Contract Controls Who Gets Insurance Proceeds in a Foreclosure
The Connecticut Court of Appeal was asked to resolve a dispute over who was entitled to recover from an excess insurance policy for damage to property in James M. Jancewicz et al. v. 1721, LLC, et al., No. AC 32719 (Conn.App. 03/27/2012). Plaintiffs, James M. Jancewicz and Kimberly A. Jancewicz, appeal from the trial court’s judgment awarding the defendants, 1721, LLC (1721), and Daniel Del Grosso, excess insurance proceeds stemming from a settlement of damages done to property owned by 1721, which is secured by a purchase money mortgage held by the plaintiffs. The plaintiffs claim that the court improperly (1) awarded the excess insurance proceeds to the defendants despite language in the mortgage directing that such proceeds be paid to the plaintiffs and (2) failed to award them attorney’s fees on the defendants’ unsuccessful counterclaim.
In 2006, 1721 purchased from the plaintiffs certain property located at 495 East Main Street in Norwich (the “property”). A small commercial building that formerly served as a pizza restaurant is located on the property. The plaintiffs took back a purchase money mortgage in the property as a part of the sale. The note secured by this mortgage became due and payable on March 1, 2009. When the note became due, 1721 was unable to make the required balloon payment, but it continued to make monthly payments.
On April 16, 2009, a car struck the building located at 495 East Main Street, damaging it. The city of Norwich issued a permit to the defendants on October 21, 2009, allowing them to repair the damage sustained by the building. The defendants repaired the building, expending $7000 to do so. Following the completion of the work, a building official for the city of Norwich certified that the building had been repaired. 1721 received an insurance proceeds check in the amount of $57,920.69, made payable to 1721 and the plaintiffs, which the defendants requested that the plaintiffs execute to pay for the repairs. The plaintiffs refused to sign the check.
The plaintiffs initiated foreclosure proceedings against the defendants by a complaint filed November 16, 2009. The foreclosure was uncontested. During the foreclosure proceeding, the court found the total value of the property to be $145,000. The court established this valuation solely for the purpose of the foreclosure proceeding, and the parties agreed that they could submit different valuations at future proceedings.
At a hearing on July 28, 2010, the court found that the actual cost of the repairs, together with overhead, was $9400, and that the repairs fully restored the property. The court ordered that the plaintiffs pay the defendants this amount to compensate them for the repairs. At a hearing on September 8, 2010, the court awarded the balance of the insurance proceeds to the defendants.
Construction of a mortgage deed is governed by the same rules of interpretation that apply to written instruments or contracts generally, and to deeds particularly. The primary rule of construction is to ascertain the intention of the parties. This is done not only from the face of the instrument, but also from the situation of the parties and the nature and object of their transactions. A promissory note and a mortgage deed are deemed parts of one transaction and must be construed together as such. If a contract is unambiguous within its four corners, intent of the parties is a question of law requiring plenary review.
The plaintiffs first claim that the court improperly awarded the excess insurance proceeds to the defendants because the language of the contract provides, in part: “If the restoration or repair is not economically feasible or [the plaintiffs'] security would be lessened, the insurance proceeds shall be applied to the sums secured by this Security Instrument, whether or not then due, with any excess paid to . …”
The plaintiffs argue that, because the court found that their security was not lessened, the second sentence of paragraph four, which directs that excess insurance proceeds be distributed to 1721, does not apply. According to the plaintiffs, the general rule is that, absent satisfaction of the entire mortgage debt by the mortgagor, excess insurance proceeds must be distributed to the mortgagee when the mortgage does not contain an agreement to the contrary.
Although no single provision of the mortgage deed is dispositive of the issue before the court of appeal, the intent of the parties readily can be ascertained by considering paragraph four of the mortgage within the context of the entire deed. The mortgage does not reference any right in the plaintiffs to insurance proceeds, except in three enumerated circumstances:
- where restoration or repair is economically unfeasible or the plaintiffs’ security would be lessened;
- if 1721 abandons the property or does not answer within thirty days a notice from the plaintiffs that the insurance carrier has offered to settle a claim; or
- if the property is acquired by the plaintiffs.
The mortgage, therefore, creates a right to insurance proceeds in 1721 that is altered only if one of three enumerated circumstances arises. As none of these circumstances occurred in the present case, the court correctly determined that any excess insurance proceeds should be distributed to the defendants.
Insurance, with regard to a mortgage, is obtained as additional collateral procured to protect the debt in accordance with the mortgage. Therefore, claims regarding insurance concern the property. The plaintiffs’ did not purchase insurance in its own name but relied on the purchase of insurance by 1721. Rather, since insurance against the risk of loss of property is a contract of personal indemnity, in this case the appellate court was presented with the issue of the distribution of proceeds from properly obtained insurance by 1721. It concluded that since the security was not impaired because 1721 completed the repairs the plaintiffs were not entitled to “excess” insurance proceeds and were allowed to foreclose returning to them the property that secured the debt.
Many people believe that “property insurance” insures property. It does not. Rather, it is a contract of personal indemnity that insures a person or entity against certain enumerated risks of loss.
A person who has an interest in the property but is not named as an insured cannot recover under the policy. Similarly, a person named on a policy who has no interest cannot recover.
As the California Supreme Court observed in Garvey v. State Farm Fire and Casualty Co., 48 Cal. 3d 395, 770 P.2d 704, 257 Cal. Rptr. 292 (Cal. 03/30/1989), a first party insurance policy provides coverage for loss or damage sustained directly by the insured (e.g., life, disability, health, fire, theft, and casualty insurance).
There are instances where, because of contractual provisions or equitable considerations, the insured holds the proceeds of a fire insurance policy in trust for or otherwise subject to the claim of others who have an interest in the property covered by the subject policy. The plaintiffs, in this case, could not find the equitable considerations since they received the full security, a piece of land with a building fully repaired. They wanted to profit from the insurance that was acquired by 1721 and the court properly refused to allow them to take advantage of the borrower.
Insurance counsel and insurance claims personnel should never assume who is entitled to the proceeds of an insurance policy. If the insured and mortgagee cannot agree they should, as did the insurer in this case, put both names on the check or pay the disputed funds into court with an interpleader action stating the insurer has no interest in the funds but cannot safely pay one over another.
© 2012 – Barry Zalma
Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.
He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.
Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.