Coverage for a Mortgagee
December 15, 2014
The insured's mortgagee brought an action against the insurer to recover for a fire loss to a vacant building. This case is SWE Homes, LP v. Wellington Ins. Co., 436 S.W.3d 86 (Tex. App. 2014).
Sadberry purchased a residential property with a mortgage from SWE. He insured the home with Wellington Insurance Company. The policy contained a mortgage clause and a vacancy clause. The vacancy clause prohibited coverage for damage to the dwelling if the insured building is vacant for sixty consecutive days immediately before a loss.
The property was damaged in a fire and Sadberry filed a claim. However, after Sadberry admitted that the property had been vacant for over a year prior to the fire, the insurer denied coverage. SWE then filed a claim pursuant to the mortgage clause. When Wellington failed to respond, SWE filed a lawsuit. The district court entered summary judgment for the insurer and this appeal followed.
Wellington argued that there was no covered loss since the property had been left vacant for over sixty consecutive days immediately before the loss. SWE argued that under the policy, coverage for the mortgagee could not be defeated by the mortgagor's actions triggering the vacancy clause when SWE had no knowledge of those actions. So, the court of appeals of Texas, Houston, said that the only real dispute here revolves around whether SWE's claim under the mortgage clause is defeated by operation of the policy's vacancy clause.
Wellington focused on the language of the mortgage clause wherein it states that Wellington will pay for any covered loss and then interprets this language as meaning that because Sadberry triggered the vacancy clause by leaving the property vacant for a prolonged period, the fire damage was not a covered loss. SWE countered that this interpretation renders the other sections of the mortgage clause meaningless, that is, the section that declares SWE has the right to receive the loss payment under certain circumstances, including the condition that SWE inform Wellington of any change in occupancy or substantial change in risk that was known to SWE.
The court would not accept the insurer's interpretation of the policy language. The court said that such an interpretation does not construe the document as a whole, harmonizing all of the provisions so that none are rendered meaningless. While the vacancy clause would mean no coverage for the insured, the clear import of the standard loss payable language means that the vacancy clause does not operate to defeat coverage for SWE.
The court noted that there are two common types of loss payable clauses in insurance policies. The open clause states simply that any loss is payable to the mortgagee as its interest may appear, that is, the mortgagee enjoys the same rights as the insured and if coverage is defeated due to an act of the insured, the mortgagee likewise would be denied recovery. The other type is a standard mortgage clause that provides coverage is not invalidated by any act or neglect of the mortgagor. In this case, the court found that the mortgage clause is a standard loss payable clause and so, acts committed by Sadberry would not constitute a defense to an action by SWE.
The court also noted that the provisions barring coverage would be rendered void by operation of Texas Insurance Code, section 862.055.
The opinion of the trial court was reversed and remanded.
Editor's Note: The court of appeals contrasted the vacancy clause with the mortgagee clause and decided that the language favored the mortgagee in its quest to have coverage for the fire loss. As long as the mortgagee complied with the terms of the mortgagee clause (and it did), the insurer was obliged to pay the mortgagee for the loss.