On appeal from the Superior Court of New Jersey, Law Division, Essex County
Before Judges Petrella, Havey and Brochin
The opinion of the court was delivered by
The subject of this appeal is a mortgagee's liability for failing to pay premiums for hazard insurance on the mortgaged property with funds paid by the mortgagor and escrowed for that purpose.
In 1970, plaintiffs Ruby and Anthony Cromartie purchased a house in Newark, New Jersey for $26,750. To finance their purchase, they borrowed $25,000 from J.I. Kislak Mortgage Corporation, securing their loan by an F.H.A. insured first mortgage on the property. Their mortgagee assigned the mortgage to defendant Carteret Savings and Loan Association. Carteret, although continuing to service the mortgage, thereafter assigned it to Federal Home Loan Bank of New York.
As required by the mortgage, the Cromarties also purchased fire insurance from Allstate Insurance Company. They did not introduce their insurance policy into evidence. However, Carteret introduced an Allstate "Deluxe Homeowners Policy" for a one-year period beginning July 7, 1977, which insured the Cromarties and their mortgagee against various risks, including fire damage to the extent of $32,000 for the dwelling, $3,200 for appurtenant private structures, and $16,000 for unscheduled personal property. This 1977 insurance policy was one of the annual renewal policies which replaced their original policy.
The terms of the Cromarties' mortgage required them to make a single monthly payment to the mortgagee each month in an amount which would include a pro rata portion of the annual real estate taxes, assessments and premiums for "policies of fire and other hazard insurance covering the mortgaged property." The mortgage also provided that these payments would be "held by Mortgagee in trust to pay said . . . premiums, taxes and special assessments; and . . . [would] be applied by the mortgagee to the following items in the order set forth: . . . taxes, special assessments, fire, and other hazard insurance premiums."
The Cromarties made the monthly payments due under the mortgage. From 1970 to some time in 1978, the mortgagees paid the taxes on the property to the City of Newark and the hazard insurance premiums to Allstate Insurance Company out of the escrowed funds which they collected from the Cromarties. During that period Carteret, first on its own behalf and then as servicing agent for Federal Home Loan Bank of New York, obtained annual renewal policies from the insurer without any action on the part of plaintiffs. These renewal policies were received and retained by Carteret. However, beginning some time in 1978, although Carteret continued to collect the monthly sums to pay the insurance premiums, it stopped paying them to Allstate Insurance Company. Consequently, the fire insurance on plaintiffs' property lapsed. Carteret did not report the termination of coverage to plaintiffs and, in fact, continued to send them periodic statements of their escrow account. These statements reflected the amounts which Carteret collected from plaintiffs to pay premiums. Since the statements did not show an accumulation of undisbursed funds in the escrow account, they implied that Carteret was continuing to pay premiums to maintain hazard insurance on the property.
On November 10, 1983, plaintiffs' house was so severely damaged by fire that it became uninhabitable. Mrs. Cromartie reported the fire to Allstate Insurance Company and then to Carteret. Allstate responded by informing her, for the first time, that her fire insurance policy had lapsed. Veronica Errico, who was then the manager in charge of Carteret's insurance department, told Mrs. Cromartie that Allstate was at fault for terminating the policy and that Carteret would take care of the property until the insurance coverage issue had been resolved.
Carteret commenced a suit against Allstate for the fire damage, but the suit was dismissed on the ground that it was barred by the one-year period of limitations which is a standard provision of a New Jersey fire insurance policy. See N.J.S.A. 17:36-5.20; but cf. Peloso v. Hartford Fire Ins. Co., 56 N.J. 514, 521, 267 A.2d 498 (1970) (period within which insured may sue on a fire insurance policy is tolled from the time the insured gives notice to sue until liability is formally declined). Apparently acting in the caretaking role which it assumed after the fire, Carteret purchased insurance to protect the property against further damage by fire and charged the premiums to the Cromarties' escrow funds, had the house boarded up to prevent a continuation of reported vandalism, and arranged for monthly inspections. These inspections continued until 1985 or 1986.
Thereafter, the City of Newark acquired the property by foreclosure. Plaintiffs assert that the foreclosure occurred in September 1986, and they claim to have received no notice of it. We cannot tell from the record submitted to us whether the foreclosure was for unpaid real estate taxes, for sewerage charges, for water usage fees, or for some combination of all three. Carteret was responsible for the payment of taxes at least to the extent of the escrowed funds which it had collected from the Cromarties for that purpose. However, the mortgage does not provide for Carteret to pay sewerage and water charges. There is nothing in the record to show that the caretaking function which Carteret assumed after the fire extended to paying those charges. Carteret did not continue paying taxes and the Cromarties made no further mortgage payments after the fire.
After Newark had foreclosed its liens on the property, the Cromarties commenced this suit against Carteret Savings and Loan and Allstate Insurance Company. They alleged that Allstate had failed to notify them of the lapse of their policy and that it was therefore liable to them for breach of contract and for negligence. They also alleged that because Carteret had allowed their fire insurance to lapse, it was liable to them for breach of contract, fraud, and negligence. Carteret counterclaimed for the unpaid balance of the mortgage loan.
The claims against Allstate were dismissed. The court held that they were barred because suit had not been instituted within the period of limitations established by N.J.S.A., 17:36-5.20. The remaining claims were tried to a jury. At the close of the presentation of the evidence, the trial Judge dismissed plaintiffs' negligence claim on the ground that it was subsumed in their contract claim. He held that the evidence presented at trial had proved, beyond any reasonable dispute, that Carteret had contracted to maintain insurance coverage on the Cromarties' property or to notify them of its termination, and that it had breached that obligation. He ...