[184 NJSuper Page 603] The question to be resolved herein is whether plaintiff mortgagors are entitled to the proceeds of a fire insurance policy (which insures the interest of both the mortgagors and the mortgagees) to rebuild the residence or must the proceeds be applied in reduction of the mortgage where the value of the vacant land exceeds the balance due on the mortgage which has been kept current. Research has revealed no New Jersey case which addresses this problem of payment of the fire insurance proceeds where the security is not impaired and the mortgage is not in default. It is held that under the facts of this case the mortgagors are entitled to the proceeds to rebuild the residence.
Plaintiff mortgagors Tami Starkman and Dora Birnbaum executed a purchase money mortgage to defendant mortgagees Robert Sigmond and Barbara Sigmond, his wife, in the amount of $60,000. A fire loss occurred on the mortgaged premises; mortgagees demand that the insurance proceeds be applied to the outstanding mortgage balance. Plaintiff mortgagors seek the proceeds of the fire insurance to rebuild the residence. The essential facts are not in dispute and both parties move for summary judgment.
After the complaint was filed and before filing an answer, defendant mortgagees moved for summary judgment. At the time the motion was heard the insurance company, Prudential Property and Casualty Insurance (Prudential), was not a party to the action. The court determined it should have the benefit of Prudential's position on its obligation under the insurance policy, and on August 23, 1981 denied defendants' motion. Thereafter, plaintiffs filed an amended complaint against Prudential; defendants Sigmond filed an answer and crossclaim against Prudential. Prudential filed its answer, including a third-party complaint against plaintiffs' husbands, Morris Starkman and Simon Birnbaum, asserting they were the real parties in interest.
Subsequently, Prudential agreed to issue a $135,000 check in settlement of all claims made under the insurance policy. After application by plaintiffs, the court on December 21, 1981, by consent of the parties, ordered Prudential to issue the $135,000 in two drafts: one in the sum of $60,000 payable to both mortgagees and mortgagors and the other in the sum of $75,000 payable to plaintiff mortgagors only. Thereafter, plaintiffs, defendants Sigmond and Prudential entered into a consent order to invest the $60,000 pending a determination by the court of the rights of the parties. Prudential required a release from the Sigmonds before it would issue the $60,000 check. On February 16, 1982 the court entered another consent order which provided that payment of the $60,000 would be in a nature of an interpleader. The Sigmonds were to execute the release and assert
any claims against the fund which may have been asserted against Prudential.
On January 6, 1981 plaintiffs purchased a house and lot located at 112 South Sacramento Avenue, Ventnor, New Jersey from defendants for $150,000. Defendants took back a purchase money mortgage in the sum of $60,000 with interest at the rate of 10% payable in monthly amortization installments of $525. The mortgage is for a 30-year term but has a "balloon" at the end which requires full payment to be made on January 6, 1986, i.e. , the entire mortgage is payable within five years. The mortgage also required the mortgagors to maintain hazard insurance on the premises for the benefit of the mortgagees. Prudential issued the insurance policy to plaintiffs as the "insureds"; defendants are listed as mortgagees on the face of the insurance policy. The loss payable clause to the mortgagee appears in the body of the policy and provides:
Loss, if any, under this policy, shall be payable to the mortgagee . . ., named on the first page of this policy, as interest may appear . . ., and this insurance as to the interest of the mortgagee . . ., shall not be invalidated by any act or neglect of the mortgagor. . . .
This clause is known as a "union mortgage clause" because it insulates the mortgagee from policy defenses which may be available against the mortgagor. 5A Appleman, Insurance Law and Practice , § 3401 at 282 (1970). The union mortgage clause is to be distinguished from an "open loss payable clause." Under an open loss clause the policy merely identifies who is to collect the proceeds. Ibid. "In the open form, the indemnity of the mortgagee is subject to the risk of every act and neglect of the mortgagor which would avoid the original policy in the mortgagor's hands." 5A Appleman, op. cit. , § 3401 at 293.*fn1
On February 23, 1981 the house was substantially destroyed by fire. On November 17, 1981 plaintiffs received notification from the building inspector of Ventnor to demolish the dwelling
because the fire damage amounted to total destruction creating a dangerous situation -- the walls could collapse and youngsters were playing on the rotting floors. Plaintiffs submitted a certification from a real estate appraiser evaluating the vacant land at approximately $71,500, an amount which is at least $10,000 in excess of the outstanding balance on the mortgage. Plaintiffs have kept the monthly mortgage payments current.
Plaintiffs argue that since the mortgage is not in default and the security is not impaired, defendants cannot insist on applying the proceeds of the insurance to pay off the mortgage debt. Plaintiffs place primary reliance on the terms and conditions for acceleration in the mortgage and note. Plaintiffs observe that the provisions of the note and mortgage were negotiated*fn2 and these documents are silent as to acceleration in the event of fire. They contend that if defendants use the proceeds to satisfy the mortgage debt, theywill be deprived of the loan from defendants and defendants are currently getting what they bargained for, i.e. , continuous monthly payments over a period of time.
In contrast, defendants rely on the terms of the insurance policy. They argue that the policy is an independent agreement between the insurer and the mortgagees and that their rights cannot be affected by any acts of the mortgagors in rebuilding. Defendants claim their rights under the insurance policy became vested at the time of the fire and no subsequent act of the mortgagor can defeat their right to the proceeds. Defendants suggest that payment of the $60,000 to plaintiffs will result in a windfall to plaintiffs.*fn3 Defendants maintain that plaintiffs will
have realized $56,000 profit within a few months. While defendants acknowledge that part of the proceeds of the insurance represent a loss of contents by plaintiffs, they suggest that the contents claim would not in any way approximate $56,000.
The standard mortgage clause creates an independent contract of insurance, for the separate benefit of the mortgagee, engrafted upon the main contract of insurance contained in the policy itself. 495 Corp. v. N.J.Ins. Underwriting Ass'n, supra , 173 N.J. Super. at 123, citing Reed v. Firemen's Ins. Co. , 81 N.J.L. 523, 526, 80 A. 462 (E. & A. 1910); 5A Appleman, op. cit. , § 3401 at 292. An independent agreement exists between the mortgagee and the insurer. Employers' Fire Ins. Co. v. Ritter , 112 N.J. Eq. 418, 420 (Ch.1933). ...