Mortgagee has no Right to Insurance Proceeds After Debt Paid

Satisfaction of Mortgage Eliminates Right of Mortgagee to Recover from Homeowners Policy

In Thomas P. Williams, Sr. v. Nationwide Insurance a/k/a Nationwide Mutual Insurance Company, Civil Action No. 22-1090, United States District Court, E.D. Pennsylvania (March 24, 2023) Nationwide denied the claim of its insured because they failed to comply with the Policy's post-loss duties by failing to appear for scheduled examinations, not producing requested documents, making material misrepresentations to Nationwide and because Nationwide's investigation of the fire revealed that it was “intentionally set.”

The homeowners sold the fire-damaged property to the plaintiff. The money from the sale was used to satisfy the entirety of the homeowners' outstanding mortgage with a bank.

The plaintiff requested that the insurer reimburse him for the amount he claims he paid toward satisfying the homeowners' mortgage. He based his request on a standard mortgage clause in the homeowners' insurance policy, which stated that a denial of the homeowners' claim would not preclude payment to a valid claim of the mortgagee.

PNC Bank was the original mortgagee. The plaintiff claims that he stepped into the shoes of the bank once he allegedly paid the balance of the mortgage. Thus, the plaintiff claims that he is entitled to the same payment the insurer would have had to pay to the bank, namely the amount it would cost to repair the property.

The insurer refused to pay the plaintiff's claim and the plaintiff sued.

PROCEDURAL HISTORY

The plaintiff Thomas P. Williams alleged that he had purchased a fire-damaged property and paid off the mortgage encumbering the property.

FACTUAL BACKGROUND

The Ruchs owned property located in Albrightsville, PA (“the Property”). They had insured the Property for property damage under a policy with Nationwide (“the Policy”) and had a mortgage on the Property with PNC Bank NA (“PNC”).

A fire caused damage to the Property. The Ruchs submitted a claim to Nationwide under the Policy, and Nationwide eventually determined that the amount of the adjusted claim was $103,000.00. However, Nationwide later denied the claim because of breach of condition and fraud.

The Policy contained a mortgage clause allowed payment to the bank upon receipt of a proof of loss. Williams purchased an assignment of the proceeds of the Policy from the Ruchs but not the bank.

At the time of the sale, the Ruchs owed $135,490.13 on the mortgage to PNC and used the funds from the sale to satisfy the outstanding balance. At that time, Nationwide had not made any payment to PNC pursuant to the mortgage clause. After receiving the payment, PNC filed a Satisfaction of Mortgage with the Carbon County Recorder of Deeds.

DISCUSSION

Williams argued that because his funds paid to the Rauch's satisfied the mortgage on the Property and because Nationwide would have had to pay PNC if it fulfilled the policy conditions, he stepped into the shoes of PNC. Nationwide argued that it had no obligation to pay under the mortgage clause because the mortgage was satisfied. Further, Nationwide contended that Williams misconstrues his property interest because he stepped into the shoes of the mortgagor (the Ruchs), not the mortgagee (PNC). When he bought the property Williams’ interest in the property became that of owner, not mortgagee. He had no rights under Nationwide's Policy.” The court concluded that Nationwide was correct on both points.

There was no evidence demonstrating Williams assumed any legal rights under the mortgage. While Williams novel argument demonstrates a logical creativity, he cites no case law, and the court found none to support his contention that a purchaser of a property steps into the shoes of the mortgagee when the funds from the purchase are used to satisfy an outstanding mortgage.

Duty to Pay Pursuant to the Mortgage Clause

Nationwide averred that Williams had no cognizable claim because the Ruchs satisfied the mortgage at closing and there was no present obligation to pay. Because the law permits a mortgagee to recover the amount necessary to satisfy the mortgage but no more, the court found that because the mortgage was satisfied and there is no evidence of a new mortgage, the mortgagee is not entitled to any further payment under the Policy's standard mortgage clause.

The fire damaged the Property and after the loss, Williams obtained his interest in the Property. The insured mortgage was fully satisfied and neither party presented any evidence that once Williams obtained his interest, there was any outstanding mortgage on the Property. Therefore, any further recovery under the Policy would constitute an unjust enrichment for the mortgagee.

At bottom, the mortgagee cannot seek further payment under the Policy and Nationwide had no obligation to pay. The court granted Nationwide's motion for summary judgment and  denied Williams' cross-motion for summary judgment.

ZALMA OPINION

Nationwide had two contracts: first with the Rauch's as named insured and second with PNC Bank as mortgagee. Once Nationwide denied the claim of the named insureds it had the obligation to pay PNC if it presented a sworn proof of loss. Before PNC even attempted to protect its rights under the policy Williams purchased the property and the money he paid to the owners was used to satisfy the mortgage, thereby eliminating the right of PNC to make a claim to Nationwide. Had Williams obtained an assignment from PNC rather than the Rauch's he would have a claim. He did not and his "creative" argument failed.

(c) 2023 Barry Zalma & ClaimSchool, Inc.

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Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com

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