On appeal from Superior Court, Law Division, Middlesex County.
Seidman, Michels and Devine. The opinion of the court was delivered by Seidman, P.J.A.D.
The issue here, on which we have found no reported decision in this State precisely in point, and none has been cited to us by counsel, is whether a mortgagee, named as such in the mortgage clause of a fire insurance policy, who acquires title to the property prior to a fire loss by a conveyance from the owner in lieu of foreclosure, retains an insurable interest under the policy entitling it to recover for its loss. The insurance company rejected the mortgagee's proof of loss and refused payment on the ground that when the mortgagee accepted the deed in full satisfaction of the debt, it no longer had such insurable interest.
In the suit instituted by the mortgagee, plaintiff herein, the trial judge held on stipulated facts that coverage was afforded by the policy only to the extent of plaintiff's interest as mortgagee and thus it was entitled to be paid no more than the amount, if any, that was still due and owing on the mortgage after the conveyance.*fn1 Judgment was entered accordingly and
plaintiff appealed, contending that the insurer was obligated to pay it, within the policy limit, the full loss sustained.
Defendant John L. Chmielewski owned an apartment building in Newark. The fire insurance policy in question was issued to him by defendant New Jersey Insurance Underwriting Association on that building and on another one not involved in this litigation. The policy contained a standard mortgage clause naming Mohawk Savings & Loan Association as first mortgagee and plaintiff 495 Corporation, as second mortgagee. As indicated, during the term of the policy and prior to the loss Chmielewski, to avoid a foreclosure, conveyed the property to plaintiff in satisfaction of the second mortgage, but subject to the first mortgage. Chmielewski makes no claim to any part of the insurance proceeds.
The standard mortgage clause*fn2 provided, among other things, that the loss, if any, under the policy would be payable to the named mortgagee "as interest may appear under all present or future mortgages upon the property," and that the insurance, as to the interest of the mortgagee, would not be invalidated by any act or neglect of the mortgagor or owner, or any foreclosure
or other proceeding or notice of sale, or by any change in the title or ownership of the property. The clause also required the mortgagee to notify the insurer "of any change of ownership . . . which shall come to the knowledge of said mortgagee . . . otherwise this policy shall be null and void."
In reaching his conclusion that the insurer was not liable to plaintiff except possibly for the amount that might still be owed by the mortgagor, the trial judge relied upon Whitestone S. & L. Ass'n v. Allstate Ins. Co. , 28 N.Y. 2d 332, 321 N.Y.S. 2d 862, 270 N.E. 2d 694 (Ct.App.1971), as "compelling authority." He held in his letter opinion that while under the mortgage clause the insurer's obligation to plaintiff would have survived a conveyance to a third party, a foreclosure proceeding or a foreclosure sale that did not satisfy the mortgage debt, the insurer's obligation here, according to Whitestone , was extinguished by the conveyance which discharged the mortgage debt. He concluded that "plaintiff stands no higher than a third party grantee of the insured would, that is, it is not an insured and is barred under the terms of the policy . . .." We do not agree.
Whitestone proceeds from the premise that "[b]ecause a mortgagee is entitled to one satisfaction of his debt and no more, the bidding in of the debt to purchase the mortgaged property, thus cutting off other lower bidders, has always constituted a satisfaction of the debt." 28 N.Y. 2d at 335, 321 N.Y.S. 2d at 864, 270 N.E. 2d at 696. According to the Whitestone court, the theory of recovery by a mortgagee is indemnity against an impairment of the mortgaged property which adversely affects the mortgagee's ability to resort to the property as a source for repayment. Thus, where the debt has been satisfied in full subsequent to a fire "neither reason nor precedent suggest recovery on the policy by ...