F. F. SHORES and Wife, Mary Lee Shores,
v.
James L. RABON and Nationwide Mutual Fire Insurance Company.
No. 458.
Supreme Court of North Carolina.
January 29, 1960.*558 O. L. Richardson, Monroe, and William G. Pittman, Rockingham, for plaintiffs.
Smith & Griffin, Monroe, for defendants.
MOORE, Justice.
Insurer insists the court below committed error in overruling its demurrer ore tenus and rendering judgment for plaintiffs. It contends: (1) Feme defendant was not named in the policy and was not insured thereunder. (2) Male defendant's status as mortgagee was extinguished by *559 the foreclosure sale, and the execution and delivery of the foreclosure deed and the change of ownership thereunder. (3) Male defendant violated a condition of the insurance contract by failing to give notice of the change of ownership.
Mary Lee Shores, feme plaintiff, was not a named insured in the mortgage clause. She contends that her interest is protected and she is insured according to the terms of the mortgage clause by virtue of G.S. § 58-180.1 which provides as follows: "Any policy of fire insurance issued to husband or wife, on buildings and household furniture owned by the husband and wife, either by entirety, in common, or jointly, either name of one of the parties in interest named as the insured or beneficiary therein, shall be sufficient and the policy shall not be void for failure to disclose the interest of the other, unless it appears that in the procuring of the issuance of such policy, fraudulent means or methods were used by the insured or owner thereof."
This statute relates to "any policy of fire insurance issued to husband or wife, on buildings and household furniture owned by the husband and wife, either by entirety, in common, or jointly * * *" (Emphasis ours). The owner is "The person in whom is vested the ownership, dominion, or title of property; proprietor." Black's Law Dictionary. Plaintiffs owned an estate by the entirety in the land, but conveyed the land to Reece and wife and took from them a note secured by a deed of trust. The note and the security therefor are considered personal property, a chose in action, and the husband and wife are tenants in common with respect to the ownership thereof. Turlington v. Lucas, 186 N.C. 283, 119 S.E. 366. See also Bowling v. Bowling, 243 N.C. 515, 91 S.E.2d 176; Wilson v. Ervin, 227 N.C. 396, 42 S.E.2d 468; Dozier v. Leary, 196 N.C. 12, 144 S.E. 368. We must conclude that plaintiffs were not owners of buildings within the purview of the statute and G.S. § 58-180.1 does not apply in this case. There is nothing to indicate that insurer had notice of or was requested to insure the interest of the feme plaintiff. There is nothing in the policy or mortgage clause to indicate an intention to insure her interest or from which such intention may be inferred. Her one-half interest is her sole and separate property and her husband has no ownership, dominion or control with respect thereto and is not her agent in the management thereof in the absence of positive evidence to the contrary. G.S. § 52-1. We conclude that the interest of Mary Lee Shores was not insured under the mortgage clause.
The male plaintiff as beneficiary in the deed of trust had an insurable interest. "Any interest is insurable, if the peril against which insurance is made would bring loss upon the insured, by its immediate and direct effect, a pecuniary loss." Federal Land Bank of Columbia v. Atlas Assurance Co., 188 N.C. 747, 751, 125 S.E. 631, 633. Ordinarily the trustee in a deed of trust is named insured in a mortgage clause, for this protects all beneficiaries. And, too, the trustee holds the legal title. Riddick v. Davis, 220 N.C. 120, 16 S.E.2d 662. But where a holder of a note secured by a deed of trust is named insured, he has an insurable interest that will be recognized by the court under the terms of the standard mortgage clause.
Even so, insurer contends that the relationship of mortgagor-mortgagee between the owners and F. F. Shores was extinguished by the foreclosure sale and that the change of ownership and failure to give notice thereof terminated the insurance contract as to the male plaintiff.
"It is the accepted position in North Carolina and most other states that when the standard or union mortgage clause is attached to or inserted in a policy insuring property against loss, it operates as a distinct and independent contract between the insurance company and the mortgagee, effecting a separate insurance of the mortgage interest." Green v. Fidelity-Phenix Fire Insurance Co., 233 N.C. 321, 325-326, *560 64 S.E.2d 162, 165, and authorities cited. This principle has been so steadfastly adhered to by this Court and for such long duration that it must be assumed that insurance companies contract and fix rates in full contemplation of the risk imposed thereby.
It was alleged by plaintiffs and admitted by insurer that Mrs. Shores purchased at the foreclosure sale "for herself and as agent for her husband." The deed was made to Mrs. Shores. The mortgage clause plainly provides that "Loss * * * shall not be invalidated by * * * any foreclosure or other proceedings or notice of sale relating to the property * * *." Surely the possibility exists in every instance where a standard mortgage clause is attached to a policy that there will be a foreclosure. The contract requires on the part of the mortgagee no notice of a foreclosure. We assume that the risk of foreclosure entered into the calculations of the insurer in issuing the contract. The fact that there was a foreclosure in the instant case did not extinguish mortgagee's insurance. The mortgage clause further provides "that the mortgagee * * * shall notify this Company of any change of ownership * * * which shall come to the knowledge of said mortgagee * * * and, unless permitted by this policy, it shall be noted thereon, * * *; otherwise this policy shall be null and void." Having admitted that Mrs. Shores purchased "for herself and as agent for her husband," insurer is in no position to deny that the male plaintiff acquired under the foreclosure proceedings an estate in the land. It is unnecessary to decide whether a tenancy by the entirety or a tenancy in common was thereby created as between the plaintiffs. A husband has an insurable interest in an estate by the entirety which runs to the whole of the property and covers the entire estate. Carter v. Continental Insurance Co., 242 N.C. 578, 89 S.E.2d 122. Likewise a tenant in common has an insurable interest in property. Clapp v. Farmers' Mut. Fire Insurance Ass'n, 126 N.C. 388, 35 S.E. 617. If male plaintiff acquired only a one-half undivided interest as tenant in common, this corresponds to his interest as mortgagee in the note and deed of trust.
"Under a policy containing a union or standard mortgage clause, the mortgagee's interest is regarded as separately and independently insured, and his acquisition of title to the insured property is generally regarded as an increase of interest, rather than a change of ownership." 29 Am.Jur., Insurance, sec. 651, p. 515. By the overwhelming weight of authority a "deed to the mortgagee upon foreclosure of the mortgage does not defeat the right of the mortgagee under a standard or union mortgage clause, despite the argument that the word `mortgagee' in that clause discloses an intention to benefit one in that capacity only, and the contention based on the provisions of that clause requiring the mortgagee to notify the insurer of any change of ownership which shall come to (his) knowledge * * *." 29 Am.Jur., Insurance, sec. 554, p. 451; Annotation: 45 A.L.R. 598 et seq.
In Union Central Life Insurance Co. of Cincinnati v. Codington County Farmers Fire & Lighting Mut. Insurance Co., 1939, 66 S.D. 561, 287 N.W. 46, 50, 124 A.L.R. 1027, the facts and contentions of insurer were similar to those in the instant case. The Court said: "The response of the courts to these contentions may be thus epitomized: It is concluded that the word `mortgagee' is a mere matter of convenient description or designation, and was not intended to limit the primary agreement to pay the loss to the beneficiary `as his interest may appear.' It is held that provisions dealing with `change of ownership' apply only to strangers to the insurance contract and were inserted to permit the insurer to gauge the moral hazard involved and to select those with whom it will contract. It passed judgment, so they say, upon the mortgagee when it wrote the policy. The transfer, they assert, does not operate to increase the interest of the mortgagee."
*561 In an analogous situation, the Court in Employers' Fire Insurance Co. v. Ritter, 1933, 112 N.J.Eq. 418, 164 A. 426, 428, reasoned: "No new person became a party to the insurance contract at the foreclosure sale, and there was no change of risk except by the withdrawal of the interest of the mortgagor and the increase of the amount of interest of the mortgagee. The parties to the contract were the same after the sale. The foreclosure did not constitute such a change of ownership as would invalidate the policy, though no notice of such foreclosure was given to the company."
With respect to the matter of notice of "change of ownership" in a similar factual situation, it was said: "`the proviso that the mortgagee should notify the defendant of any change of ownership which should come to its knowledge evidently has reference only to changes resulting from the acts of the mortgagor or owner of the equity of redemption.' The proviso has reference to a change or transfer of title or possession to a third person, not to one from the mortgagor to the mortgagee through a foreclosure." Pioneer Savings & Loan Co. v. St. Paul Fire & Marine Insurance Co., 1897, 68 Minn. 170, 70 N.W. 979, 980. See also Washburn Mill Co. v. Fire Ass'n, 1895, 60 Minn. 68, 61 N.W. 828; Guarantee Trust & Safe Deposit Co. of Shamokin v. Home Mutual Fire Insurance Co., 1955, 180 Pa.Super. 1, 117 A.2d 824; Fort Scott Building & Loan Ass'n v. Palatine Insurance Co., 1906, 74 Kan. 272, 86 P. 142; Glen Cove Trust Co. v. Trypuc, Sup., 1952, 110 N.Y.S.2d 368; Westchester Fire Insurance Co. of New York v. Norfolk Building & Loan Ass'n, 8 Cir., 1926, 14 F.2d 524; Royal Insurance Co. v. Drury, 1926, 150 Md. 211, 132 A. 635, 45 A.L.R. 582.
Insurer asserts that acquisition of title, in whole or in part by feme plaintiff constituted a "change in ownership" to a stranger to the contract and the failure of the husband mortgagee to give notice of the change worked a forfeiture of the insurance coverage. The law does not favor forfeitures and a provision in a standard mortgage clause requiring the mortgagee to give insurer notice of a change of ownership which has come to his knowledge is not a condition precedent, but is a covenant and directory only and merely requires the mortgagee to give notice to the insurer within a reasonable time after the knowledge is acquired and failure to give notice will not forfeit rights under the insurance contract unless the prohibited change is such as to increase the risk. 45 C.J.S. Insurance § 563, p. 322; Loan Ass'n v. Insurance Co., Pa.1916, 66 Pa. Super. 90; New York Underwriters Insurance Co. v. Central Union Bank, 4 Cir., 1933, 65 F.2d 738, certiorari denied 290 U.S. 679, 54 S. Ct. 102, 78 L. Ed. 585; Svea Fire & Life Insurance Co., Limited of Gothenburg, Sweden v. State Savings & Loan Ass'n, 10 Cir., 1927, 19 F.2d 134; Phenix Insurance Co. of Brooklyn v. Omaha Loan & Trust Co., 1894, 41 Neb. 834, 60 N.W. 133, 25 L.R.A. 679; Rio Grande Nat. Life Insurance Co. v. Hardware Dealers Mut. Fire Insurance Co., Tex.Civ.App., 1948, 209 S.W.2d 654. As already indicated, mortgagee was under no duty to give notice of the foreclosure proceedings. The duty to give notice of change of ownership did not arise until the deed was actually delivered. Until moment of delivery of the deed there remained a possibility of redemption by the owners. Ordinarily what is a reasonable time is a question for the jury, but we hold, as a matter of law, that delay of five days in giving notice was not unreasonable under the circumstances here presented. Had notice been given at the very moment of delivery of the deed, mortgagee would have been entitled, under the terms of the mortgage clause, to ten days notice of cancellation before termination of the insurance contract by insurer. Furthermore, it is inconceivable that vesting of title in the wife increased the hazard. The change of ownership in this case did not extinguish insurer's liability.
*562 The fact that the purchase might have created a tenancy by the entirety in plaintiffs does not enlarge the rights of either of the plaintiffs under the insurance contract. The contract will be construed as of the time of making.
The judgment below is modified to the extent that no recovery is allowed by the feme plaintiff. The case is remanded that the court may determine the amount of indebtedness, with interest, due the male plaintiff as of 5 January 1958, to wit, onehalf of the total indebtedness evidenced by the promissory note from Reece and wife to plaintiffs. This amount (not to exceed $8,000) with interest shall be the recovery allowed male plaintiff. In determining this indebtedness, the foreclosure sale shall not be construed to have extinguished the debt.
Modified and remanded.