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495 Corp. v. New Jersey Insurance Underwriting Association

Decided: May 27, 1981.


On certification to the Superior Court, Appellate Division, whose opinion is reported at 173 N.J. Super. 114 (1980).

For affirmance -- Chief Justice Wilentz and Justices Sullivan, Pashman, Clifford, Handler and Pollock. For reversal -- none. The opinion of the Court was delivered by Pashman, J. Clifford, J., concurring in result.


[86 NJ Page 160] The standard mortgage clause in an insurance policy protects the interest of a mortgagee in the insured real property. This case presents the question whether a standard mortgage clause entitles a mortgagee to recover the full amount of a loss incurred after it acquired title to the insured property by a conveyance from the owner. The trial court held that the insurer is liable only for the amount of the outstanding mortgage debt. The Appellate Division reversed, finding that the mortgagee may recover the full amount of loss, subject to the policy limits and the rights of superior mortgagees. 173 N.J. Super. 114

(1980). Having granted the petition for certification of defendant New Jersey Insurance Underwriting Association, 84 N.J. 431 (1980), we now affirm the judgment of the Appellate Division.


The trial court decided the question of liability on the basis of stipulated facts. Defendant John L. Chmielewski owned an apartment building in Newark. When he purchased the building, he assumed an existing first mortgage and gave a second mortgage to plaintiff securing a debt of $12,100. Defendant New Jersey Insurance Underwriting Association [Insurance Underwriting] issued to Chmielewski a fire insurance policy with $100,000 coverage on the building. The policy contained a standard mortgage clause naming Mohawk Savings & Loan Association as first mortgagee and plaintiff 495 Corporation as second mortgagee. During the term of the policy, Chmielewski conveyed the property to 495 Corporation in satisfaction of the second mortgage but subject to the first mortgage. Plaintiff took title to the property and recorded the deed, but did not cancel the mortgage or note,*fn1 nor did it notify Insurance Underwriting of the change in the ownership of the building and in its interest in the property.

After this conveyance to 495 Corporation but during the term of the policy, the building was damaged by a fire and subsequent vandalism. Plaintiff filed a claim for these losses under the insurance policy. When Insurance Underwriting declined to pay, plaintiff instituted this action.

The trial court granted judgment for defendant Insurance Underwriting, limiting its liability to any undischarged mortgage

debt owed by Chmielewski. Relying on Whitestone Savings & Loan Association v. Allstate Insurance Co., 28 N.Y. 2d 332, 270 N.E. 2d 694, 321 N.Y.S. 2d 862 (1971), the court reasoned that the conveyance of the property extinguished defendant's obligation to insure plaintiff at the same time as it discharged the mortgage debt.

The Appellate Division reversed the judgment for defendant.*fn2 It distinguished Whitestone as involving a loss prior to foreclosure and, relying upon Nationwide Mutual Fire Insurance Co. v. Wilborn, 291 Ala. 193, 279 So. 2d 460 (1973), held that "where, as here, a mortgagee acquires title to the mortgaged premises by a conveyance from the defaulting mortgagor in lieu of foreclosure, and a fire occurs thereafter, the mortgagee-owner is entitled to be compensated for its loss, to the extent of available insurance moneys after payment has first been made to the superior mortgagee, if there is one."*fn3 173 N.J. Super. at 128-29. The court found this result "equitable, realistic and entirely consistent with the intent and purpose of the independent contract between mortgagee and insurer created by the standard mortgage clause." Id. at 128. We agree and, accordingly, affirm.


The standard mortgage clause included in defendant Chmielewski's insurance policy is an independent agreement between the insurer and the mortgagee. Power Building & Loan Association v. Ajax Fire Insurance Co., 110 N.J.L. 256, 257 (E & A 1933). Under the agreement, a mortgagee may recover for damages to the insured property regardless of any defenses that the insurer may have against the named insured. The clause provides that:

Loss, if any, under this policy, shall be payable to the mortgagee (or trustee), named on the first page of this policy, as interest may appear under all present or future mortgages upon the property herein described in which the aforesaid may have an interest as mortgagee (or trustee) in order of precedence of said mortgages, and this insurance, as to the interest of the mortgagee (or trustee) only therein, shall not be invalidated by any act or neglect of the mortgagor or owner of the within described property, nor by any foreclosure or other proceedings or notice of sale relating to the property, nor by any change in the title or ownership of the property. . . .

The issue presented in this appeal is whether such a clause affords to a mortgagee coverage for losses occurring after it ...

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