Foremost Insurance v. Allstate Insurance

486 N.W.2d 600, 439 Mich. 378

• Court: Michigan Supreme Court
• Decided: May 15, 1992
• Docket: 89808, (Calendar No. 6)
• Status: Published

Opinions

Riley, J.

We granted leave to appeal to resolve a conflict in the Court of Appeals¹ over whether a lienholder may recover under a loss payable clause where the insured breached an insurance contract, by intentionally destroying his property and misrepresenting the loss to his insurer.² In cases involving nearly identical loss payable clauses, two Court of Appeals panels agreed that a standard loss payable clause operates as a separate contract of insurance between the lienholder and the insurer, yet differed over the coverage conferred upon the lienholder.³ The Boyd Court concluded that a lienholder’s right of recovery is no greater than that of the insured, and because the insured’s intentional act of destroying her automobile was excluded under the terms of the policy, the lien-holder could not recover under the loss payable clause when the insured intentionally destroyed her vehicle.⁴ However, in the instant case, the Foremost panel concluded that because the lien-holder has a separate contract with the insurer, it is entitled to recovery under the loss payable clause even when the insured was excluded from recovering under the same policy.⁵ We are persuaded that the Foremost panel correctly concluded that the insured’s acts of arson do not preclude the lienholder’s recovery from the insurer, and now affirm.

i

The parties stipulated the following set of facts pursuant to MCR 2.116(A)(2).

On July 24, 1985, Bobby Taylor executed an installment note with the State Employees Credit Union. The note was secured by a 1982 Be[e]ch-craft motor home. The State Employees Credit Union was named as a lienholder on the title to the motor home. On the same date, Bobby Taylor entered into a separate contract with Allstate Insurance Company (Allstate) to provide motor vehicle insurance for the motor home. The declaration sheet and the certificate of insurance designated State Employees Credit Union as a lien-holder.

In recognition of State Employees Credit Union’s interest in Bobby Taylor’s vehicle, Allstate Insurance Company issued to the Credit Union a "Loss Payable Clause,” which reads in pertinent part as follows:

"Loss or damage, if any, under the policy shall be payable as interest may appear to [State Employees Credit Union] and this insurance as to the interest of the Bailment Lessor, Conditional Vendor, Mortgagee or other secured party of Assignee of Bailment Lessor, Conditional Vendor, Mortgagee or other secured party [herein called a Lien-holder] shall not be invalidated by any act or neglect of the Lessee, Mortgagor, Owner of the within described automobile or other Debtor nor by any change in the title or ownership of the property; provided, however, that the conversion, embezzlement or secretion by the Lessee, Mortgagor, Purchaser or other Debtor in possession of the property insured under a bailment lease, conditional sale, mortgage or other security agreement is not covered under such policy unless specifically insured against and premium paid therefor . . . .”

On August 25, 1985, the motor home was destroyed by an incendiary fire. Bobby Taylor filed a claim with Allstate for insurance proceeds. It is undisputed that Bobby Taylor committed arson in an effort to defraud the Company. In addition, Mr. Taylor committed fraud and false swearing. His acts amounted to a material breach of contract, and on June 11, 1986, Allstate expressly and unequivocally denied his claim.

State Employees Credit Union, in its letter of April 22, 1986, requested Allstate to provide coverage under the policy issued to Bobby Taylor based on its interest in the motor home as a lienholder. On June 16, 1986, State Employees Credit Union’s request for coverage under the insurance policy issued to Bobby Taylor was denied.

On February 10, 1988, Foremost Insurance Company, as subrogee of State Employees Credit Union, filed a Complaint against Allstate seeking to recover for the loss of the motor home.

II

In general, there are two types of loss payable clauses, otherwise known as mortgage clauses, contained in insurance policies which protect lien-holders. The first type, commonly known as an ordinary loss payable clause, directs the insurer to pay the proceeds of the policy to the lienholder, as its interest may appear, before the insured receives payment on the policy.⁶ Under this type of policy, the lienholder is simply an appointee to receive the insurance fund to the extent of its interest, and its right of recovery is no greater than the right of the insured.⁷ There is no privity of contract between the two parties because there is no consideration given by the lienholder to the insured.⁸ Accordingly, a breach of the conditions of the policy by the insured would prevent recovery by the lienholder.⁹

The second type of loss payable clause is known as a standard loss payable clause.¹⁰ Under this type of clause, a lienholder is not subject to the exclusions available to the insurer against the insured because an independent or separate contract of insurance exists between the lienholder and the insurer.¹¹ In other words, there are two contracts of insurance within the policy — one with the lien-holder and the insurer and the other with the insured and the insurer. Under the standard loss payable clause, the consideration for the insurer’s contract with the lienholder is that which the insured paid for the policy itself.¹²

Traditionally, insurers have undertaken the risk that the insured will commit fraud against them by inserting a standard loss payable clause in the insurance contract for the lienholder’s protection.¹³ The lienholder, usually the financial or lending institution, is assured, through the incorporation of the clause, that they will not be required to evaluate the borrower’s insurance claim history when approving a loan.¹⁴ Thus, the lender protects its interest by requiring the borrower to obtain insurance with a loss payable clause made payable to the lender prior to purchasing the vehicle that will protect the lender against the defenses that could be asserted against the borrower by the insurer.

In the instant case, both parties agree that the loss payable clause used by Allstate is a standard loss payable clause. Allstate, however, argues that its clause does not operate as a standard loss payable clause in the traditional sense because it provides less than complete protection: it excludes coverage where the insured converts, embezzles, or secretes the property.¹⁵ Thus, Allstate would have us read the loss payable clause in reference to the underlying insurance policy that defines "loss” as a "direct and accidental loss” and take the coverage for the lienholder out of its hands. We do not agree.

We believe that Allstate’s argument misses the mark because it runs contrary to the language and the purpose of the standard loss payable clause in its policy.¹⁶

We are persuaded that under Allstate’s theory of the case the inclusion of the specific prohibition against recovery in a standard mortgage clause— where the insured converts, embezzles, or secretes the property — would be rendered either redundant or meaningless.¹⁷ The exclusions in the standard loss payable clause would be rendered meaningless because losses in the described circumstances are never accidental. Embezzlement, conversion, and secretion require an intentional act by the defendant of dominion or control over the property that is inconsistent with an owner’s property rights.¹⁸ Moreover, it would be redundant to provide for the three exclusions because these acts are already excluded from coverage in the underlying policy of the insured.

We also believe that under Allstate’s theory of the case, an insurer would be able to avoid its basic promise to hold the lienholder harmless from any act or neglect by the insured and, therefore, the lienholder would only be entitled to recover for an accidental loss. Allstate has failed to recognize the significance of the fact that we are evaluating two separate contracts of insurance. The Boyd Court’s analysis is illustrative of the problems that arise by not recognizing the significance of the two contracts when evaluating the standard loss payable clause at issue.

In 1981, Boyd entered into a standard installment sales agreement with General Motors Acceptance Corporation to finance the purchase of her new automobile.¹⁹ As part of this agreement, gmac, the lienholder, conditioned the financing of the vehicle upon her obtaining insurance while the vehicle was being financed.²⁰ Boyd insured the car with Auto Club Insurance Association and listed gmac as the loss payee in its standard loss payable clause.²¹ Acia’s standard loss payable clause is almost identical to the clause used by Allstate in the instant case.²²

A few years later, Boyd reported the car stolen and filed a claim with acia.²³ Acia denied her claim, alleging that Boyd intentionally destroyed the car, and also denied the claim of gmac as the security lienholder under the loss payable clause, on the basis of its belief that a lienholder is subject to the same exclusions as the insured because it is part of the same insurance policy and does not provide any greater coverage than that provided in the policy._

In reversing the trial court’s grant of summary disposition for gmac, the Court of Appeals held that the loss payable clause would only protect gmac with regard to risk otherwise covered in the acia policy.²⁴ The Court reasoned that because Boyd’s intentional destruction of the vehicle was not a covered risk under the policy, and because the loss payable clause only protected gmac from covered risk, gmac was not entitled to any insurance proceeds.

The Boyd Court, as does Allstate, misinterprets the nature of the standard loss payable clause in relation to the policy issued to the insured by the insurer.²⁵ As we have previously noted, there are two contracts of insurance involved in this case. One covers risk and outlines exclusions for the insured and the insurer. The other operates as an independent contract for the limited purpose of preventing the loss of coverage by any act or neglect between the insurer and the insured.²⁶ The prevention of recovery under the contract between the insured and the insurer does not prohibit the recovery by the lienholder under its separate contract of insurance with the insurer because the exclusions in the standard loss payable clause do not apply.²⁷

We are not alone in the conclusion we reach today. Every jurisdiction that has considered this issue in light of the same or similar standard loss payable clauses has concluded that the lienholder’s interest in the insured’s property will not be avoided by any acts, representations, or omissions of the insured.²⁸

Thus a policy payable to the mortgagee as his interest may appear, and which contains clauses of the character under consideration, is to be construed so as to effectuate the parties’ interests, and so constitutes two separate contracts of indemnity which relate to the same subject matter, but cover distinct interests therein, and it effects a new and independent insurance which protects the mortgagee as stipulated, and which cannot be destroyed or impaired by the mortgagor’s acts or by those of any person other than the mortgagee or someone authorized to act for him and in his behalf.[²⁹]

III

Allstate suggests that if we find that their loss payable clause operates as a traditional standard loss payable clause, coverage should be denied to Foremost because Bobby Taylor converted the State Employees Credit Union’s interest in the motor home when he intentionally destroyed it.

The crux of Allstate’s argument is that the conversion proviso refers to State Employees Credit Union’s lien or security interest. Foremost, however, argues that it refers to Bobby Taylor’s motor home. The pertinent part of Allstate’s standard loss payable clause provides:

"[provided, however, that the conversion, embezzlement or secretion by the Lessee, Mortgagor, Purchaser or other Debtor in possession of the property insured under a bailment lease, conditional sale, mortgage or other security agreement is not covered under such policy, unless specifically insured against and premium paid therefor . . . .” [Emphasis added.]

We are persuaded that the exclusion simply provides that the insured will not be covered when he converts his own property. In other words, the conversion provision focuses on the insured’s property and not on State Employees Credit Union’s lien.³⁰ Having so concluded, we must now determine whether Bobby Taylor converted the mobile home when he intentionally destroyed it.

In the civil context, conversion is defined as any distinct act of domain wrongfully exerted over another’s personal property in denial of or inconsistent with the rights therein.³¹ In general, it is viewed as an intentional tort in the sense that the converter’s actions are wilful, although the tort can be committed unwittingly if unaware of the plaintiff’s outstanding property interest.³²

In the instant case, we believe that Bobby Taylor’s intentional destruction of his motor home, as well as his fraud and false swearing to his insurer, Allstate, cannot be considered conversion. In each of the cases referred to above, the property converted belonged to another person who had original ownership or possession. In this case, however, the alleged converter owned the item that Allstate contends was converted. We agree with the Court of Appeals in the instant case that "a person can[not] 'convert’ his own property,” and therefore we reject Allstate’s second argument.³³

IV

Allstate’s final argument is that public policy should preclude recovery by the lienholder because allowing recovery will encourage automobile owners to intentionally burn their vehicles, and will invite collusion between borrowers and lenders in the conventional automobile financing arrangements. We find this argument untenable.

Allowing a lienholder to recover its interest in the property that was intentionally destroyed by the insured under a standard loss payable clause simply protects the lienholder’s insurable interest in accordance with what the insurer promised to do. That is, the insurer promised to cover the lienholder’s security interest in the insured’s automobile regardless of any act or neglect of the insured. Thus, rejection of Allstate’s public policy arguments, which endorse the holding in Boyd, would at most simply return lenders and insurance companies to the traditional role they play in the commercial marketplace. Lenders will be returned to the role of evaluating credit risk associated with the making of commercial loans, and insurance companies will be returned to their traditional role of evaluating every conceivable risk of loss in order to price their respective premiums for policyholders.³⁴

We, therefore, conclude that the insured’s acts of arson and misrepresentation to Allstate did not preclude Allstate’s coverage to State Employees Credit Union under the standard loss payable clause. Thus, to the extent inconsistent with this opinion, we overrule Boyd v General Motors Acceptance Corp and its progeny.³⁵ The Court of Appeals decision in the instant case is affirmed.

Levin, Griffin, and Mallett, JJ., concurred with Riley, J.

1 Boyd v General Motors Acceptance Corp, 162 Mich App 446; 413 NW2d 683 (1987); General Motors Acceptance Corp v Auto Club Ins Ass’n, 168 Mich App 733; 425 NW2d 156 (1988); General Motors Acceptance Corp v Ibrahim, 171 Mich App 483; 431 NW2d 41 (1988); cf. Foremost Ins Co v Allstate Ins Co, 185 Mich App 119; 460 NW2d 242 (1990).

2 437 Mich 1035 (1991).

3 Boyd, n 1 supra at 453; Foremost, n 1 supra at 121.

4 Boyd at 455-457.

5 Foremost at 121-122.

6 Van Buren v St Joseph Co Village Fire Ins Co, 28 Mich 398, 405 (1874); Gallant v Lake States Mut Ins Co, 142 Mich App 183, 187; 369 NW2d 205 (1985); J C Wyckoff & Associates v Standard Fire Ins Co, 936 F2d 1474, 1493 (CA 6, 1991).

7 Van Buren, n 6 supra at 404; Gallant, n 6 supra at 187.

8 See 10A Couch, Insurance, 2d (rev ed), § 42:702, p 738; Van Buren, supra at 404.

9 Id.

10 Insurance companies have used standard loss payable clauses in real estate fire insurance policies since at least 1878. Hastings v Westchester Fire Ins Co, 73 NY 141 (1878). For an interesting and complete historical review of mortgage arrangements, see Lehto, The standard mortgage clause under attack: The lender’s insurance claim when a borrower commits arson, 66 U Det L R 603, 607 (1989).

11 Citizens State Bank v State Mut Fire Ins Co, 276 Mich 62, 67-69; 267 NW 785 (1936); Pink v Smith, 281 Mich 107, 111-112; 274 NW 727 (1937); Cottrell v Clark, 126 Mich App 276, 280; 337 NW2d 58 (1983).

See also Vormelker v Oleksinski, 40 Mich App 618, 624; 199 NW2d 287 (1972); Cole v Michigan Mut Ins Co, 116 Mich App 51, 55; 321 NW2d 839 (1982); Heritage Federal Savings Bank v Cincinnati Ins Co, 180 Mich App 720, 723-724; 448 NW2d 39 (1989).

12 Couch, n 8 supra, § 42:728, pp 763-764.

13 Lehto, The standard mortgage clause, n 10 supra.

¹⁴

15 The exclusion barring a lender’s claim for the insured’s conversion, embezzlement, or secretion of its automobile has been part of the standard loss payable clause included in automobile insurance policies since at least 1920. Buxton v Int’l Indemnity Co, 47 Cal App 583; 191 P 84 (1920). See also Lehto, The standard mortgage clause, n 10 supra at 607. Florida courts have classified this type of loss payable clause as a "hybrid” clause because it provides for coverage through neglect of any act of the insured, and also establishes several instances where coverage would not exist — conversion, embezzlement, or secretion. Progressive American Ins Co v Florida Bank at Daytona Beach, 452 So 2d 42, 44-45 (Fla, 1984).

16 The purpose of a standard loss payable clause was explained by Judge Rapallo in his concurring opinion in Hastings, n 10 supra at 154, the first recorded decision explaining this type of mortgage arrangement.

I think the intent of the clause was to make the policy operate as an insurance of the mortgagors and the mortgagees separately, and to give the mortgagees the same benefit as if they had taken out a separate policy, free from the conditions imposed upon the owners, making the mortgagees responsible only for their own acts. . . . This provision, in case the policy were invalidated as to the mortgagors, made it, in substance, an insurance solely of the interest of the mortgagees, by direct contract with them, unaffected by any questions which might exist between the company and the mortgagors.

See also Lehto, The standard mortgage clause, n 10 supra at 607.

17 The Massachusetts Supreme Court has reached the same conclusion in Gibraltar Financial Corp v Lumbermens Mut Casualty Co, 400 Mass 870, 871-873; 513 NE2d 681 (1987).

18 Embezzlement differs from conversion and secretion in that it focuses on a narrow type of relationship between the owner and the defendant. See People v Doe, 264 Mich 475, 481; 250 NW 270 (1933); People v Bergman, 246 Mich 68; 224 NW 375 (1929). See, generally, 12 Michigan Practice, Criminal Law, §§ 7.72, 7.83, pp 85-86, 97-100.

19 Boyd, n 1 supra at 448.

20 Id. at 449.

²¹

22 The loss payable clause in Boyd provided in pertinent part:

"Loss or damage, if any, under the policy shall be payable as interest may appear to . . . [lienholder] and this insurance as to the interest of the Bailment Lessor, Conditional Vendor, Mortgagee or other secured party or Assignee of Bailment Lessor, Conditional Vendor, Mortgagee or other secured party (herein called the Lienholder) shall not be invalidated by any act or neglect of the Lessee, Mortgagor, Owner of the within described automobile or other Debtor nor by any change in the title or ownership of the property; provided, however, that the conversion, embezzlement or secretion by the Lessee, Mortgagor, Purchaser or other Debtor in possession of the property insured under a bailment lease, conditional sale, mortgage or other security agreement is not covered under such policy, unless specifically insured against and premium paid therefor; and provided, also, that in case the Lessee, Mortgagor, Owner or other Debtor shall neglect to pay any premium due under such policy the Lienholder shall, on demand, pay the same.” [Id. at 449-450.]

23 Id. at 450.

24 Id. at 458.

25 We believe that Justice Brickley errs, as did the Boyd Court, in his analysis of the clause. Initially, he agrees with us that the mortgage clause at issue in this case is a standard loss payable clause. However, he construes the language of the conversion proviso as referencing the lienholder’s lien. The effect of this construction not only is at odds'with the language of the proviso, but also renders the "any act or neglect” language of the standard loss payable clause meaningless. Under his construction, any act or neglect of the insured would invalidate the lienholder’s interest in the insurance policy. The effect of this construction would be to render this clause as an ordinary mortgage clause having only one contract between all three parties. Because we believe that there are two contracts of insurance in this standard loss payable clause, we cannot agree with this analysis.

26 Except, of course, conversion, embezzlement, and secretion. See ante, p 382.

27 Our analysis does not obviate the general rule, with respect to construction of contracts, that where one writing refers to another, the two writings are to be construed together. Whittlesey v Herbrand Co, 217 Mich 625, 627-628; 187 NW 279 (1922). Nor does it ignore the distinction between conditions subsequent for coverage and exclusions from coverage. As the Boyd Court recognized:

"A condition subsequent is to be distinguished from an exclusion from the coverage: the breach of the former is to terminate or suspend the insurance, while the effect of the latter is to declare that there never was insurance with respect to the excluded risk. Accordingly, the shicide clause in a life insurance policy is not a condition subsequent but rather suicide is simply not a risk insured against.” [Boyd, n 1 supra at 455, quoting 7 Couch, Insurance, 2d (rev ed), § 36:49, pp 482-483.]

The purpose of the standard loss payable clause is to confer greater coverage to the lienholder than the insured has in the underlying policy. This is the distinction between that type of coverage and the coverage involved in an ordinary loss payable clause, which merely assigns the proceeds of the policy to the lienholder upon destruction of the automobile but does not cover the intentional acts or neglect of the insured.

28 See also 5A Appleman, Insurance Law & Practice, § 3401, p 286.

29 Couch, n 8 supra, § 42:736, pp 768-771.

30 We believe Justice Brickley errs in asserting that the language or the purpose of the proviso references the lienholder’s interest. The language of the conversion proviso supports our conclusion that the exclusion solely refers to the insured’s property. We additionally note, in support of our conclusion, that when the Massachusetts Supreme Court evaluated an identical conversion exclusion in Gibraltar Financial Corp, n 17 supra at 872-873, it reached the same conclusion as we do today. In Gibraltar, the court concluded:

A simple reading of the loss payable clause reveals that it is a conversion of the insured property, not of the mortgagee’s interest in that property, which would shield the insurer from liability.

31 Nelson & Witt v Texas Co, 256 Mich 65, 70; 239 NW 289 (1931); Thoma v Tracy Motor Sales, Inc, 360 Mich 434, 438; 104 NW2d 360 (1960); Citizens Ins Co v Delcamp, 178 Mich App 570, 575; 444 NW2d 210 (1985).

32 Warren Tool Co v Stephenson, 11 Mich App 274, 299; 161 NW2d 133 (1968); Citizens Ins Co, n 31 supra.

33 Foremost Ins Co, n 1 supra at 122.

34 We note that should Allstate wish to avoid liability to lienholders where insureds intentionally destroy their vehicles by arson, it can easily add arson to the list of owner acts excluded from coverage in its standard loss payable clause. Amicus curiae acia, who has submitted a brief in support of Allstate, has revised its list of owner acts excluded from coverage in its standard loss payable contracts. A certified copy of acia’s revised loss payable clause provides in pertinent part:

We agree that this Endorsement shall not be invalidated as to the interest of the Lienholder in the described vehicle by any act or neglect of any Named Insured or of any owner except:

1) When that vehicle is intentionally damaged, destroyed or concealed by or at the direction of any Named Insured or by any owner; or

2) When the vehicle is damaged, destroyed or concealed as a result of any other act which constitutes a breach' of contract between any Named Insured or owner and the Lienholder.

35 General Motors Acceptance Corp v Auto Club Ins Ass’n, n 1 supra; General Motors Acceptance Corp v Ibrahim, n 1 supra.