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District Court of Appeal, First District, Division 1, California.


Civ. 10969

Decided: March 05, 1941

White, Wakefield, Leighton & White, Dunn, White & Aiken, and Carlos G. White, all of Oakland, for appellant. Fitzgerald, Abbott & Beardsley, of Oakland, for respondent.

The plaintiff, Fageol Truck & Coach Co., brought this action to recover a collision loss claimed to be due under two policies of insurance issued respectively by the defendants Pacific Indemnity Company and Detroit Fire and Marine Insurance Company, covering a truck sold by plaintiff under a conditional sales contract to D.M. Thomas, doing business under the name of Empire System. Plaintiff was given judgment against each defendant, separately, for $3,146.81, the full amount of the loss; but the judgment against Pacific Indemnity Company was conditioned that no part thereof was collectible until plaintiff had satisfactorily established that it was unable to satisfy its judgment against Detroit Fire and Marine Insurance Company. The defendants took separate appeals, which are presented on separate records. However, the main legal problems involved in each appeal are interrelated and arise out of the same facts.

The conditional sales contract was executed on November 28, 1932, and the truck was delivered during the latter part of the following month. Both transactions took place at Fageol's branch plant in Seattle. The purchase price was $9,871.76 and a $2,000 down payment was made prior to delivery. An additional payment of $500 fell due on December 21, 1932, and the balance was divided into eighteen equal installment payments of $410 each. The first fell due on January 10, 1933, and the others monthly thereafter, except that no payments were required to be made during the months of February and March, 1933. The contract provided that title to the truck was reserved in the seller until the purchase price was fully paid, and the seller was given the right of repossession in case of default in any of the payments. It also provided that the purchaser should carry insurance against specific risks, such as fire and theft, etc. (collision and upset were omitted); that the amount of insurance should not be less than the unpaid balance of the purchase price, and that the insurance should be carried with a company satisfactory to the seller, with loss, if any, payable to the seller or the purchaser or both, as their interests might appear.

The Pacific Indemnity Company was Fageol's regular insurer, and on the day of the execution of the sales contract, Pacific, at Fageol's request, issued its policy naming Thomas as the insured, with loss payable to Thomas and Fageol's as their interests might appear. However, that policy insured only against such risks as fire and theft; consequently an endorsement was attached thereto designated as “Single Interest Collision Coverage Endorsement”, or “VSI”, insuring Fageol alone against the perils of collision or upset. Thomas was not protected by said endorsement, Fageol alone being named therein as the assured, and the loss if any made payable to Fageol. The endorsement expressly provided that the insurance should be considered as “excess insurance” and that in any case any “specific” insurance existed in the name of or for the benefit of the assured, the insurance provided for by the endorsement should not apply or contribute to the loss until such specific insurance should have been exhausted. Furthermore it provided that the loss occasioned by collision or upset was payable only if at the time of the collision or upset the truck was in the possession of the purchaser, the purchaser had defaulted in payments thereon, and the assured had repossessed the truck.

Thomas was aware that he was not protected by the “VSI” endorsement or otherwise under the Pacific policy against the risks of collision or upset; consequently he sought through his brokers in Seattle to obtain a policy giving him coverage against those particular risks; but he was advised that he could secure the same only by taking out a combination policy covering also loss by fire and theft; and on December 20, 1932, the Detroit company issued and delivered to him such a policy, naming him as the assured. That part of the policy pertaining to loss by collision or upset was of a type known as “$250 deductible”, that is, it provided that in the event of loss the insurer would pay only that part in excess of $250. It also provided that no recovery should be had under the policy “if at the time a loss occurs there be any other insurance, whether such other insurance be valid and/or collectible or not, covering such loss, which would attach if this insurance had not been effected”. Annexed to the policy by way of an endorsement was a “loss payable clause” which read: “Loss, if any, subject to all the terms and conditions of this policy, is payable to Fageol Truck & Coach Company;” and the policy itself contained provisions which read: “Name of Assured. Don M. Thomas d/b/as Empire System * loss, if any, payable, as interest may appear, to Assured and (See Endorsements Attached).”

Shortly after the issuance of the Detroit policy, Fageol's Seattle office strongly advised the main office in Oakland to cancel its policy with Pacific and accept in lieu thereof the Detroit policy; but the main office refused so to do; and on January 18, 1933, the truck was damaged in collision.

At the time of the collision the truck was in the possession of the purchaser en route from Spokane to Seattle, and at that time also the purchaser was in default in one of his payments under the sales contract. A thirty-day extension had been granted him on the $500 payment, but he had failed to meet the January 10th installment of $410. On the day the collision happened Thomas requested Fageol to have the truck brought in to its Seattle plant and repaired, but he was advised to get in touch with his insurance company, which he did, and as a result a representative of the Detroit company requested Fageol to bring in the truck, and furnish Detroit with an estimate of the repair costs. Such estimate was submitted on January 25, 1933, and was approved by a Detroit representative, and on January 27, 1933, Fageol started to rebuild the truck. Meanwhile correspondence continued between Fageol's Seattle office and the main office in Oakland in an effort to induce the main office to cancel its Pacific policy and accept in lieu thereof the Detroit policy, which the main office still declined to do. Apparently one of the reasons for such refusal was because of the existence of the $250 deductible clause in the Detroit policy, and the fact that there was a premium due thereon of $243.10. As a result of the discussion which had arisen over the matter of insurance, Fageol on January 31, 1933, through its main office, ordered the repair work stopped. Also at the same time it indicated to its Seattle branch that it intended to repossess the truck; and on February 20, 1933, it exercised its right in this behalf by serving notice on Thomas that because of his default in making the January 10th payment his interest in said truck and the conditional sales contract was terminated. Pacific was notified accordingly.

L.A. Lundstrom, president and manager of Fageol, maintained his offices at the main plant in Oakland, and all of the transactions and correspondence relating to the matter of the insurance were carried on with him. On March 6, 1933, which as will be noted was subsequent to the repossession of the truck, a representative of Pacific called on Lundstrom and after some preliminary discussion relating to the confusion about the insurance stated in substance that in order that the repair work might proceed Pacific was willing to assume the payment of the premium of $243.10 to Detroit, and, also to pay Fageol the $250 deductible under the Detroit policy, adding that his company would handle the matter with Detroit. Lundstrom replied that if the two companies “got together” it was agreeable to him, but that he wanted it definitely understood that he was “going to look to the Pacific Indemnity Company for full recovery” under the policy which it had issued to Fageol. The truth of the matter was that two days prior to this conference and on March 4, 1933, the Seattle representative of Pacific had furnished Thomas with the necessary money to pay the premium on the Detroit policy, and on the following day, March 5th, Thomas paid the same in full to Detroit. In connection with this transaction the evidence shows that Detroit had threatened to cancel its policy as of March 4, 1933, unless the premium was paid, and therefore Pacific gave Thomas the money to pay the same, pursuant to an understanding with Thomas that the Detroit policy should shortly thereafter be cancelled by him and that the returned unearned premium should be repaid to Pacific. Shortly after the conference with Lundstrom on March 6th the rebuilding of the truck was resumed, and at Thomas' request he was furnished an estimate of the costs of the repair job so that he could file proof of loss with Detroit. This he did on March 14, 1933.

In said proof of loss Thomas made no mention of the existence of the Pacific policy; but about that time a Detroit adjusted in checking the repair bill heard that there was other insurance on the truck, and the matter was then referred to Detroit's attorney. After some difficulty he learned of the existence of Pacific's policy, but was informed that Pacific would contribute nothing toward the payment of the loss. Said attorney also learned from Fageol's representative that a letter had been written by someone connected with Fageol terminating the Thomas contract, but that there was a question about the authority of the Fageol employee to write the letter; and the attorney was given to understand that plans were being worked out whereby Thomas would be allowed to retain the truck. In fact neither said attorney nor Detroit knew that Fageol had repossessed the truck until long thereafter; and in the absence of such knowledge said attorney proceeded to obtain a settlement of the loss. To that end and in June, 1933, he obtained drafts for the payment of the loss to be delivered to Thomas and Fageol; and he prepared a form of receipt for them to sign, which he forwarded to them for that purpose. Some several months elapsed, but the receipts were never signed or returned. Meanwhile, in May, 1933, Fageol sold the rebuilt truck to a third party; and on July 14, 1933, Thomas surrendered his policy to Detroit for cancellation and Detroit returned the unearned premium thereon. Several months afterwards the present action was filed.

From the foregoing it is apparent that the real controversy here is between the two insurance companies, that is as to which of the two is liable to Fageol for the payment of the loss it sustained as the result of the collision; and while the determination of that question would seem to be of little concern to Fageol, it has taken the definite position on these appeals that Detroit is primarily liable for the full amount of the loss, and that Pacific's liability is merely secondary, and that therefore the judgment should be affirmed in the form in which it was rendered. We are unable to sustain this view.

The vital issue upon which the decision in the case turns is whether the repossession of the truck by Fageol on February 20, 1933, terminated any right it may have had to recover any of the insurance called for by the policy taken out by Thomas with Detroit. If it did, then necessarily Fageol's loss is collectible only under the VSI endorsement to the policy it took out with Pacific. It is our conclusion that the contentions made by Detroit in this behalf are fully supported by the authorities and the facts.

It is held generally that in the absence of agreement as to the matter of insurance, neither the vendor nor the vendee has any interest in the insurance procured by the other; and although it is frequently said that the property is insured, the fact is that an insurance policy is not insurance of the specific thing without regard to ownership, but is a special agreement of indemnity with the person insuring against such loss or damage as he may sustain; and therefore, in the absence of agreement the insurance is not a substitute for the property and the policy does not pass with title thereto. Alexander v. Security First Nat. Bank, 7 Cal.2d 718, 62 P.2d 735. Furthermore, it is held that under an “open” or “loss payable” clause, as distinguished from a “union” or “standard” clause the party named in the clause does not become an “insured” under the policy; he is simply an appointee of the fund (Holbrook v. Baloise Fire Ins. Co., 117 Cal. 561, 49 P. 555: Hayward Lumber, etc., Co. v. Lyders, 139 Cal.App. 517, 34 P.2d 805), and the policy is regarded merely as additional security for the payment of the obligation outstanding between the insured and the party named in the loss payable clause. Reynolds v. London, etc., Ins. Co., 128 Cal. 16, 60 P. 467, 79 Am.St.Rep. 17; 124 A.L.R. 1034, note. And the law is well settled that the right of an obligee to resort to additional security depends necessarily on his right to sue and recover upon the debt; and that where a breach occurs and the obligee is given the option of terminating the contract by taking or repossessing the property, or of suing upon the debt, and he elects to terminate the contract, he not only loses his right to sue for the debt, but by terminating his contract he loses his right to resort to the collateral given as additional security for the payment of the debt. Reynolds v. London, etc., Ins. Co., supra; Murphy v. Hellman Commercial, etc., Bank, 43 Cal.App. 579, 185 P. 485; Frankel v. Rosenfield, 95 Cal.App. 647, 273 P. 122.

In the present case Thomas was not required by the conditional sales contract to take out collision or upset insurance, but he did so for his own protection; and he alone was named in the policy as the insured; the only interest Fageol acquired in that policy or to the proceeds payable thereunder was by reason of the “loss payable” endorsement. Therefore as to Fageol the policy served merely as additional security for the payment of the debt due from Thomas under the conditional sales contract; and Fageol concedes that long before the commencement of this action, exercising the option granted by the conditional sales contract, it elected to extinguish the debt and repossess the truck. In this regard the notice it served on Thomas stated: “* we are repossessing the above mentioned truck, and are cancelling the balance owing us by you on said contract.” And subsequently Fageol resold the truck as its own. Therefore, under the authorities cited, by extinguishing the debt, Fageol likewise extinguished its right to resort to the collateral given as additional security for the payment of the debt.

In support of its contention that repossession of the truck did not terminate its right to collect under the Detroit policy, Fageol relies principally upon the case of Brown v. Northwestern Mutual Fire Ass'n, 176 Wash. 693, 30 P.2d 640. But factually that case is essentially different from the present one, mainly for the reason that it was not founded on a simple type of “loss payable” clause such as we have here attached by way of rider. That case involved the proceeds of a fire insurance policy which the vendees were required to take out for the benefit of the vendors under a conditional sales contract for the sale of real property; and the clause in question was couched in such language that when considered in the light of the peculiar facts of that case the court was warranted in holding as it did that the vendors “were just as much insured” under the policy as the vendees; hence that the vendors were entitled to the benefits of the policy. As shown by earlier decisions, however, notably Inland Finance Co. v. Home Ins. Co., 134 Wash. 485, 236 P. 73, 48 A.L.R. 121, the state of Washington fully recognizes and adheres to the doctrine prevailing in practically all jurisdictions (see note 124 A.L.R. 1034) that under a simple ?“loss payable” rider such as we have here the creditor named therein is not deemed to be the “insured” under the policy, but becomes merely an appointee of the fund and is entitled to the proceeds of the policy only as his interest may appear. There is nothing to be found in the decision in Brown v. Northwestern Mutual Fire Ass'n., supra, indicating an intention to repudiate the above universal doctrine.

It is further contended that the doctrine declaring that insurance proceeds payable under a simple “loss payable” rider shall be considered merely as additional security for the payment of debt applies only in cases of mortgages, because there the relationship of debtor and creditor exists; and in support of such contention Fageol quotes Washington cases to the effect that conditional sales contracts “do not create a lien as security for the payment of a debt, nor do they ordinarily create the relationship of debtor and creditor between the contracting parties”; that “title remains in the vendor or passes from him to the vendee accordingly as the conditions of the sale contract are broken or fulfilled *.” Barbour v. Hodge, 99 Wash. 578, 170 P. 115, 119; Holt Mfg. Co. v. Jassaud, 132 Wash. 667, 233 P. 35, 38 A.L.R. 1312; Lahn & Simons v. Matzen Woolen Mills, 147 Wash. 560, 266 P. 697. But no authority has been cited from any jurisdiction which holds that the additional security doctrine governing in the case of mortgages does not apply to conditional sales contracts, nor have any sound reasons been advanced why said doctrine should not apply alike to both. Manifestly in both situations there is an existing debt which in the case of a mortgage the mortgagor agrees to pay and in the case of a conditional sales contract the vendee agrees to pay, either by the terms of the instrument itself or by a separate writing. It is true that in a conditional sale “title” does not pass but is retained by the seller as a security, while in the case of a mortgage “title” passes and the seller retains only a “lien” as security. But, fundamentally, in both transactions security for the indebtedness is the important feature of the transaction. The economic function of the two types of instruments is identical. Under such circumstances important rights and duties of the parties should not be made to depend on the mere form of the transaction. In Bank of Italy, etc., Ass'n v. Bentley, 217 Cal. 644, 657, 20 P.2d 940, 945, the court in discussing deeds of trust and mortgages, after pointing out that under a deed of trust “title” passes to the trustee, while in a mortgage only a “lien” is created, stated: “Considering all these cases, we do not feel justified in holding, merely because ‘title’ passes by a deed of trust, while only a ‘lien’ is created by a mortgage, that, in reference to the necessity of exhausting the security before enforcing the obligation secured, deeds of trust and mortgages are so different that in one case the security must be exhausted before suit on the personal obligation, while, in the other, no such necessity exists. Fundamentally, it cannot be doubted that in both situations the security for an indebtedness is the important and essential thing in the whole transaction. The economic function of the two instruments would seem to be identical. Where there is one and the same object to be accomplished, important rights and duties of the parties should not be made to depend on the more or less accidental form of the security.” For the same reasons there is ample justification for holding that the doctrine that insurance proceeds payable under a simple “loss payable” rider shall be considered as additional security for the payment of the debt should apply whether the transaction is in the form of a mortgage or conditional sale.

In view of the conclusion reached on the vital issue above discussed, it is unnecessary to inquire into the remaining points raised by the respective appeals, except the one urged by Pacific in furtherance of its appeal, to the effect that the repossession of the truck by Fageol was unlawful, and that therefore there can be no recovery against Pacific. In this connection it is conceded that Fageol actually repossessed the truck and afterwards sold it as its own property; but Pacific asserts that the extension of time granted by Fageol to Thomas to make the $500 payment operated to extend also the time to pay the installment upon which the repossession purports to have been based. Assuming that Pacific is in a position to raise this point, the record shows that it is without merit. It clearly appears therefrom that except as to the $500 payment Fageol at all times insisted upon prompt payment, and did nothing to lull Thomas into the belief that prompt performance would not be insisted upon. In fact there is no evidence in the record that Thomas ever believed that plaintiff would not require prompt performance.

For the reasons hereinabove set forth, it is ordered that the judgment be reversed with directions to the trial court to revise its conclusions of law to conform to the views hereinabove expressed; that thereupon judgment be entered in favor of the defendant Detroit Fire and Marine Insurance Company, and an unconditional judgment be entered against the Pacific Indemnity Company in favor of Fageol Truck & Coach Co. for the full amount of the collision loss sustained by it. It is further ordered that on appeal No. 10969 Detroit Fire and Marine Insurance Company recover its costs against Fageol Truck & Coach Co., and that on appeal No. 10976, 110 P.2d 1090, Fageol Truck & Coach Co. recover its costs against Pacific Indemnity Company.

KNIGHT, Justice.

We concur: PETERS, P.J.; WARD, J.