These two actions, which were tried together although never formally consolidated, are here pursuant to our leave on the question whether, under the New York standard mortgagee clause as incorporated into a standard fire insurance policy, a mortgagee — here the Syracuse Savings Bank, plaintiff-appellant in action No. 1 (hereinafter referred to as the Bank) — may be bound by an appraisal of loss conducted by the owner — here Isadore Blumberg, plaintiff-appellant in action No. 2 — and the insurer — here Yorkshire Insurance Company, Ltd., defendant-respondent in both actions (hereinafter referred to as Yorkshire) — without the mortgagee's participation in either the selection of the appraiser or the formulation of the award.
The essential facts are undisputed. Blumberg is the owner of a building upon which the Bank holds a $44,000 mortgage executed by Blumberg and his wife, which contained a provision that they would keep the premises insured for the mortgagee's benefit. Blumberg as owner procured from four different insurance companies — of which the defendant, Yorkshire, was one — New York standard fire policies in the total amount of $27,000 all of which included a New York standard mortgagee clause. While the policies were in effect a fire in an adjacent building caused extensive smoke and water damage to the Blumberg property. Blumberg and Yorkshire, failing to agree as to the amount of the loss, proceeded in accordance with the terms of the policy to the appointment of appraisers to fix the sound value of the building and the amount of the loss. Blumberg selected the J. D. Taylor Construction Corporation, a domestic corporation, and Yorkshire nominated an individual, F. T. Delaney. The Taylor corporation, acting through its vice-president, R. D. Cragg, and the said Delaney found a sound value of $20,000 and fixed the loss at $4,366 which amount they awarded to Blumberg. Yorkshire's prorata share under its policy amounted to the sum of $808.52, which was tendered to the Bank and Blumberg by a check drawn to both their names. The plaintiff Bank rejected the tender and advised Blumberg to refuse also. It is conceded by a stipulation entered into on the trial that the Bank had no notice of, and did not participate in, the appraisal. Furthermore, it is conceded by the Bank that there was present no element of fraud or bad faith nor is there any claim by any party that the policy conditions were not fully complied with by Blumberg and Yorkshire.
It is well settled in this and most other States that a mortgagee clause in a standard form policy creates an independent insurance of the mortgagee's interest just as if he had received a separate policy from the company but without any inconsistent or repugnant conditions imposed upon the owner and free from invalidation by the latter's "act or neglect" (Savarese v. Ohio Farmers Ins. Co., 260 N.Y. 45; Goldstein v. National Liberty Ins. Co., 256 N.Y. 26; McDowell v. St. Paul Fire & Marine Ins. Co., 207 N.Y. 482; Heilbrunn v. German Alliance Ins. Co., 140 App. Div. 557, affd. 202 N.Y. 610; Eddy v. London Assur. Corp., 143 N.Y. 311; Hastings v. Westchester Fire Ins. Co., 73 N.Y. 141; Browning v. Home Ins. Co., 71 N.Y. 508).
This principle of the mortgagee's separate independent interest in the proceeds of the policy has been conclusive of earlier problems arising under this and similar clauses. Thus, failure of the owner to render proof of loss as required by provisions of the policy within the policy time limit, may not prevent a mortgagee's recovery (McDowell v. St. Paul Fire & Marine Ins. Co., supra), the interest of the mortgagee and owner being regarded as distinct subjects of insurance (Heilbrunn v. German Alliance Ins. Co., supra). The mortgagee, we have held, is a necessary party to any suit to recover for a fire loss brought by the owner against the company (Lewis v. Guardian Fire & Life Assur. Co., 181 N.Y. 392), if a judgment rendered in such an action is to be binding upon the mortgagee (see Steinbach v. Prudential Ins. Co., 172 N.Y. 471; Civ. Prac. Act, § 193). Nor is the mortgagee to be bound in any manner by the owner's proof of loss or any admission by an owner after a fire concerning either the sound value of the property or the amount of damage in an action by the mortgagee against the insurer for there is no relationship of principal and agent — their interest being
The Appellate Division found its answer to the present problem in the Massachusetts rule enunciated in Dragon v. Automobile Ins. Co. (265 Mass. 440). Although recognizing the separability of interest under a standard mortgagee clause (see Hardy v. Lancashire Ins. Co., 166 Mass. 210), it was there held that the mortgagee is bound by an appraisal conducted without his participation but otherwise pursuant to the terms of the policy. Authority for this view was found in Erie Brewing Co. v. Ohio Farmers Ins. Co. (81 Ohio St. 1), a case which arose in a jurisdiction which does not accord to a mortgagee any separate insurable interest under the standard mortgagee clause. The holding in the Erie Brewing Co. case has been criticized by many commentators as contrary to the weight of authority (see Richards on Law of Insurance [4th ed.], § 281; 25 L. R. A. [N. S.] 740; 38 A. L. R. 383, 389; 111 A. L. R. 697; 29 Am. Jur., Insurance, § 1253; see Beaver Falls B. & Loan Assn. v. Allemania Fire Ins. Co., 305 Pa. 290). Much of the difficulty with the Erie Brewing Co. case appears to stem from its reliance upon Chandos v. American Fire Ins. Co. (84 Wis. 184) in which neither a standard mortgagee clause nor its predecessor, the "Union Mortgagee Clause" was involved. That case was decided upon the construction of a simple "loss payable" clause which is generally considered to amount to no more than a designation of an assignee to receive payments, who, as an assignee, stands only in the shoes of his assignor, the owner (19 L. R. A. 321).
The reasoning adopted in Beaver Falls B. & Loan Assn. v. Allemania Fire Ins. Co., (supra) and other jurisdictions and text writers adopting the same view, turns on the recognition of the separate distinct right enjoyed by the mortgagee of which it may not be deprived by any act or neglect of the mortgagor. The
Upon principle and precedent then, we hold that a standard mortgagee clause, creating as it does, a separate and independent
We turn to a second point presented by this appeal. The validity of the appraisal made herein is now challenged by Blumberg as invalid on the ground that a corporation was incompetent to act as an appraiser. This is predicated on the circumstance that the Taylor corporation's charter while, in general terms, authorizing it to engage in the building and construction business, does not specifically authorize it to act as an appraiser. Appraisal of real property is not, however, an unreasonable incident to such a business and may well lie among the necessary implied powers of the corporation. The doctrine of ultra vires has been developed for the benefit and protection of stockholders and directors or contracting parties and not for disinterested third parties (7 Fletcher on Corporations, §§ 3419, 3448). Only the State may collaterally take cognizance of corporate malfeasance (§ 3457), (People v. North Riv. Sugar Refining Co., 121 N.Y. 582).
It is also pointed out by the appellants that a written oath attached to the appraisal report was signed in the corporate name. This, however, has little force and effect, depending, as it does, entirely on the theory that the appraisal must be governed by the statutory provisions of the act relating to arbitration proceedings despite the clearly permissive rather than mandatory effect of prior procedure (Civ. Prac. Act, art. 84). We see nothing in section 1448 of the Civil Practice Act as amended in 1941, requiring the appraisal authorized by section 168 of the Insurance Law to be treated as an arbitration proceeding. The case of Davis v. Rochester Can Co. (220 App. Div. 487, affd. 247 N.Y. 521) relied upon in the first appeal below (268 App. Div. 818) questioned the capacity of the Interstate Commerce
In any event, the Taylor corporation was named by the mortgagor who now seeks to avoid the consequences of his own act. As far as Blumberg is concerned, he is estopped from making any complaint. So far as the bank is concerned, the question is academic in view of our ruling that it is not bound by the appraisal.
The judgments in Syracuse Savings Bank v. Yorkshire Insurance Company, Ltd., should be reversed and a new trial granted, with costs to abide the event; the judgment in Blumberg v. Yorkshire Insurance Company, Ltd., should be affirmed, with costs.
I, too, am for reversal in the action brought by the Syracuse Savings Bank, but I would add a few words about that aspect of the case relating to the appraisal provision.
The conclusion reached by Judge DYE follows, it seems to me, from the settled rule that the effect of the mortgagee clause is to make an entirely separate insurance of the mortgagee's interest and to impose upon the insurance company an independent obligation to pay the loss or damage under the policy to the mortgagee "as interest may appear". (See e.g., Savarese v. Ohio Farmers Ins. Co., 260 N.Y. 45, 51; McDowell v. St. Paul Fire & Marine Ins. Co., 207 N.Y. 482, 487-488; Eddy v. London Assur. Corp., 143 N.Y. 311, 322.)
Thus, the amount of the loss or damage set forth in the proof of loss filed, as prescribed in the policy, by the owner and mortgagor with the insurance company is not binding on the mortgagee, for it has been held that no admission of the former after the fire has occurred concerning the property's worth or the amount of the damage is even receivable in evidence against the mortgagee in an action brought by him against the company on the policy. (See Browning v. Home Ins. Co., 71 N.Y. 508, 512.) Moreover, an agreement of settlement between the owner and the insurance company is not binding upon the mortgagee — even though the policy provides that the insurance company is to pay the loss as ascertained or estimated "by the insured and this company." (See Hathaway v. Orient Ins. Co., 134 N.Y. 409; see, also, McDowell v. St. Paul Fire & Marine Ins. Co., supra, 207 N.Y. 482, 485.) And, beyond that, since the mortgagee is a necessary party in a suit brought by the owner mortgagor against the insurance company upon the policy for the loss or damage suffered (see Lewis v. Guardian Fire & Life Assur. Co., 181 N.Y. 392, 397-398), a judgment rendered in such an action is not binding upon the mortgagee if he was not a party to it. (Civ. Prac. Act, § 193; see Steinbach v. Prudential Ins. Co., 172 N.Y. 471, 477-478; see, also, Twelfth Annual Report of N. Y. Judicial Council, 1946, pp. 169, 176-179; Shapiro, Necessary and Indispensable Parties , 29 Cal. L. Rev. 731, 736.)
Certainly, then, if the mortgagee must be a party to any settlement between the insured and the company and to any judicial proceeding brought by the insured against the company, the mortgagee cannot be bound by an appraisal of which it had no notice and in which it had no opportunity to participate.
It is no answer that the policy issued by the company provides for the appointment of appraisers by the insured and the company "In case the insured and this Company shall fail to agree
The policy was written to cover all cases, whether there was a mortgagee or not. There would, of course, be no question as to the binding effect of the award arrived at pursuant to the appraisal provision — just as there would be no doubt as to the conclusiveness of the proof of loss filed by the insured or the settlement agreed to by him — if there was no mortgage on the property. But it does not follow, from the presence of the provision in the policy, that it is binding on any one but the insured. While, therefore, the policy provided for an appraisal by appraisers selected by the insured and the company, that provision was not intended or designed to prescribe the applicable rules of law that would govern the rights of the parties involved if there was a mortgagee. In short, relating it to the present case, who are to be parties to the appraisal proceeding, in order to render the award binding in any particular case, depends upon principles altogether independent of the policy itself, and those principles do not permit the insured to deprive the mortgagee of the right to participate in a proceeding designed to determine the amount to be paid by the company on account of the loss or damage suffered.
No one will question the fairness and the importance of permitting the mortgagee to participate in fixing the amount to be paid under the policy. In many cases, his mortgage interest will be in excess of the fire damage and he will be entitled, under his contract with the company, to the entire amount of insurance paid. It would be going pretty far to hold that the mortgagee has not only no say in choosing the appraisers who are to hear and determine the question of the amount to be paid to him, but no right to attend the appraisal proceedings and introduce evidence that will have a bearing upon that question. True, the mortgagor may be intent on procuring the highest possible award, and, it may be urged, he may be expected to present all available evidence and in the best possible light. That same argument, however, could be advanced with equal force where the
The judgments of the Appellate Division should be reversed in the Bank case.
No one doubts that the standard mortgagee clause, in a fire insurance policy, creates an independent contract of insurance for the separate benefit of the mortgagee (Goldstein v. National Liberty Ins. Co., 256 N.Y. 26, 29). In other words, the insurer is separately and directly obligated to the mortgagee. However, for the terms of that separate contractual obligation (insurer to mortgagee) we must look to the policy itself, for there is nowhere else to look. The sole question here is as to the alleged contractual right of the mortgagee (plaintiff Syracuse Savings Bank) to have notice of, and participate in, the appraisal procedure described in the policy as one of the methods of establishing the amount of the loss. Since the policy contains no language conferring any such right on a mortgagee, and indeed specifically confers such a right on the owner alone, I cannot find a basis for a holding that the mortgagee has such a right, nonetheless. Where does it come from?
The policy provisions bearing on this question are these: "STANDARD MORTGAGEE CLAUSE. Loss or damage, if any, under this policy, shall be payable to Syracuse Savings Bank, as first mortgagee * * * as interest may appear, and this insurance, as to the interest of the mortgagee * * * only therein, shall not be invalidated by any act or neglect of the mortgagor or owner * * *."
Thus by the contract of the mortgagee with the insurer, it is provided: first that the loss or damage "under the policy" shall be paid to the mortgagee; second, that this insurance of the mortgagee shall not be invalidated by any act or neglect of the owner; third, that in case of disagreement between the insured and the company, there shall be an appraisal, with an appraiser nominated by the insured and the other by the company, and an umpire selected by the two appraisers; and, fourth, that the appraisal award shall determine the amount due under the policy. It can hardly be doubted that the "insured" referred to in the appraisal provision is the owner, not the mortgagee. Thus, there is nothing whatever in the policy to give the mortgagee any part in the appraisal. Since the policy makes the appraisal award determinative of the amount of loss, the appraisal, unless shown to be fraudulent or otherwise vitiated, must of necessity, conclude the mortgagee.
Surely, the owner, by going forward in good faith with the very appraisal procedures set up by the very policy to which the mortgagee must look for all the latter's rights, cannot be guilty of an act or neglect invalidating the mortgagee's rights. The owner, by so doing, is not invalidating, but asserting the mortgagee's right to collect the amount of the loss.
None of the cases cited here for reversal is authority for a holding that the mortgagee, despite the very language of the policy on which he relies, has some separate right to conduct or control the appraisal. Browning v. Home Ins. Co. (71 N.Y. 508) says only that once a mortgagee's rights have become fixed, they cannot be affected by any admissions or declarations made by the owner. Hathaway v. Orient Ins. Co. (134 N.Y. 409, 413) says that a compromise or accord and satisfaction, agreed to by the owner without the mortgagee's consent, does not bind the mortgagee. McDowell v. St. Paul Fire & Marine Ins. Co. (207 N.Y. 482) holds that the owner's neglect to file a
The language of the appraisal clause which contemplates an owner-appointed appraiser and an insurer-appointed appraiser, cannot be stretched to let in a third appraiser, the presence of a third appraiser would destroy the policy's plainly pictured scheme of appraisal, and no reason appears why such stretching should be attempted. All the mortgagee is entitled to is the amount of the loss, determined as per the policy. This judgment gives it that.
The judgments in both actions should be affirmed, with costs.
In first above-entitled action: Judgments reversed, etc.
In second above-entitled action: Judgment affirmed.