A third party who bought a fire-damaged property at a sheriff’s sale was not entitled to insurance proceeds issued for the property, and an insurer was entitled to a refund from the lender to the extent the loan was satisfied with proceeds from the sheriff’s sale. ( Washington Mut. Bank v. Jacoby (2010) 180 Cal.App.4th 639)
Facts
Rubin Pittman owned a residence that was encumbered by a first deed of trust held by Washington Mutual. State Farm issued a homeowner’s insurance policy that included a standard lender’s loss payable endorsement.
A third party obtained a judgment against Pittman, and the sheriff recorded a writ of execution against the property as part of the third party’s collection efforts.
Ultimately, a fire damaged the property, and Pittman submitted a claim against his homeowner’s insurance policy. State Farm suspected Pittman was involved in setting the fire, and State Farm eventually denied Pittman’s claim because he failed to comply with various policy conditions. Pittman later died. Neither Pittman nor his successors in interest challenged State Farm’s denial of coverage. However, the lender’s loss payable endorsement in favor of Washington Mutual remained in effect.
Later, Scott Jacoby bought the property at a sheriff’s sale for $480,100.00. On the date of the purchase, $113,854.61 remained owing on the note and trust deed Washington Mutual held. After the sale, the sheriff issued payment of $113,854.61 to Washington Mutual. Thereafter, Washington Mutual informed State Farm that the amount required to pay off the note was actually $118,169.98. In response, State Farm sent Washington Mutual a check for $118,169.98 in accordance with the lender’s loss payable endorsement.
The combined amount Washington Mutual received (i.e., the proceeds from the sheriff’s sale and the payment from State Farm) exceeded the amount owing on the note. Washington Mutual applied all of the sheriff’s sale proceeds to the loan, and further applied $4,942.27 from the State Farm proceeds to complete the loan payoff.
Washington Mutual filed a complaint in interpleader against State Farm, Pittman’s successors and Jacoby to resolve a dispute over the remaining funds, which totaled $113,227.51. Pittman’s successors did not respond to the interpleader complaint, and the court entered a default against Pittman’s successors.
Jacoby and State Farm subsequently filed cross-motions for summary judgment, each claiming an entitlement to the excess funds. The trial court granted State Farm’s motion and Jacoby appealed.
Holding
The Court of Appeal affirmed the ruling in favor of State Farm. The Court ruled that Jacoby’s status as current owner of the property did not make him a party to the insurance contract that State Farm had issued to Pittman, and that Jacoby had no entitlement to the insurance proceeds. The Court relied on California Insurance Code section 305, which states in part that “[t]he mere transfer of subject matter insured does not transfer the insurance ….” In short, the Court reiterated the well-established rule that an insurance policy does not “run with the land.”
The Court also held that State Farm’s obligation under the lender’s loss payable endorsement was to pay only the extent of Washington Mutual’s interest, which was the amount outstanding on the promissory note. Once the debt was discharged, Washington Mutual had no further claim on any insurance proceeds.
Comment
The main concept utilized in this case frequently has been applied in connection with foreclosure sales and a lender’s “full credit bid.” When a trustee or mortgagee forecloses on an encumbered property and makes a successful full credit bid—a bid that is equal to the unpaid principal and interest of the mortgage debt, along with all costs and foreclosure expenses—the debt is extinguished and the trustee/mortgagee is not entitled to insurance proceeds payable for pre-purchase damage to the property.