be binding upon the mortgagee (see Steinbach v. Prudential Ins. Co., 172 N. Y. 471; Civ. Prac. Act, § 193). Nor is the mortgagee to be bound in any manner by the owner’s proof of loss or any admission by an owner after a fire concerning either the sound value of the property or the amount of damage in an action by the mortgagee against the insurer for there is no relationship of principal and agent — their interest being separate and distinct (Browning v. Home Ins. Co., supra). We thus come to the further conclusion that no settlement between the owner and the insurer can operate in any way to the detriment of a mortgagee (Hathaway v. Orient Ins. Co., 134 N. Y. 409; McDowell v. St. Paul Fire & Marine Ins. Co., supra). It necessarily follows that a mortgagee in his own right is entitled as a principal to participate in any appraisal proceedings which will actually determine the amount due him by reason of the mortgage.

The Appellate Division found its answer to the present problem in the Massachusetts rule enunciated in Dragon v. Automobile Ins. Co. (265 Mass. 440). Although recognizing the separability of interest under a standard mortgagee clause (see Hardy v. Lancashire Ins. Co., 166 Mass. 210), it was there held that the mortgagee is bound by an appraisal conducted without his participation but otherwise pursuant to the terms of the policy. Authority for this view was found in Erie Brewing Co. v. Ohio Farmers Ins. Co. (81 Ohio St. 1), a case which arose in a jurisdiction which does not accord to a mortgagee any separate insurable interest under the standard mortgagee clause. The holding in the Erie Brewing Go. case has been criticized by many commentators as contrary to the weight of authority (see Richards on Law of Insurance [4th ed.], § 281; 25 L. R. A. [N. S.] 740; 38 A. L. R. 383, 389; 111 A. L. R. 697; 29 Am. Jur., Insurance, § 1253; see Beaver Falls B. & Loan Assn. v. Allemania Fire Ins. Co., 305 Pa. 290). Much of the difficulty with the Erie Brewing Co. case appears to stem from its reliance upon Chandos v. American Fire Ins. Co. (84 Wis. 184) in which neither a standard mortgagee clause nor its predecessor, the “ Union Mortgagee Clause ” was involved. That case was decided upon the construction of a simple “ loss payable ” clause which is generally considered to amount to no more than a designation of an assignee to receive payments, who, as an assignee, stands only in the shoes of his assignor, the owner (19 L. R. A. 321).

The reasoning adopted in Beaver Falls B. & Loan Assn. v. Allemania Fire Ins. Co., (supra) and other jurisdictions and text writers adopting the same view, turns on the recognition of the separate distinct right enjoyed by the mortgagee of which it may not be deprived by any act or neglect of the mortgagor. The clear language of this condition can mean but one thing, namely, that if “any act or neglect ” of the mortgagor operates to the mortgagee’s prejudice he is not bound thereby. An appraisal conducted by the mortgagor and the company without notice to the mortgagee might, and sometimes does, operate to the detriment of the mortgagee and this may be so notwithstanding the fact that the mortgagor usually has an equity in the premises above and beyond the amount of the mortgagee’s lien. This should not be our test — rather we look to see whether the mortgagee may be deprived of the full measure of its protection. The phrase “ any act ” should be construed as sufficiently broad to extend to the appraisal conditions of the policy. To repeat what was said in the Beaver Falls opinion (supra, p. 295): “ The language of the clause must be permitted to operate, and, so operating, no act of the owner can deprive the mortgagee of the protection which the policy afforded.” (Cf. Scottish Union & Nat. Ins. Co. v. Field, 18 Col. App. 68; Collinsville Sav. Soc. v. Boston Ins. Co., 77 Conn. 676; Hartford Fire Ins. Co. v. Olcott, 97 Ill. 439; Syndicate Ins. Co. v. Bohn, 65 F. 165; Reeder v. Twin City Fire Ins. Co., 5 F. Supp. 805; Queens Ins. Co. v. People’s Union Sav. Bank, 50 F. 2d 63; 14 R. C. L., Insurance, § 534, p. 1365; 29 Am. Jur., Insurance, § 1253.) So viewed, the distinct and separate interest which the standard mortgagee clause confers on the holder of a mortgage necessarily means that in the event of loss he is entitled to notice and the opportunity to participate in an appraisal, if he is to be bound thereby. This is not repugnant to or inconsistent with the condition of the policy providing that a mortgagee is entitled to file a proof of loss whenever the owner fails or neglects to file such proof within the policy limits. The policy is designed to cover all possible situations. When a mortgagee clause is used a new party with a separate and distinct interest is added. Under such circumstances it would be illogical to assume that the appraisal conditions were not available, particularly when the express language of the mortgagee clause provides that the mortgagee’s interest “ shall not be invalidated by any act or neglect ”. So interpreted, the mortgagee is a principal and must be treated as such.

Upon principle and precedent then, we hold that a standard mortgagee clause, creating as it does, a separate and independent insurance of the mortgagee’s interest, must operate to free the latter from any act or neglect by the owner, despite .the fact that the latter may he, in his own right, proceeding strictly in accordance with the policy terms and conditions applicable to him when the loss occurs (cf. Savarese v. Ohio Farmers Ins. Co., supra; Eddy v. London Assur. Corp., supra). The owner has no greater power to affect the mortgagee’s security interest by sanctioning an appraisal proceeding without his knowledge and participation than he has by entering into a settlement with the ,usurer or by procuring a judgment in an action to which the mortgagee was not a party.

We turn to a second point presented by this appeal. The validity of the appraisal made herein is now challenged by Blumberg as invalid on the ground that a corporation was incompetent to act as an appraiser. This is predicated on the circumstance that the Taylor corporation’s charter while, in general terms, authorizing it to engage in the building and construction business, does not specifically authorize it to act as an appraiser. Appraisal of real property is not, however, an unreasonable incident to such a business and may well lie among the necessary implied powers of the corporation. The doctrine of ultra vires has been developed for the benefit and protection of stockholders and directors or contracting parties and not for disinterested third parties (7 Fletcher on Corporations, §§ 3419, 3448). Only the State may collaterally take cognizance of corporate malfeasance (§ 3457), (People v. North Riv. Sugar Refining Co., 121 N. Y. 582).

It is also pointed out by the appellants that a written oath attached to the appraisal report was signed in the corporate name. This, however, has little force and effect, depending, as it does, entirely on the theory that the appraisal must be governed by the statutory provisions of the act relating to arbitration proceedings despite the clearly permissive rather than mandatory effect of prior procedure (Civ. Prac. Act, art. 84). We see nothing in section 1448 of the Civil Practice Act as amended in 1941, requiring the appraisal authorized by section 168 of the Insurance Law to be treated as an arbitration proceeding. The case of Davis v. Rochester Can Co. (220 App. Div. 487, affd. 247 N. Y. 521) relied upon in the first appeal below (268 App. Div. 818) questioned the capacity of the Interstate Commcrce Commission'to act as an arbitrator. The ruling that it could not so act turned solely on a construction of that agency’s statutory powers and is, therefore, unavailing here. There is nothing in the policy provision relating to appraisal which gives an appraiser the status of an arbitrator or requires him to sign an oath. It is well established that the determination of a fire loss is not an arbitration proceeding (Matter of Fletcher [Nicholas], 237 N. Y. 440; Townsend v. Greenwich Ins. Co., 86 App. Div. 323, affd. 178 N. Y. 634; Strome v. London Assur. Corp., 20 App. Div. 571, affd. 162 N. Y. 627; Matter of American Ins. Co. [Wasserman], 208 App. Div. 168; Williams v. Hamilton Fire Ins. Co., 118 Misc. 799; 6 Appleman on Insurance Law and Practice, § 3922, p. 321) and that an appraiser’s oath is unnecessary (Wurster v. Armfield, 175 N. Y. 256, 264; Matter of American Ins. Co. [Wasserman], supra; Williams v. Hamilton Fire Ins. Co., supra; Turner v. New York Central & H. R. R. R. Co., 74 Misc. 524).

In any event, the Taylor corporation was named by the mortgagor who now seeks to avoid the consequences of his own act. As far as Blumberg is concerned, he is estopped from making any complaint. So far as the bank is concerned, the question is academic in view of our ruling that it is not bound by the appraisal.

The judgments in Syracuse Savings Bank v. Yorkshire Insurance Company, Ltd., should be reversed and a new trial granted, with costs to abide the event; the judgment in Blumberg v. Yorkshire Insurance Company, Ltd., should be affirmed, with costs.