Regardless of Acts of Insured Mortgagee Gets Insurance Proceeds
When two or more people make claim to the proceeds of an insurance claim that the insurer admits it owes the prudent insurer interpleads the funds into court and allows the competing claimants to fight out their claims in court. When a divorce is involved, of course, the disputes must be vicious and litigious.
In Privilege Underwriters Reciprocal Exchange v. Kyle West, Angela West, and Arvest Bank, Case No. 17-CV-0661-CVE-JFJ, United States District Court For The Northern District Of Oklahoma (August 27, 2018) Privilege Underwriters Reciprocal Exchange (PURE) filed an interpleader action because it had received competing claims to insurance benefits payable under a homeowner’s insurance policy.
Angela West and Arvest Bank (Arvest) argue that the insurance proceeds should be paid to Arvest, because the insured property was subject to a mortgage that requires the insurance proceeds to be paid to Arvest to cover the cost of repairs to the insured property. Kyle West claims that Angela West received the insured property as part of a divorce settlement, and she agreed to accept the property “as is” and it would be inequitable to allow her to recover the insurance proceeds.
Kyle and Angela West were married in 1993, and they purchased a home located in Tulsa, Oklahoma. The Wests later separated and the divorce became final in October 2017. On December 22, 2017, the state court issued a revised decision as to the division of property, and the Residence was awarded to Angela West. Angela West received the Residence pursuant to a stipulation by the parties to the divorce, and she agreed to assume all debt associated with the Residence. The Residence was valued at $920,000 and was subject to two mortgages in the total amount of $843,859.
The Residence is subject to a mortgage held by Arvest Bank, and one of the conditions of the mortgage is that the mortgagor obtain homeowner’s insurance for the property.
Angela and Kyle West purchased a homeowner’s insurance policy from PURE, and they are both named insureds on that policy. The insurance contract contains a mortgage clause stating that “[i]f a mortagee is named in this policy, any covered loss under dwelling or other structures coverages will be paid to the mortgagee and you, as interests appear.”
Angela West submitted a claim to PURE for damage to the roof of the Oswego Residence, and PURE agreed that the claim was a covered loss under the insurance policy. Angela West states that she was unaware of any damage to the roof until near the time that she made the claim, and the PURE adjustor used the date of the most recent hail storm as the basis for the claim. James Haley, a vice-president of Arvest, states that Arvest and the Wests have not otherwise agreed in writing as to the disposition of the insurance proceeds, and Arvest has determined that the repairs are economically feasible and that its security is not lessened.
Kyle West has made a claim for the insurance proceeds, and Angela West claims that he does not intend to use the insurance to repair the roof of the Residence.
PURE filed this interpleader action due to the competing claims of Angela West, Kyle West, and Arvest to the insurance proceeds, and the parties agree that the full amount of the insurance proceeds have been deposited into the registry of the Court.
Angela West and Arvest argue that the insurance proceeds should be paid to Arvest for disbursement to cover the cost of repair to the insured property. They rely on the mortgage agreement under which the parties agreed that Arvest had the right to hold any insurance proceeds paid for the purpose of repairing or restoring the insured property. Kyle West argues that Angela West accepted the Oswege Residence in “as is” condition as part of the property division in the divorce proceedings, and she has no claim to the insurance proceeds. He further claims that the “as is” value of the Oswego Residence exceeds the value of Arvest’s mortgage, and “Arvest is fully protected and has no higher claim to the proceeds.”
PURE does not deny that it is obligated to pay for the property damage claim, and it has deposited the insurance proceeds with the Court for distribution to the appropriate party. Arvest is listed as the mortgagee on the declarations page of the insurance policy. The mortgage agreement between Arvest and the Wests also contains language specifically addressing the disposition of insurance proceeds received for the purpose of repairing or restoring the Residence.
Tenth Circuit and Oklahoma Supreme Court precedent clearly support Arvest’s argument that it has a superior claim to the insurance proceeds. The Oklahoma Supreme Court has explained that homeowner’s insurance is a personal contract between insurer and insured, and the insurance does not attach to or run with title to the real property. However, one consequence of this principle is that a mortgage usually has a provision requiring a mortgagor to obtain insurance to protect a mortgagee’s interest. When an insurance policy contains such a provision, Oklahoma follows the general rule that a mortgage clause in an insurance policy creates a separate contract of insurance in favor of the mortgagee which cannot be defeated by acts of the insured, and the mortgagee is entitled to recover the insurance proceeds up to the amount of the outstanding mortgage debt.
The Court, after reviewing the facts and law, concluded that the insurance proceeds should be paid to Arvest for the purpose of repairing or restoring the Residence under the terms of the mortgage agreement and the insurance policy. The Court has determined that Arvest has a superior claim to the insurance proceeds and that neither Angela nor Kyle West should directly receive the insurance proceeds.
The insurance proceeds are not assets of either of the parties to the divorce, and the state court has no jurisdiction to determine if the insurance proceeds should be paid to either of the divorcing parties. Kyle West has not shown that he has any claim to the insurance proceeds, and the Court will direct the Court Clerk to disburse the interpled funds to Arvest.
The mortgagee named on a homeowners policy is an insured as its interest may appear. Regardless of the disputes between the parties or the actions of the parties insured, the mortgagee has the right to protect its interest and collect the proceeds of an insurance claim and ascertain that the dwelling, the security for its loan, is protected by causing the insurance proceeds to be used to repair the property. Regardless of the disputes between the named insureds the mortgagee gets paid.
© 2018 – Barry Zalma
This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and email@example.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
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