In Christmas v. Nationwide Mut. Ins. Co., 2014 U.S. Dist. LEXIS 91735 (E.D. North Carolina 2014), the U.S. District Court for the Eastern District of North Carolina considered the question of who, if anyone, receives the dwelling replacement insurance payment in the event a home in foreclosure is destroyed in a fire, but the mortgagee bids the full amount of the mortgage debt at a subsequent foreclosure sale, thereby extinguishing its interest in the property.

On March 12, 2009, Barbara Christmas’s home, which was insured by National Mutual Insurance Company (Nationwide), was partially destroyed by a fire. The policy provided for a total dwelling cost replacement limit of $213,905 as well as coverage for living expenses and personal property. Nationwide examined the property and assigned a replacement value of $94,842.88.

Christmas inherited the home upon the death of her mother, Gladys Davis. Prior to her death, Ms. Davis obtained a reverse mortgage on the property from Financial Freedom, which became due upon her death. When Christmas inherited the home, she failed to make any payments on the debt and Financial Freedom began foreclosure proceedings. The foreclosure sale was set for July 29, 2009, over four months after the fire. At the foreclosure sale, Financial Freedom bid the entire amount of the outstanding debt ($129,222.00), thereby extinguishing any interest it had in the property.

Prior the foreclosure sale, Nationwide issued a check in the amount of $94,842.89 payable to both Christmas and Financial Freedom and advised that the check would be valid for 180 days. At the time it issued the check, Nationwide was unaware that the home was in foreclosure. At some point after receiving the check, Christmas contacted Nationwide and requested that it remove Financial Freedom’s name from the check. Upon investigation, Nationwide discovered that the home was in foreclosure. Nationwide stopped payment on the check and initiated an investigation regarding how the dwelling replacement payment should be distributed. Ultimately, Nationwide determined that Christmas was not entitled to the replacement cost payment because the mortgage debt exceeded the replacement cost, and, therefore, Christmas had no insurable interest in the property at the time of the loss. Additionally, although Nationwide paid Christmas approximately $91,600 for the loss of her personal property and living expenses, after seven months it stopped providing the living expense payments. In turn, Christmas brought suit against Nationwide for breach of contract and deceptive trade practices.

The District Court determined that Christmas’ insurable interest was not limited to her equity in the property and that she retained an insurable interest in the full value of the property at the time of the loss. The court reasoned that while the contract language contemplates apportioning payment between the named insured as the interests existed at the time of the loss, subsequent acts by the mortgagee can extinguish its interest in the insurance proceeds. While Christmas’s interest may have been subordinate to the mortgagee’s interest at the time of the loss, that does not preclude her from recovering her interest at the time of the loss in the event the mortgagee extinguishes its interest. The court further held that Christmas had paid all of her insurance premiums and the policy was fully enforceable at the time of the loss and, therefore, Nationwide would be unjustly enriched if it did not pay Christmas under the circumstances.

Tressler Comments

The court essentially applied the mortgagee’s subsequent acts retroactively to the date of loss. In so doing, the court determined that in extinguishing any interest in the property, Nationwide also extinguished any interest in the insurance proceeds, even though it may have held such an interest as of the date of loss. The court’s holding rejects the notion that the parties’ interests in insurance proceeds are “fixed” as of the date of loss. While a mortgagor’s insurable interest may be subordinate to that of the mortgagee as of the date of loss, it is not limited by her equity in the property. Once a mortgagee’s interest in the property is extinguished by their subsequent acts, any interest it had in the policy reverts back to the policyholder or others entitled to collect under the policy.