Insurance Law News - January 2010

• Party Who Bought Fire-Damaged Property at Sheriff’s Sale Was Not Entitled to Insurance Proceeds, and Insurer Was Entitled to Refund from Lender to Extent Lender Received Payoff from Sheriff’s Sale
• “Land Subsidence” Exclusion Relieves Insurer of Duty to Defend Insured Against Suits Arising From Landslide

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Party Who Bought Fire-Damaged Property at Sheriff’s Sale Was Not Entitled to Insurance Proceeds, and Insurer Was Entitled to Refund from Lender to Extent Lender Received Payoff from Sheriff’s Sale

A third party who bought a fire-damaged property at a sheriff’s sale was not entitled to insurance proceeds issued for the property, and an insurer was entitled to a refund from the lender to the extent the loan was satisfied with proceeds from the sheriff’s sale. (Washington Mut. Bank v. Jacoby (2010) 180 Cal.App.4th 639)

Facts

Rubin Pittman owned a residence that was encumbered by a first deed of trust held by Washington Mutual. State Farm issued a homeowner’s insurance policy that included a standard lender’s loss payable endorsement.

A third party obtained a judgment against Pittman, and the sheriff recorded a writ of execution against the property as part of the third party’s collection efforts.

Ultimately, a fire damaged the property, and Pittman submitted a claim against his homeowner’s insurance policy. State Farm suspected Pittman was involved in setting the fire, and State Farm eventually denied Pittman’s claim because he failed to comply with various policy conditions. Pittman later died. Neither Pittman nor his successors in interest challenged State Farm’s denial of coverage.  However, the lender’s loss payable endorsement in favor of Washington Mutual remained in effect.

Later, Scott Jacoby bought the property at a sheriff’s sale for $480,100.00. On the date of the purchase, $113,854.61 remained owing on the note and trust deed Washington Mutual held. After the sale, the sheriff issued payment of $113,854.61 to Washington Mutual. Thereafter, Washington Mutual informed State Farm that the amount required to pay off the note was actually $118,169.98. In response, State Farm sent Washington Mutual a check for $118,169.98 in accordance with the lender’s loss payable endorsement.

The combined amount Washington Mutual received (i.e., the proceeds from the sheriff’s sale and the payment from State Farm) exceeded the amount owing on the note. Washington Mutual applied all of the sheriff’s sale proceeds to the loan, and further applied $4,942.27 from the State Farm proceeds to complete the loan payoff. 

Washington Mutual filed a complaint in interpleader against State Farm, Pittman’s successors and Jacoby to resolve a dispute over the remaining funds, which totaled $113,227.51. Pittman’s successors did not respond to the interpleader complaint, and the court entered a default against Pittman’s successors.

Jacoby and State Farm subsequently filed cross-motions for summary judgment, each claiming an entitlement to the excess funds. The trial court granted State Farm’s motion and Jacoby appealed.

Holding

The Court of Appeal affirmed the ruling in favor of State Farm. The Court ruled that Jacoby’s status as current owner of the property did not make him a party to the insurance contract that State Farm had issued to Pittman, and that Jacoby had no entitlement to the insurance proceeds. The Court relied on California Insurance Code section 305, which states in part that “[t]he mere transfer of subject matter insured does not transfer the insurance ….” In short, the Court reiterated the well-established rule that an insurance policy does not “run with the land.” 

The Court also held that State Farm’s obligation under the lender’s loss payable endorsement was to pay only the extent of Washington Mutual’s interest, which was the amount outstanding on the promissory note. Once the debt was discharged, Washington Mutual had no further claim on any insurance proceeds. 

Comment

The main concept utilized in this case frequently has been applied in connection with foreclosure sales and a lender’s “full credit bid.” When a trustee or mortgagee forecloses on an encumbered property and makes a successful full credit bid—a bid that is equal to the unpaid principal and interest of the mortgage debt, along with all costs and foreclosure expenses—the debt is extinguished and the trustee/mortgagee is not entitled to insurance proceeds payable for pre-purchase damage to the property.   

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"Land Subsidence" Exclusion Relieves Insurer of Duty to Defend Insured Against Suits Arising From Landslide

Facts

Various homeowners sued the City of Carlsbad, alleging that the City had negligently maintained and repaired a water line, resulting in a landslide. The homeowners alleged that as a result of the landslide, they suffered both property damage and bodily injury.

The City sought defense and indemnity under its general liability policy with Insurance Company of the State of Pennsylvania (ISOP). ISOP agreed to defend the City under a reservation of rights and ultimately indemnified the City for the bodily injury claims. However, ISOP denied coverage for the property damage claims based on a policy exclusion which barred coverage for “any property damage arising out of land subsidence for any reason whatsoever.” The policy defined “land subsidence” as “movement of land or earth,” specifically including “landslide” as an example.

Following ISOP’s denial of coverage for the property damage claims, the City sued ISOP for breach of contract and breach of the implied covenant of good faith and fair dealing. The trial court ruled that the ISOP policy’s “land subsidence” exclusion barred coverage for any liability the City had on the property damage claims, and thus entered judgment in favor of ISOP.

Holding

The Court of Appeal affirmed. The Court ruled that an exclusion barring coverage for “any property damage arising out of land subsidence for any reason whatsoever” unambiguously barred coverage for any liability the City had for property damage arising out of the landslide – regardless of the cause of the landslide.

The Court rejected the City’s argument that the City was entitled to indemnification under the “efficient proximate cause” doctrine. Specifically, the City claimed that the “efficient proximate cause” of the property damage was not the landslide, but rather, the City’s earlier negligence in maintaining its water line. The Court disagreed, holding that the “efficient proximate cause” doctrine is limited to first party property insurance cases, and is not applicable in third party liability insurance cases.

The Court noted that the “concurrent proximate cause” doctrine might apply where the insured is seeking coverage for liability to a third party.  However, in this case, the “concurrent proximate cause” doctrine was inapplicable because there were not two separate and independent causes that combined to cause the homeowners’ damages. Any negligence by the City in maintaining its water line only became actionable because of the subsequent landslide, which was clearly excluded from coverage.

Comment

In reaching its conclusion, the Court reiterated a seemingly obvious proposition, i.e., that the “efficient proximate cause” doctrine applies in first party property insurance cases and the “concurrent proximate cause” doctrine applies in third party liability insurance cases.

Note that the result in this case is consistent with an earlier case, Blackhawk Corp. v. Gotham Ins. Co. (1997) 54 Cal.App.4th 1090, in which another California Court of Appeal upheld a similar exclusion for “movement of land or earth.”

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