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In Blanding v. Long Beach Mortgage Company, Op. No. 4387 (S.C.Ct.App. filed May 6, 2008) (Shearouse Adv.Sh. No. 20 at 41), 2008 WL 2019113, the South Carolina Court of Appeals determined the priority and application of proceeds between a primary homeowners policy and a forced placed mortgagee policy. Blanding involved a property owner who gave a mortgage on real estate and an affixed mobile home which required her to insure the collateral and name the lender as a mortgagee on the policy. The property owner purchased a homeowner's policy from Foremost Insurance Company ("Foremost") with limits of $63,000 and named the lender as a mortgagee on the policy. The lender, however, mistakenly believed that the property owner had not purchased a policy and obtained a forced placed policy from American Security Insurance Company ("American Security") in the amount of $48,000. The American Security policy was issued to the mortgagee as the named insured and named the property owner as an additional insured.
During the terms of these policies, the property owner failed to make payments on the loan, a foreclosure action was instituted and the property was ordered foreclosed. Four days before the foreclosure sale, the home was destroyed by fire. The total debt due on the mortgage was $51,995.14 and the lender purchased the property at the foreclosure sale for $2,500. Thereafter, American Security, believing it to be the only insurer of the property, issued a check to the lender in the amount of $22,403.91. Later, Foremost issued a check to the property owner and the lender in the amount of $62,750. Upon receipt of the Foremost check, the lender returned $22,403.91 to American Security. The lender took the position that it was required under the American Security policy to return the proceeds and that it was entitled by the mortgage to apply the proceeds of the Foremost policy to the full amount of the property owner's debt.
The property owner filed a declaratory judgment action against the lender1 and alleged that the lender should have applied both the American Security and Foremost proceeds to her debt, resulting in payment to her of $35,908.77 from the balance of the Foremost proceeds after the debt was extinguished. Alternatively, she argued that both the American Security and Foremost policies were contributive and application of the proceeds of the policies on this basis resulted in payment to her in the amount of $40,720.86 from the Foremost policy. The lender took the position that the American Security policy was excess only and that the proceeds from the primary Foremost policy were sufficient to extinguish the debt. At trial, the court held that the Foremost policy was primary and the proceeds should first be applied to the property owner's debt, less the amount of the lender's bid at the foreclosure sale. The court also held that the American Security policy was excess, based on the policies' "other insurance" clauses, and, because the property owner's debt was satisfied from the Foremost proceeds, it was not triggered and no benefits were owed to the property owner.
On appeal, the South Carolina Court of Appeals affirmed the trial court's rulings. It termed "disingenuous" the property owner's argument that the "other insurance" clauses in the policies were irrelevant. The Foremost policy's "other insurance" clause provided that it was primary. The American Security policy's "other insurance" clause provided that was excess if there were any other valid or collectible insurance which would apply if the American Security policy had not been issued, and then only after all other insurance had been exhausted. Because the Foremost policy was collectible insurance which attached if the American Security policy had not been issued, the American Security policy was excess. Further, because the Foremost policy was sufficient to extinguish the debt, the American Security policy provided no proceeds.
The property owner also argued that the "other insurance" clauses were inapplicable because the policies did not cover the same risk and same interest for the benefit of the same insured over the same period of time. Specifically, she argued that she and the lender had different interests in the property and, therefore, both policies should have been applied without regard to any determination of primary or excess coverage. The court agreed that the property owner and lender had separate and distinct interests in the property, however, it held that both policies covered the same interests for the benefit of the same insureds. Both the American Security policy and the Foremost policy insured both the property owner's interest and the lender's interest. "Thus, the two policies, while insuring the parties' separate and distinct interest, each insured the same interest of the mortgagor and the same interest of the mortgagee." Id. at 50.
Finally, the property owner argued that the "other insurance" clause in the American Security policy violated South Carolina's Stated Value Statute, 38-75-20, and a statute regarding the issuance of insurance policies on mobile homes, 38-75-220. Both statutes provide that if two or more policies of insurance are written on the same property, they are considered contributive and each insurer pays its pro-rata share of the total or partial loss. The property owner argued that the American Security "other insurance" clause, which contained a provision designating the policy as excess only, "and in no event as contributing insurance," violated the statutes. Arguing that the American Security "other insurance" clause was void because of the statutory violation, she took the position that both the Foremost and American Security policies were primary and were required to contribute on a pro-rata basis to the extinguishment of the debt and that all excess funds were owed to her. The Court disagreed, noting that there was precedent from the South Carolina Supreme Court which allowed insurers to avoid the statute by including an anti-concurrent/contributive provision in their "other insurance" clauses. Because the American Security policy's "other insurance" clause contained such a provision, the court held that its status as an excess policy was unaffected by South Carolina statutory law.
While neither insurer whose policy was interpreted was a party to this action, the Blanding case provides assistance to insurers in determining their status where two or more policies cover the same loss. While reiterating the rule regarding when "other insurance" clauses are applicable, the court also acknowledged that primary homeowner's policies and forced placed policies are generally going to be subject to their "other insurance" clauses. Although the forced placed policy typically insures the mortgagee's interest in the amount due, it also names the property owner as an additional insured. Likewise, the homeowner's policy generally names the property owner as a named insured but also protects the mortgagee up to the amount of its interest in the property. The court clarified that these policies, though differing in particulars, protect the same risk and the same interests for the benefit of the same insureds over the same period of time. Thus, Blanding appears to provide security to forced placed insurers whose policies are typically designated as excess to any other applicable insurance.
http://www.judicial.state.sc.us/opinions/displayOpinion.cfm?caseNo=4387
1 - No insurers were named as parties to the action.
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