Morris Cty Natl Bnk v. John Deere Ins Co

• Court: Court of Appeals for the Fifth Circuit
• Decided: July 3, 2001
• Docket: 00-40533
• Status: Published

Opinion

REVISED JULY 3, 2001

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT __________________________

No. 00-40533 __________________________

MORRIS COUNTY NATIONAL BANK, Plaintiff-Appellee,

versus

JOHN DEERE INSURANCE COMPANY, Defendant-Appellant.

_________________________________________________________

Appeal from the United States District Court for the Eastern District of Texas _________________________________________________________ June 14, 2001

Before REYNALDO G. GARZA, HIGGINBOTHAM, and SMITH, Circuit Judges.

REYNALDO G. GARZA, Circuit Judge:

John Deere Insurance Company (“John Deere”) appeals the district court’s grant of

summary judgment in favor of Morris County National Bank (“Morris County”). For the reasons

stated below, we REVERSE.

FACTUAL AND PROCEDURAL BACKGROUND

Morris County loaned J.T. Lockeby (“Lockeby”) $50,000 for the purchase of a 1989

Hydroax Feller Buncher (“Buncher”). A Buncher is a piece of heavy equipment used in the

timber industry to cut down trees. John Deere insured the Buncher for Lockeby under a fire

-1- insurance policy that named Morris County as the loss payee. This policy was effective from

September 24, 1996 to September 24, 1997, and Morris County had a copy of the policy that

stated its term.

The policy did not require John Deere to give either Lockeby or Morris County notice of

its expiration, but, on September 19, 1997, John Deere warned Lockeby that the policy would

expire on September 24, 1997 unless renewal premiums were paid. John Deere did not give

Morris County the same notice. Lockeby did not pay the renewal premium, and the policy

expired. Then, John Deere notified Lockeby, but not Morris County, that the policy had, in fact,

expired.

On October 4, 1997, a fire destroyed the Buncher. Morris County demanded $50,000

under the policy to cover the loss. John Deere denied Morris County’s demand on the grounds

that the policy had expired prior to the loss.

Morris County filed an Original Petition for Declaratory Judgment in state court on

August 27, 1999. It sought a judgment that John Deere owed Morris County, as a mortgagee,

reasonable notice of the termination of coverage under the policy before any such termination

would become effective as to its interests. Morever, Morris County claimed that, because no

notice was given, John Deere was obligated to pay it $50,000, plus interests, costs, and

reasonable attorney’s fees. John Deere removed the action to federal district court based on

complete diversity of citizenship.

Both parties filed motions for summary judgment in the federal district court. The district

court concluded that article 6.15 of the Texas Insurance Code required John Deere to give Morris

County notice of the policy’s expiration, and, since no notice was given, Morris County still had

-2- an interest in the policy. Accordingly, the district court granted summary judgment in favor of

Morris County. John Deere now appeals.

DISCUSSION

I. Standard of Review

We review the granting of summary judgment de novo. See Bussian v. RJR Nabisco, Inc.,

223 F.3d 286, 293 (5th Cir. 2000). We view all evidence in the light most favorable to the party

opposing the motion and draw all reasonable inferences in that party’s favor. See id. If the

evidence demonstrates that there is no genuine issue regarding any material fact, summary

judgment is proper. See id.

II. Analysis

This case presents an issue that Texas courts have not addressed. That issue is whether

article 6.15 of the Texas Insurance Code imposes a duty on an insurer to notify its insured’s

mortgagee of the policy’s impending expiration when the insurance policy does not require such

notice. We hold that article 6.15 does not contain an independent notice requirement; therefore, it

does not impose a duty on the insurer to notify an insured’s mortgagee of the policy’s impending

expiration.

Article 6.15 of the Texas Insurance Code provides:

The interest of a mortgagee or trustee under any fire insurance contract hereafter issued covering any property situated in this State shall not be invalidated by any act or neglect of the mortgagor or owner of said described property or the happening of any condition beyond his control, and any stipulation in any contract in conflict herewith shall be null and void.

TEX. INS. CODE ANN. art. 6.15.

-3- The purpose of article 6.15 is “to protect mortgagees from mortgagor derelictions with

respect to insurance policies on mortgaged properties.” Standard Fire Ins. Co. v. United States,

407 F.2d 1295, 1299 (5th Cir. 1969). The statute “immunizes the mortgagee against the legal

consequences of any act done by the mortgagor or owner either prior to or subsequent to

issuance of the policy in question.” St. Paul Fire & Marine Ins. Co. v. Crutchfield, 162 Tex. 586,

350 S.W.2d 534, 537 (1961). The effect of the statute is to free the mortgagee from the burden

of micro-managing its mortgagor’s fire insurance policies by immunizing the mortgagee from the

legal consequences of the mortgagor’s acts or omissions in procuring or maintaining an insurance

policy. See Standard Fire Ins. Co., 407 F.2d at 1299.

Article 6.15 achieves this effect by creating a new and independent contract between the

mortgagee and the insurer. See id.; see also St. Paul Fire & Marine Ins. Co., 350 S.W.2d at 591.

Therefore, when the mortgagor’s acts or omissions invalidate his fire insurance contract, the

mortgagee’s independent contract survives just as any other independent contract would. See id.

For example, in Standard Fire Ins. Co. v. United States, an insurer cancelled the mortgagor’s

insurance policy for nonpayment of premiums without notifying the mortgagee. Std. Fire Ins.

Co., 407 F.2d at 1296. A fire destroyed the covered property after cancellation. See id. The

mortgagee made a claim on the insurance proceeds, but the insurer denied coverage on the

ground that it had cancelled the policy. See id. We held that the cancellation was ineffective as to

the mortgagee’s rights to coverage because the cancellation was due to the mortgagor’s failure to

make premium payments. See id. at 1301. The mortgagee in Standard Fire was immune from

the effects of the mortgagor’s acts because article 6.15 makes the mortgagee’s rights under the

-4- contract independent of the mortgagor’s. Therefore, the mortgagee could not lose its rights due

to the act of the mortgagor.

The mortgagee can, however, lose its rights due to its own acts or omissions. See Citizens

St. Bank of Dickinson v. Amer. Fire & Cas. Co., 198 F.2d 57, 60 (5th Cir. 1952). In Citizens

State Bank of Dickinson v. American Fire and Cas. Co., the mortgagor obtained a fire insurance

policy on certain motor vehicles by misrepresenting to the insurer that no other policies of

insurance had been cancelled on the vehicles in the past year. Id. at 58. The mortgagee was

aware of this misrepresentation and withheld the information from the insurer. See id. When fire

destroyed the vehicles, the mortgagee claimed that it was entitled to the insurance proceeds. See

id. The insurer denied coverage on the ground that the policy was void due to the

misrepresentation. See id. The mortgagee argued it was entitled to the insurance proceeds

because the mortgagor’s misrepresentation was an act that could not invalidate the independent

rights article 6.15 provides. See id. at 59-60. We agreed that the mortgagor’s misrepresentation

could not invalidate the mortgagee’s rights, but we held that article 6.15 did not protect the

mortgagee from its own wrongful act. See id. at 60. The mortgagee lost its interest because of

its misrepresentation, not because of the mortgagor’s. See id. So, though the mortgagor’s acts

or omissions cannot invalidate the mortgagee’s rights, the mortgagee’s own acts or omissions can

invalidate its rights. See id.

Our decision in Citizens State Bank reveals that the contract article 6.15 grants the

mortgagee is independent of the mortgagor’s contract, but it is still a contract, which means it is

subject to the same limitations to which all contracts are subject. Proper notice can cancel it, see

Std. Fire Ins. Co., 407 F.2d at 1301-02, the mortgagee’s wrongful act can void it, see Citizens St.

-5- Bank of Dickinson, 198 F.2d at 60, and, most importantly for this case, it can expire pursuant to

its terms.

While article 6.15 grants the mortgagee an independent contract with independent rights,

it does not free the mortgagee from the responsibilities and limitations of that independent

contract. In Texas, one limitation on an insurance policy is that an insurer has no duty to notify

the insured of the policy’s expiration in the absence of contrary policy provisions. See Shindler v.

Mid-Continent Life Ins. Co., 768 S.W.2d 331, 333 (Tex. App.–Houston[14th Dist.] 1989). This

rule is consistent with Texas’s principle that an insured is deemed to know the contents of his

insurance contract, including its expiration date. See id. at 334. The language of article 6.15

makes clear that it protects the mortgagee from the acts and omissions of the mortgagor. We see

nothing in the statute that protects the mortgagee from the terms of the contract the statute

creates. The duty article 6.15 imposes upon an insurer is to do unto the mortgagee as it is

required to do unto the mortgagor. While Texas law clearly grants a mortgagee a contract

independent of the mortgagor’s, it does not grant a contract better than the mortgagor’s. These

principles are the only ones consistent with the notion that article 6.15 grants the mortgagee an

independent contract with the insurer.

Here, the terms of the insurance contract state that coverage expired on September 24,

1997. Texas law imposes no duty on John Deere to notify Morris County or Lockeby of the

policy’s expiration. Thus, on September 24, 1997, Morris County lost coverage, not because

Lockeby’s contract expired or because of his act or omission, but because Morris County’s own

contract expired.

-6- This analysis is complicated slightly by the fact that John Deere gave Lockeby an

opportunity to renew his policy despite having no duty to do so. Morris County argues that

Lockeby’s failure to renew is an omission protected by article 6.15. However, the purpose of the

statute reveals that the failure to pay a renewal premium is not the type of “act or omission”

contemplated by article 6.15.

The purpose of article 6.15 is to free mortgagees from the burden of micro-managing the

mortgagor’s insurance policies. Mortgagee’s need not do intensive investigation of facts recited

in the mortgagor’s insurance application because article 6.15 protects mortgagees from

mortgagor fraud or misrepresentation in procuring the policy. See Citizens St. Bank of

Dickinson, 198 F.2d at 60. Mortgagees do not have to ask the insurer if the mortgagors have

paid the premium on a monthly basis because article 6.15 protects them from cancellation for

nonpayment of premiums. See Std. Fire Ins. Co., 407 F.2d at 1301. In sum, article 6.15 frees

mortgagees from constantly having to expend effort to determine if they still have coverage.

This underlying purpose is not implicated, however, when, as here, coverage expires

pursuant to the terms of the mortgagee’s own contract. Morris County had a copy of the

insurance contract that stated the date on which the policy expired. Morris County did not have

to expend continuous effort to determine whether they were still covered under the insurance

contract. They merely had to know the terms of their own contract with the insurer.

Furthermore, we think the alternative to our decision is unacceptable. If article 6.15

contained an independent notice requirement, Morris County would have retained coverage for an

indefinite period of time after the policy expired despite the fact that Morris County’s own copy

-7- of the contract stated that coverage would expire on September 24, 1997 without notice. This

result is inconsistent with the purpose of the statute.

CONCLUSION

We hold that article 6.15 does not contain an independent notice requirement, and,

therefore, it does not impose a duty on the insurer to notify an insured’s mortgagee of the policy’s

impending expiration. Any issues not addressed in this opinion were considered but deemed to be

without merit. We REVERSE the decision of the district court and RENDER judgment in favor

of John Deere Insurance Company.

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