April 28, 2014
In a published decision, Wells Fargo Bank N.A. v Null (Docket No. 312485, March 6, 2014), the Michigan Court of Appeals has held that standard mortgage clauses in homeowners insurance policies operate to afford coverage to mortgagees even when coverage is denied to an insured in a context other than the application of a policy exclusion.
In 1994, Auto-Owners issued a homeowners policy covering a residence in Cassopolis, Michigan under which Lonnie Null was the named insured. The policy contained a standard mortgage clause and named Wells Fargo as the mortgagee. Three years later, Lonnie entered into a “residential real estate contract” with his sister-in-law, Elizabeth. The mortgage was never assigned to Elizabeth and the insurance policy remained in Lonnie’s name. While Lonnie stayed at the residence sporadically through approximately 2004, he did not live at the residence. In 2009, the residence was destroyed by a fire and Elizabeth filed a claim with Auto-Owners for damage to the residence and to her personal property.
Auto-Owners denied Elizabeth’s claim on the basis that no coverage existed because Lonnie, the named insured, did not reside at the residence. Elizabeth sued Auto-Owners and named Wells Fargo as a defendant as well. The circuit court eventually entered judgment in favor of Auto-Owners, agreeing that the policy’s residence requirements were not met, and the Court of Appeals affirmed that decision.
In the meantime, Wells Fargo had initiated its own action, alleging Breach of Contract against Auto-Owners, and claiming that it was entitled to any insurance proceeds recovered by Elizabeth. Auto-Owners sought summary disposition, arguing that, because Elizabeth was not entitled to coverage under the policy, Wells Fargo was not entitled to coverage despite the existence of the mortgage clause. Auto-Owners reasoned that, in contrast to a case where coverage was afforded but then negated by an exclusion (such as fraud or arson), in this case, no coverage was ever available in the first instance because the residence requirement was not met. The circuit court agreed with Auto-Owners and entered judgment in its favor. Wells Fargo appealed.
The Court of Appeals first rejected Wells Fargo’s argument that it was entitled to relitigate the issue of whether the residence was covered under the policy. The Court held that Wells Fargo was collaterally estopped from relitigating this issue because the issue was fully and finally litigated in Elizabeth’s action and the parties were all in privity. However, this finding did not doom Wells Fargo’s claim as the Court of Appeals went on to hold that, even though there was no coverage for the residence in the first instance, there remained an enforceable contract between Auto-Owners and Wells Fargo under the policy’s standard mortgage clause.
The Court of Appeals acknowledged that Michigan courts have generally only considered this coverage issue under circumstances in which coverage to the insured was excluded by operation of a policy exclusion. However, the Court reasoned that the circumstances of this case – i.e., where no coverage was available to an insured in the first instance – did not warrant a different result. Citing support from other jurisdictions, as well as from the policy language itself, the Court concluded that the proper construction of the standard mortgage clause was to afford coverage to Wells Fargo under the facts of this case, noting that the “very purpose” of standard mortgage clauses is to protect the mortgagee from acts of the insured which would jeopardize coverage to the insured property.
The take-away from this decision is that, in Michigan, a standard mortgage clause in a homeowners insurance policy will be enforced to afford coverage to a mortgagee regardless of whether coverage to the insured is precluded by operation of the coverage clause or by operation of an exclusion.
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The Agenda is as follows:
8:30 – 8:55 Continental Breakfast – Registration
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9:00 – 10:00 Michigan First-Party Automobile No-Fault (PIP) Update
Speaker: David N. Campos
10:00 – 10:30 Indiana First-Party Law Update
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10:30 -10:45 Break
10:45 – 11:15 Tips on Handling Difficult Opposing Counsel
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11:15 – 11:45 Michigan Third-Party Automobile Negligence Update
Speaker: Adam K. Gordon
11:45 – 12:15 Indiana Third-Party Law Update
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12:15 – 12:30 Question and Answer Session
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