SUPREME COURT: COUNTY OF CHAUTAUQUA
GEORGE B. WEAVER, JR.,
vs Index #H-08000
AMERICAN MOTORISTS INSURANCE
COMPANY, a wholly subsidiary of
THE KEMPER GROUP OF INSURANCE
HAGERTY & BRADY
(Mark J. Schaefer, Esq.
of Counsel) for Plaintiff
RICHARD L. WOLL, ESQ.
Attorney for Defendant
DECISION and ORDER
This is an action commenced by Plaintiff to recover
under a policy of fire insurance for losses incurred as a
result to tornado damage to a building in which he had a
mortgagee and leasehold interest.
The insurer rejected the claim contending that
Plaintiff did not have an insurable interest in the
The parties agreed to have the Court sit as an
arbitrator and on November 30, 1995 an informal arbitration
proceeding was held by the Court.
The parties submitted a stipulated statement of facts
which is appended to this Decision and Order as Exhibit 1.
Defendant contends that at best, plaintiff's insurable
interest is limited to the $40,000 plaintiff expended as
tenant to restore the leasehold.
Defendant argues that because the other insurance paid
off the equivalent of the mortgage indebtedness, plaintiff
did not sustain a security loss.
The Court does not agree with this rationale.
Citing Section G2 under Commercial Property Conditions
and Section A2k under Personal Property Coverage, Defendant
contends the limit of liability of defendant would be the
difference between the amount collected under the buyer's
policy in which plaintiff was named as mortgagee, and the
liability limits of plaintiff's $100,000 policy.
To put this in perspective, one must first consider
defendant's limits of liability as if there had been no
other insurance, and, then, its liability prior to any
payment by the owner's insurer.
Under the first assumption, defendant would have been
responsible for the $65,000 mortgage, plus the leasehold
interest of $58,000 (plaintiff's $40,000 costs plus the
$18,000 value of the elevator). In this example, defendant
would have been liable for the $100,000 limit of the
Under the second assumption, the "Other Insurance"
clause, page 1 of 3, Form CP 79 01, would have applied
resulting in a pro rata contribution on the losses
requiring defendant to assume 55% of the following losses:
Plaintiff's mortgage $ 65,000
Plaintiff's leasehold 58,000
55% $ 67,650
The policy provides:
"If there is other insurance covering the
same loss or damage, we will pay only for the
amount of covered loss or damage in excess of the
amount due from that other insurance, whether you
can collect on it or not. But we will not pay
more than the applicable Limit of Insurance."
The covered property under Plaintiff's policy does not
restrict coverage to personal property and/or improvements
and betterments only as Defendant claims.
The Court holds that Plaintiff is entitled to collect
$67,650 under his insurance policy; he had an insurable
interest as a result of the mortgage and leasehold
"Where the owner of realty, after having
obtained a fire policy covering the property,
conveyed the property, retaining a mortgage on
it, and thereafter the same property was covered
by a second fire insurance policy, both insurers
were liable to the owner pro rata as the amount
the coverage of each bears to the total
insurance, since the owner after the conveyance
still had an insurable interest to the extent of
his mortgage. " 71 NYJur2d 1892, page 222, citing
BrewervNorthRiverInsCo 1950),Sup) 268 NYS
The insurable interest must be calculated as of the
time of loss.
Because the mortgagor's policy would have paid off the
mortgage but its proceeds were instead used to repair the
property; the owners have always been current on their
payments; and, at no time was a default declared or
foreclosure proceedings considered, Defendant says it
should not have to pay anything for Plaintiff's interest on
Defendant relies on SaveresevOhioFarmersInsCo,
260 NY 45 and also cites WriedtvBeckenhauer, 159 NW2d
822, a Nebraska case which held:
"Where the mortgagee procures insurance on
his separate interest, for his own benefit and at
his own cost, and without any agreement with the
mortgagor with respect thereto, the mortgagee is
entitled to the proceeds, the mortgagor having no
But, then that court goes on to say:
"In the event of a loss by fire of the
insured property, or a part thereof, the
mortgagee is entitled to be compensated by his
insurance, but if the mortgage indebtedness is
subsequently paid in full, he has not sustained a
security loss and insurer is entitled to recover
the insurance paid."
Thus, Defendant seems to be saying that because the
Plaintiff elected to allow the mortgagor/owner to receive
the proceeds from the owner's insurance policy, Plaintiff
is not entitled to recover under his own policy.
Defendant argues that Plaintiff could have used the
proceeds of the owner's policy to extinguish the mortgage
interest and hence he would have had no insurable interest.
This argument begs the question and ignores Plaintiff's
interest as a leaseholder.
The Court does not agree with this rationale.
Defendant was the drafter of the insurance contract;
the policy must be construed with every benefit of doubt
given to Plaintiff.
The mortgage was $65,000 and the promissory note was
for $14,900. There is an insurable interest to the extent
of the debt owed. See SchultzvBeulahLandFarm, 181 AD2d
Plaintiff claims the note presents a "further lien
interest" in the property. However, there is nothing to
indicate any such lien interest.
Here, the owner/mortgagor was paid under his policy.
The proceeds were paid to both the mortgagee and mortgagor,
placed in an account from which repairs were made on the
Plaintiff had a right, if not a duty, to hold the
proceeds until repairs were completed to secure his
interest pursuant to RPL 254(4)(a). See also GradyvUtica
MutualInsCo 69 AD2d 668.
The repairs owners made were to the entire building,
not just the part Plaintiff had a lease on.
Clearly, the owner was in no position to make repairs
if the proceeds of the owner's policy were applied to
satisfy the mortgage. As it was, repairs were never fully
completed due to a lack of funds.
Plaintiff's standing to recover is not affected by
actions of 3rd persons since he suffered a loss and did not
waive his rights as mortgagee and maintained an interest as
The Court in WhitestoneSavings, 321 NYS2d 866 and
AlexandraRestaurantvNHInsCo, 272 AD 346, affd 297 NY
"...the fact that improvements on land may
have cost the owner nothing, or that, if
destroyed by fire, he may compel another person
to replace them without expense to him, or that
he may recoup his loss by resort to a contract
liability of a 3rd person, in no way affects the
liability of an insurer, in the absence of any
exemption in the policy."
"Nor are his damages to be diminished
because he had collateral contracts or relations
with 3rd persons which relieve him wholly or
partly from the loss against which the insured's
company agreed to indemnify him."
"Defendant's policy insured the property and
not the debt due the insured from its landlord.
The policy did not contain a clause specifically
granting the insurer subrogation to contract
rights belonging to insured....it is difficult to
see why under the subrogation clause in question,
the ultimate loss should fall upon the landlord
while the insurance company ...should have no
obligation or liability whatever."
Federal courts have taken the same position. See
CitizensInsCovFoxbiltInc 226 F.2d 641, WaltervMarine
OfficeofAmerica 537 F.2d 89.
THE LEASEHOLD INTEREST
The tornado rendered plaintiff's leasehold interest a
total loss. In addition, Plaintiff had an option to renew
for a second 5 year term under his lease and claims
compensation for the full 10 years.
Defendant says any insurable interest would not extend
to the second term, citing L&ERestaurantandLoungeInc.v
TheHomeInsCoofIndiana, a Supreme Court decision of
Hon. Penny Wolfgang, J.S.C. in Erie County. Judge Wolfgang
held that because the tenant never exercised his option to
renew, his insurable interest was limited to the term in
which his property was destroyed. See also Vendriescov
AetnaCasualtyandSuretyCo 68 AD2d 946.
This Court holds that those cases do not apply in this
case where the insured sold the property for less than its
market value, took back a mortgage and promissory note, and
reserved a leasehold interest. Moreover, the policy
contemplates consideration of renewal options. See Page 7,
item 7. Valuation, which provides:
"If your lease contains a renewal option,
the expiration of the renewal option period will
replace the expiration of the lease in this
To deal with proper assessment of damages to Plaintiff
regarding the loss of the leasehold, it is necessary to
discuss some financial issues and the actual terms of
The owners received $80,000 under their policy. The
liability limit of Plaintiff's policy was $100,000.
Plaintiff claims the leasehold is worth $63,900 at
$4.00 per square foot rental value. He has spent to date
$40,200 out of pocket to partially restore the leasehold.
The measure of damages under the policy must be the
actual cost of restoration of the leasehold along the lines
of the method set out in the policy as set forth in the
improvements and betterments clause.
Under this method, at least the $40,000 already spent
would be included, plus the cost of the freight elevator.
It would cost $80,000 to repair or replace the
elevator. Plaintiff says that the elevator would have
added a dollar a square foot to the value of the leasehold
for two five year terms which translates into a discounted
value of $18,000 for the leasehold. This is a proper
measure of damages.
The generally accepted rule even before the standard
policy was introduced is that an insured may not recover
the full value of the property but will be limited in his
recovery to the value of his actual interest in the
property damaged or destroyed. See BeekmanvFulton&
MontgomeryCountyFarmers'MutualFireInsAssn, 66 AD 72,
73 NYS 110; LarnervCommercialUnionAssurCo, 127 Misc 1,
215 NYS 151.
A party possessing a special interest in the subject
matter insured may always recover the value of the special
interest, on an insurance of the entire subject matter; the
insured is entitled to recover according to his real
interest in the property, whether his title is absolute or
qualified. See 71 NYJur2d Sec 1754, page 127, notes 60 and
61, citing VanNattaVMutualSecurityInsCo 4 NY Super Ct
490; GirardvTaylor, 6 AD2d 359.
The Court holds that Plaintiff is entitled to collect
$67,650 under his insurance policy, plus the legal rate of
interest from the date of the loss.
THIS IS THE DECISION AND ORDER OF THE COURT.
Dated: January , 1996
Mayville, New York
Supreme Court Justice
To all Counsel:
Please take notice that a DECISION and ORDER of
which the within is a copy, is duly granted in the above
entitled action on the day of , 1996, and
duly entered in the office of the Clerk of the County of
Chautauqua on the same date.