Story Case

Mr. Abraham Toplitz mortgaged his clothing store to Mr. Jacob Levinson, and agreed, at the same time, to insure the property. He took out a policy in the Continental Insurance Company in his own name but for the benefit of Mr. Jacob Levinson, mortgagee. On the fifth of April, Mr. Toplitz paid his debt. On the following night, the property was destroyed by fire. Mr. Levinson sued on the policy but the company refused to pay, on the ground that at the time of the loss, Mr. Levinson was no longer mortgagee. "Will this defense of the insurance company prevail?

Ruling Court Case. Hathaway Vs. Orient Insurance Company, Volume 124 New York Reports, Page 409

T. W. Brickon, the owner of property on which was located several buildings, mortgaged the same to Hathaway. The mortgage held by Hathaway contained a covenant that the buildings should be kept insured against damage by fire for the benefit of the holder of the mortgage. Pursuant to this covenant, Brickon procured a policy from the Orient Insurance Company by the terms of which the company "does insure T. W. Brickon. Loss, if any, payable to A. B. Hathaway, as his mortgage interest may appear." The property insured was destroyed by fire. Brickon and the insurance company, without Hathaway's knowledge or consent, came to a settlement, and loss agreed upon was paid directly to Brickon. Hathaway now brings this action against the company, seeking to recover the amount of his loss as mortgagee. He insists that he had a right in the loss, and that the company could not pay this over to Brickon without his consent as mortgagee.

Mr. Chief Justice Follet said: "It is said that Hathaway is the appointee of Brickon. He is; but he is not a mere appointee of Brickon, and without a vested interest in the policy. He acquired his right to recover the damages, not solely by the appointment of Brickon, but by the policy, a contract entered into between the insurer, the owner of the fee and the mortgagee. Had this policy provided that in case of loss the damage should be paid to a person having no interest in the insured property, such person would have been a naked appointee, the same as though the damages had been directed to be paid to a bank or to any collecting agent, and the owner could have settled the loss and released the insurer on his own terms." Judgment was given that Hathaway might recover the amount of his loss as mortgagee.

Ruling Law. Story Case Answer

We have seen that the owner of property may transfer the property insured with the insurance, provided the company consents to the assignment; in this case, it has been seen that the assignee takes the place of the former owner of the property. But the owner of the property may appoint the loss to a person, generally a mortgagee, to secure the debt of the mortgagee, and if the company consents to this, the mortgagee receives a vested interest in the policy, and the mortgagor or owner of the property can make no settlement with the company which will prejudice the rights of the mortgagee or appointee.

Where there is a mortgage on property, the insurance policy usually contains a clause providing that the insurance is first held for the benefit of the mortgagee to the extent of his debt, and then for the benefit of the mortgagor. In case of loss, it is necessary for the mortgagee to show his actual interest in the property. A mortgagee should see that the policy contains not merely a clause covering his interest, for then he risks the danger of being without protection because of breach of condition on the part of the mortgagor; he takes only through the mortgagor. The mortgage clause should also provide expressly that no breach of condition precedent or default on the part of the mortgagor shall render the policy invalid as to the mort-gee. This clause fully protects the mortgagee.

In the Story Case, Mr. Levinson was the appointee of the mortgagor, Mr. Toplitz, and without doubt, could have recovered from the insurance company, had his debt not been paid on the day previous to the fire. But since the mortgage was cancelled, he no longer owned any interest in the property and suffered no loss by its destruction. He will, therefore, fail in his suit against the fire insurance company.