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Key Pacific Mortgage v. Industrial Indemnity Co. of Alaska (1/22/93), 845 P 2d 1087
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Notice: This is subject to formal correction
before publication in the Pacific Reporter.
Readers are requested to bring typographical
or other formal errors to the attention of
the Clerk of the Appellate Courts, 303 K
Street, Anchorage, Alaska 99501, in order
that corrections may be made prior to
permanent publication.
THE SUPREME COURT OF THE STATE OF ALASKA
KEY PACIFIC MORTGAGE, INC., )
and KEY BANK OF ALASKA, )
) Supreme Court File No. S-4957
Appellants, ) Superior Court File No.
) 3AN-89-2957 Civil
v. )
)
INDUSTRIAL INDEMNITY COMPANY ) O P I N I O N
OF ALASKA, )
)
Appellee. ) [No. 3918 - January 22, 1993]
)
Appeal from the Superior Court of the
State of Alaska, Third Judicial District,
Anchorage,
Peter A. Michalski, Judge.
Appearances: Patrick B. Gilmore,
Atkinson, Conway & Gagnon, Anchorage, for
Appellants. Roger F. Holmes, Biss and
Holmes, Anchorage, and William R. Hickman,
Stephen M. Todd, Pamela A. Okano, Reed
McClure, Seattle, Washington, for Appellee.
Before: Moore, Chief Justice,
Rabinowitz, Burke and Compton, Justices.
[Matthews, Justice, not participating].
COMPTON, Justice.
Key Pacific Mortgage, Inc. and Key Bank of Alaska
(Insureds) appeal from a summary judgment holding that
the Errors and Omissions (E&O) insurance policy each
purchased from Industrial Indemnity Company of Alaska
(Industrial Indemnity) does not provide coverage for
(1) accidental loss of private mortgage insurance or
(2) accidental failure to protect an abandoned
residence against freeze damage. We affirm the
judgment of the superior court.
I. FACTUAL AND PROCEDURAL BACKGROUND
Insureds are related financial institutions in the
mortgage loan and servicing business in Alaska. Each
makes residential mortgage loans and sells most of
these loans to investors on the secondary market.
After they sell the loans, Insureds continue to service
them on behalf of the investors, handling the day-to-
day management of the loans.
On over 97% of the residential loans serviced by
Insureds, the investors require the mortgagors to pay
for the purchase of private mortgage insurance (PMI).
PMI protects mortgagees from mortgagor default. If the
mortgagor defaults, the PMI company has the option of
buying the loan and taking title to the property, or
paying a set percentage of the outstanding balance on
the loan. Insureds collect the premiums for PMI from
the mortgagors as part of the regular monthly payment
and pay the PMI insurance carrier.
In the mid-1980s, when Alaska suffered a recession,
foreclosures increased dramatically. Because of the
increased volume of foreclosures, Insureds failed to
comply with notice, foreclosure and premium renewal
requirements of PMI policies. On those grounds, PMI
carriers have denied coverage or reduced payments on a
substantial number of claims submitted by Insureds.
Insureds also failed to ensure that the water pipes
were drained or heat maintained in mortgaged homes
abandoned by mortgagors. The standard homeowner's
insurance policy excludes freeze damage to an
unoccupied building when the insured has not exercised
reasonable care to avoid such damage. The homeowner's
and forced-place1 insurers have rejected Insured's
claims for freeze damage.
Insureds purchased E&O insurance from Industrial
Indemnity for the period May 1983 - May 1987. E&O Form
CF 00 63 provides coverage for losses and liability
arising out of the accidental loss of other insurance.
The disputed provisions are sections II A and III A.
Section II A reads, in part:
COVERAGE--MORTGAGEE INTEREST: Subject
to the limit of liability specified above,
this Company agrees to indemnify the Insured
for loss to the Insured's mortgagee interest
(including the Insured's mortgagee interest
in any legal fiduciary capacity) in real
property and in personal property mortgaged
in connection therewith, when such loss
occurs through error or accidental omission
on the part of the Insured . . . in the
operation of the Insured's customary
procedure in requiring, procuring and
maintaining valid policies or other evidences
of insurance against the perils described
below, . . .
Section III A reads, in part:
COVERAGE--MORTGAGEE LIABILITY: Subject
to the limit of liability, this Company
agrees to pay on behalf of the Insured all
sums which the Insured shall become legally
obligated to pay as damages in any mortgagee,
mortgage fiduciary or mortgage servicing
agency capacity arising by reason of error or
accidental omission in the operation of the
Insured's customary procedure in procuring
and maintaining valid policies or other
evidences of insurance, against the risks and
perils described below, for the benefit of
the mortgagor in amounts and under terms and
conditions customarily accepted by the
mortgagor; . . .
Insureds failed to pay PMI premiums on two mortgage
loans. When the loans went into default, the PMI
carrier denied Insureds' claims. An investor demanded
reimbursement from Insureds for the face value of the
PMI policy in one case and repurchase of the loan in
the other. Insureds complied with the investor's
demands.
Insureds submitted claims to Industrial Indemnity under
the E&O policy for the losses arising out of the lapse
in PMI coverage. They stated that there were also a
number of additional potential claims. Industrial
Indemnity denied coverage for claims arising out of the
loss of PMI.
Insureds also submitted claims for freeze damage which
the homeowner's and forced-place insurance carriers had
denied. Industrial Indemnity denied coverage for these
claims as well.
Insureds sued Industrial Indemnity for declaratory
relief and breach of contract. After Industrial
Indemnity answered, both parties filed motions for
partial summary judgment on the PMI claims. The trial
court granted Industrial Indemnity's motion.
Industrial Indemnity moved also for summary judgment on
the freeze damage claims. The trial court granted that
motion as well. Final judgment was entered on January
2, 1992. Insureds appeal.
II. DISCUSSION
A. STANDARD OF REVIEW
The trial court decided all issues on motions for
summary judgment. On appeal from a summary judgment,
this court determines whether there was a genuine issue
of material fact and whether the moving party was
entitled to judgment as a matter of law on the
established facts. Crissey v. Alaska USA Fed. Credit
Union, 811 P.2d 1057, 1059 (Alaska 1991). Since no
material facts are in dispute, the issue is one of
contract interpretation. The independent judgment
standard of review applies. Jackson v. Barbero, 776
P.2d 786, 788 (Alaska 1989).
B. CLAIMS RESULTING FROM THE ACCIDENTAL LOSS OF PMI
Section III A covers Insureds' liability for the loss
of policies which are procured and maintained "for the
benefit of the mortgagor." The crux of the dispute is
whether PMI is procured and maintained "for the benefit
of the mortgagor."2 The trial court concluded that it
is not.
Insurance "for the benefit of"a party is insurance in
which the party has a right to the proceeds. See
Howarth v. First Nat'l Bank of Anchorage, 596 P.2d
1164, 1169 n.16 (Alaska 1979); Robert E. Keeton, Basic
Text on Insurance Law 4.1(b) (1971); cf. Fireman's
Fund Mortgage Corp. v. Allstate Ins. Co., 838 P.2d 790,
792, (Alaska 1992) (holder of second deed of trust,
although not named in policy, has a lender's interest,
and is therefore a loss payee under policy "for the
benefit of" the lender); Clark v. Greater Anchorage,
Inc., 780 P.2d 1031, 1034 (Alaska 1989) (agreement to
provide insurance naming sponsor of festival a covered
entity is an agreement to purchase insurance for the
benefit of the sponsor). The contractual beneficiaries
of PMI are mortgagees and investors. Mortgagors have
no right to the proceeds of a PMI policy. In fact,
mortgagors cannot purchase PMI for themselves, since
PMI insurance does not insure a mortgagor against the
risk of his own default.3
Insureds concede that mortgagors are not entitled to
the proceeds of PMI policies. Nevertheless, Insureds
argue that mortgagors obtain substantial benefits from
PMI. Purchasing PMI usually reduces the downpayment
required to qualify for a loan. PMI companies may loan
money to delinquent mortgagors or to mortgagors who do
not have sufficient cash to close a prospective sale.
We conclude that the benefits PMI confers upon
mortgagors are only incidental. PMI protects
mortgagees and investors, not mortgagors. Incidental
benefits which may flow to mortgagors from PMI do not
transform PMI to insurance "for the benefit of" the
mortgagor. Section III A does not cover Insureds'
failure to maintain PMI policies for the benefit of the
investors.
C. CLAIMS RESULTING FROM FREEZE DAMAGE
Since Insureds did not take steps to protect abandoned
mortgaged property, their freeze damage claims were
excluded by the underlying homeowner's policies.
Insureds argue that their failure to exercise
reasonable care to avoid freeze damage is a failure to
maintain valid policies of insurance, an occurrence
covered by sections II A and III A.
Section II A covers losses that occur through Insureds'
error or accidental omission in "requiring, procuring
and maintaining valid policies," resulting in
"requisite insurance [] not [being] in force at the
time of loss." Section III A covers losses "arising by
reason of error or accidental omission in the operation
of the Insured's customary procedure in procuring and
maintaining valid policies . . . of insurance." Both
coverages apply to the maintenance of the policies
themselves.
The underlying homeowner's policies were in effect at
the time of the freeze damage. The freeze damage
claims were denied because they were excluded from
coverage by the underlying policies, not because
Insureds failed to maintain the policies. Sections II
A and III A cover claims arising from the failure to
maintain valid policies of insurance, not from the
failure to maintain mortgaged property. Since the
underlying policies were still in force at the time of
the damage, sections II A and III A do not cover
Insureds' freeze damage claims.
III. CONCLUSION
PMI is not maintained for the benefit of the mortgagor.
Therefore, section III A does not cover claims arising
from Insureds' failure to maintain PMI policies.
The freeze damage claims are not covered by sections II
A or III A of the policy. The underlying homeowner's
policies were in force at the time of the damage.
Insureds' failure to properly maintain mortgaged
properties is not an error or omission in maintaining
the policies.
The judgment of the superior court is AFFIRMED.
_______________________________
1. Forced-place insurance takes the place of homeowner's
insurance if a mortgagor abandons or if the bank
forecloses on a mortgaged residence.
2. Industrial Indemnity conceded at oral argument that for
the purpose of this appeal, the PMI issue is ripe for
adjudication. Therefore, we deem abandoned its claim
that Insureds' suit is premature, and reach the merits
of the issue.
3. Each PMI policy in the record included a provision
subrogating the PMI insurer to the mortgagee's rights
against the mortgagor. For example, the PMI insurer
may enforce a deficiency judgment against the
defaulting mortgagor. Hutson v. Wenatchee Fed. Sav. &
Loan Ass'n, 588 P.2d 1192, 1193 (Wash. App. 1978)
(explaining that PMI insurer pays mortgagee and takes
on burden of foreclosing on the debt should the
mortgagor default).
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