Tech Land Development, Inc. v. South Carolina Insurance

VAUGHN, Judge. Plaintiff argues that the court erred in concluding Tech Land was not entitled to any of the insurance proceeds paid to Northwestern. We disagree. Both the mortgagor and mortgagee have an insurable interest in mortgaged property. The mortgagor’s interest is in the full value of the property. He has an equitable right of redemption which may be exercised from the time of default until the expiration of the ten-day upset bid period in the event of foreclosure. The mortgagee has a separate insurable interest limited to the extent of the debt which the property secures. Insurance Co. v. Assurance Co., 259 N.C. 485, 131 S.E. 2d 36 (1963); 3 Couch on Insurance 2d §§ 24:70, 24:72 (2d ed. 1960). In the present action, the mortgaged property was covered by a fire insurance policy which plaintiff purchased from South Carolina Insurance Company. The policy contained a standard mortgage clause assuring defendant mortgagee payment in the event of loss. According to the policy, payment would not be invalidated by any foreclosure or change in the title of the property. In North Carolina, a standard mortgage clause is considered a distinct and independent contract between the insurance company and mortgagee. Green v. Insurance Co., 233 N.C. 321, 64 S.E. 2d 162 (1951). The mortgagee’s rights are not impaired by a sale *569 of the property. Neither are they extinguished when the mortgagee itself becomes the owner of the property at the foreclosure sale. Shores v. Rabon, 251 N.C. 790, 112 S.E. 2d 556 (1960). The word “mortgagee” in the clause is simply a shorthand description of the party whose interest is protected. It is not a limitation to the retention of an exact status. FNMA v. Ohio Casualty Ins. Co., 46 Mich. App. 587, 208 N.W. 2d 573 (1973). We, therefore, conclude that when South Carolina Insurance Company paid Northwestern $67,449.30, Northwestern was entitled under the mortgagee clause to retain at least $26,253.07, the balance owed on the note after foreclosure. The issue is whether Northwestern was entitled to insurance proceeds in excess of the deficiency. In similar cases from other jurisdictions, courts emphasize the sequence of events. See 5A J. Appleman, Insurance Law and Practice § 3403 (1970 & Supp. 1981). They distinguish between foreclosure-after-loss and foreclosure-before-loss. When insured property is damaged prior to foreclosure, courts allow the purchasing mortgagee to retain under the mortgage clause those proceeds amounting to any deficiency after foreclosure. The mortgagor recovers the remainder of the proceeds. See, e.g., Nationwide Mutual Fire Insurance Co. v. Wilborn, 291 Ala. 193, 279 So. 2d 460 (1973); Smith v. General Mortgage Corp., 402 Mich. 125, 261 N.W. 2d 710 (1978). The courts conclude that once the deficiency is satisfied, the mortgagee’s additional recovery of proceeds representing undamaged property would amount to unjust enrichment since its bid represented the value of damaged property. See, e.g.. Nationwide Mutual Fire Insurance Co. v. Wilborn, 291 Ala. at 199, 279 So. 2d at 464. Where the damage occurs after approval of the foreclosure sale and before expiration of the mortgagor’s right to redeem, courts have allowed the purchasing mortgagee to recover all the insurance proceeds should the mortgagor fail to redeem within the time period. 5A J. Appleman, Insurance Law and Practice § 3403 (1970). The courts point out that the mortgagee’s bid represented the property in an undamaged state. See, e.g., Nationwide Mutual Fire Insurance Co. v. Wilborn, supra; City of Chicago v. Maynur, 28 Ill. App. 3d 751, 329 N.E. 2d 312 (1975). The mortgagee is thus “entitled to what remains and to the money *570 which stands in place of the lost portion of the property which he purchased.” Malvaney v. Yager, 101 Mont. 331, 54 P. 2d 135, 139 (1936). Plaintiff argues that the present situation falls in the category of foreclosure-after-loss. Although Northwestern’s bid was submitted before the building was damaged by fire, the sale was not consummated until the expiration of the upset bid period —an event occurring after loss. See Building & Loan Assn. v. Black, 215 N.C. 400, 2 S.E. 2d 6 (1939). During this ten-day period, Northwestern was free to request a rescission of its bid because of the interim damage to the building. See In re Sermon’s Land, 182 N.C. 123, 108 S.E. 497 (1921). Plaintiff argues that by electing not to rescind its original bid, Northwestern offered $160,000.00 as the value of the building in its current damaged condition. Northwestern is, therefore, entitled to only insurance proceeds covering the deficiency after foreclosure. We disagree with plaintiffs analysis. Northwestern’s decision to proceed with the sale in no way affected what its bid of $160,000.00 represented — an appraisal of the building in an undamaged condition. It is that basis for the purchasing mortgagee’s bid which categorizes the situation as a foreclosure-before-loss case. When no upset bid was filed and plaintiff’s right of redemption was not exercised, Northwestern was entitled to the property and to all the insurance proceeds. Contrary to plaintiff’s assertions, such a result will not unjustly enrich Northwestern. The proceeds merely represent the difference between the property Northwestern received and the property upon which it based its only bid. The dismissal of plaintiff’s action is affirmed. Affirmed. Judges Martin (Robert M.) and Arnold concur.