WALKER v. FIRE INSURANCE EXCHANGE

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

Donald WALKER et al., Plaintiffs and Appellants, v. FIRE INSURANCE EXCHANGE,1 Defendant and Respondent.

No. D008749.

Decided: May 25, 1990

Eugene P. Yale, and Wilson & Yale, San Diego, for plaintiffs and appellants. Kenneth N. Greenfield and Michelle Freeburg, San Diego, for defendant and respondent.

In our view, this case turns upon the following proposition:  To enforce a limitation on its coverage, an insurer must show that its insured had fair notice of the limitation it wishes to enforce.   On the facts disclosed in this record, defendant Fire Insurance Exchange (FIE) has not met this burden.   Accordingly, we reverse the summary judgment dismissing plaintiffs Donald and Maxine Walker's claims.

FACTUAL SUMMARY

In 1978 the Walkers sold their home to Thomas and Kathline Kerr.   As part of their consideration the Kerrs gave the Walkers a $50,000 promissory note secured by a second deed of trust on the house.   The first deed of trust, which secured a $100,000 note, was held by Home Savings of America (Home).   Thereafter, the Walkers and Home were loss payees on a homeowners policy FIE issued to the Kerrs.   The policy was renewed by FIE for the period from November 15, 1984, to November 15, 1985.

In December 1984, the Kerrs made a claim on the policy.   They reported cracks in the swimming pool and decking.   On February 6, 1985, the Walkers' attorney wrote FIE and advised it of the Walkers' interest in both the policy and the claim the Kerrs had recently made.   In the February letter the Walkers' attorney asked FIE to send him copies of all policies FIE had issued to the Kerrs in the previous five years.

The Walkers' attorney sent FIE a second letter on May 6, 1985, acknowledging receipt of copies of the current policy and the prior policies.   The letter also advised FIE the Walkers were “in the process of foreclosing on this property and, as you will note, they are the named mortgagees along with Home Savings.   Accordingly, they step into the shoes of the named insureds as it relates to the claim for property damage.”   The letter asked FIE to begin an investigation of soil subsidence at the house.   On May 28, 1985, the Walkers in fact bought the house at a foreclosure sale.   In doing so, they made a full credit bid of $60,580.17.

The Walkers' counsel wrote to FIE again on May 30, 1985.   The May 30 letter noted that FIE had not responded to the May 6 letter and that in the interim the Walkers had taken back the property at the foreclosure sale.   The May 30 letter again asked FIE to conduct an investigation of soil subsidence at the property.

On August 2, 1985, FIE changed the policy to reflect the Walkers' new status as owners rather than lenders.   Shortly thereafter FIE sent the Walkers' insurance agent a new face sheet showing the Walkers as owners.

FIE provided the Walkers' attorney with a copy of a soils report on August 16, 1985.   At that time FIE also agreed to pay a structural engineer to review the soils report and inspect the house.

On September 5, 1985, counsel for FIE sent the Walkers' attorney a letter reserving all rights available to FIE under the Walker policy.   FIE's counsel claimed the company did not have sufficient information to make a coverage decision.   His letter stated:  “This is especially true in light of the particular issues presented relative to your clients' prior sale of the subject property to Thomas Kerr and the subsequent foreclosure action.”

FIE's counsel also asked the Walkers to sign a “nonwaiver agreement.”   Counsel explained the agreement was needed “as an expression of [the Walkers'] good faith acknowledgment that any investigation conducted by the Fire Insurance Exchange will not constitute a waiver of its rights, either under the policy, at law or in equity.”   On October 1, 1985, the Walkers' counsel advised FIE's attorney the Walkers would not sign the “nonwaiver agreement.”

On December 14, 1985, FIE received a $192,910.86 estimate of the cost of repairing the Walkers' home.   On January 9, 1986, FIE's attorney wrote to the Walkers' attorney and advised him FIE determined the Walkers were not entitled to any coverage under the policy obtained by the Kerrs.   The company based its determination on its “finding that the Kerrs' debt to the Walkers was extinguished by the Walkers' purchase of the insured premises at the trustees' sale for the total amount due and owing.   As such, the extinguishment of the mortgage debt ended all interest the Walkers may have had under the Kerr insurance policies.”

PROCEEDINGS BELOW

On April 16, 1986, the Walkers filed a complaint against FIE in which they alleged claims for breach of the duty of good faith and fair dealing, breach of fiduciary duty and breach of statutory duties.”   FIE answered on August 19, 1986, denying the material allegations of the complaint.

On April 14, 1988, FIE filed a motion for summary judgment or in the alternative summary adjudication of issues.   In its motion FIE argued the Walkers' full credit bid had fully satisfied the Kerrs' debt and therefore discharged FIE's obligation to the Walkers as lenders.   FIE further argued it had no duty to warn the Walkers prior to the foreclosure sale that a full credit bid would defeat any claim under the policy.   Neither FIE nor the Walkers produced a copy of the lenders' loss payable endorsement upon which the Walkers based their claim.

The trial court heard argument on FIE's motion on June 16, 1988, and July 8, 1988.   On July 21, 1988, it granted FIE's motion for summary judgment and dismissed the Walkers' complaint.   The Walkers filed a timely notice of appeal.

PROCEEDINGS IN THIS COURT

On March 16, 1989, the Walkers applied under rule 23(b) and rule 41 of the California Rules of Court and Code of Civil Procedure section 909 for an order permitting it to produce additional evidence on appeal.   The Walkers asked that a copy of the “lenders loss payable endorsement” to the Kerrs' policy be made a part of the record on appeal.   In pertinent part the endorsement provides “2.   The insurance under this policy, or any rider or endorsement attached thereto, as to the interest only of the Lender, its successors and assigns, shall not be invalidated nor suspended:  (a) by any error, omission, or change respecting the ownership, description, possession, or location of the subject of the insurance or the interest therein, or the title thereto;  (b) by the commencement of foreclosure proceedings or the giving of notice of sale of any of the property covered by this policy by virtue of any mortgage or trust deed;

“․

“8. Should legal title to and beneficial ownership of any of the property covered under this policy become vested in the Lender or its agents, insurance under this policy shall continue for the term thereof for the benefit of the Lender, but, in such event, any privileges granted by this Lender's Loss Payable Endorsement which are not also granted the insured under the terms and conditions of this policy and/or under other riders or endorsements attached thereto shall not apply to the insurance hereunder as respects such property.”

In support of the application the Walkers' counsel explained that the endorsement appeared on the reverse side of the declaration page of the Kerr policy and that FIE had never sent the Walkers or their attorney a copy of the reverse side of the declaration page.   According to counsel, he discovered the endorsement when reviewing an original FIE homeowners policy in another case.   FIE objected to the Walkers' application on the grounds the endorsement is not relevant and that in any event the Walkers waived their right to rely on its terms.

We granted the Walkers' application without prejudice to FIE's right to object to consideration of it on the basis of relevance or waiver and FIE has in fact renewed its objections.

ISSUES ON APPEAL

 On appeal the Walkers argue a full credit bid at a foreclosure sale should not deprive a lender of coverage for losses which occurred before the sale.   The Walkers also argue that in any event, by virtue of its conduct FIE has waived its right to rely on their full credit bid.   In part we agree with the Walkers.   In reversing the summary judgment, we find that although under some policies a full credit bid following the occurrence of a loss may relieve an insurer of its duty to indemnify the bidder/lender, such a condition is not enforceable unless the insured had reasonable notice of the condition.   Here, FIE has failed to demonstrate the Walkers were adequately alerted to the peril of making a full credit bid.

DISCUSSION

IIntroduction

At the outset of our discussion we believe what we stated in Cascade Gardens Homeowners Assn. v. McKellar & Associates (1987) 194 Cal.App.3d 1252, 1255–1256, 240 Cal.Rptr. 113, bears repeating:  “The purpose of a summary judgment motion is to determine if there are any triable issues of material fact, or whether the moving party is entitled to judgment as a matter of law.  [Citations.]   The summary judgment is proper only if the affidavits in support of the moving party would be sufficient to sustain a judgment in his favor and his opponent does not by affidavit show such facts as may be deemed by the judge hearing the motion sufficient to present a triable issue.  [Citation.]   The affidavits of the moving party are strictly construed, while those of the party opposing the motion are liberally construed.  [Citations.]   If the affidavits of the party opposing the motion contain factual averments within the general area of the issues framed by the pleadings, they are sufficient to make out a prima facie case.  [Citation.]   Any doubts as to the propriety of granting the motion must be resolved in favor of the party opposing the motion.  [Citations.]”

We also note that in moving for summary judgment, “ ‘A moving defendant must show clearly that plaintiff's action has no merit.   If a plaintiff's cause of action could be based on either of two theories, he will not be subject to defeat by summary judgment where the defendant's declarations show only that one of the two theories cannot be established.   It is the defendant's burden to rule out all possible merit.   Only if the declarations of the moving defendant considered in light of the issues raised by the pleadings together with the admissions and affirmative allegations set forth in the pleadings of the plaintiff would, standing alone support the summary judgment motion does the court look to any counteraffidavits and counterdeclarations.’ ”  (Conn v. National Can. Corp. (1981) 124 Cal.App.3d 630, 639, 177 Cal.Rptr. 445, quoting Residents of Beverly Glen, Inc. v. City of Los Angeles (1973) 34 Cal.App.3d 117, 127, 109 Cal.Rptr. 724.)

With this procedural background in mind we turn to the substantive issues presented.

II

Relying on cases in which lenders and borrowers were disputing their respective rights to insurance proceeds (Reynolds v. London Etc. Ins. Co. (1900) 128 Cal. 16, 19, 60 P. 467;  Rosenbaum v. Funcannon (9th Cir.1962) 308 F.2d 680, 685;  Armsey v. Channel Associates, Inc. (1986) 184 Cal.App.3d 833, 839, 229 Cal.Rptr. 509), FIE argues that when the Walkers made a full credit bid they received full payment for the Kerrs' obligation and hence should not be allowed a second recovery of the Kerrs' debt by way of the insurance proceeds.  (See also Cornelison v. Kornbluth (1975) 15 Cal.3d 590, 606–607, 125 Cal.Rptr. 557, 542 P.2d 981;  see also Duarte v. Lake Gregory Land and Water Co. (1974) 39 Cal.App.3d 101, 105, 113 Cal.Rptr. 893.)   In this regard, we note there are number of cases from other jurisdictions which, in interpreting variations of the “New York Standard” lender's endorsement, have found that where a loss is followed by a foreclosure, the lender may recover only the amount of any deficiency remaining after the sale.  (Whitestone Savings & Loan Ass'n. v. Allstate Ins. Co. (1971) 28 N.Y.2d 332, 321 N.Y.S.2d 862, 865, 270 N.E.2d 694, 697;  Farmers & Merchants Sav. v. Farm Bureau (Iowa 1987) 405 N.W.2d 834, 837–838;  Imperial Mtg. Corp. v. Travelers Indem. Co. (1979) 43 Colo.App. 74, 599 P.2d 276, 278;  Aetna Insurance Co. v. Baldwin County Building & Loan Ass'n. (1935) 231 Ala. 102, 103, 163 So. 604;  Smith v. General Mtg. Corp. (1978) 402 Mich. 125, 128, 261 N.W.2d 710, 713.) 2  Thus, under these cases, where the lender has made a full credit bid after a loss has occurred, the lender cannot recover any benefits under its borrower's insurance policy.  (Whitestone Savings & Loan Ass'n. v. Allstate Ins. Co., supra, 321 N.Y.S.2d at p. 865, 270 N.E.2d at p. 697.)

In accord with the prevailing interpretation of the New York standard policy, a California commentator has stated:  “The insurable interest of a mortgagee can be extinguished through the foreclosure process.   Ordinarily, a mortgagee's interest is protected under a typical loss payee endorsement stating that the lender will be paid ‘as its interest appear[s].’  The sole basis of the lender's interest in the insurance proceeds is the mortgagor's debt and the appointment of insurance funds in favor of the mortgagee in case of loss.   However, once the debt is extinguished through either payment or foreclosure, the mortgagee has no remaining interest in the insurance.   In that connection, many unwary mortgagees have unwittingly extinguished their insurable interests when foreclosing on properties after losses occur.”  (2 Cal.Insurance Law & Practice (1990) § 35.09(8), p. 35–39;  see also 5A Insurance Laws and Practice, J. Appelman, § 3401 at pp. 285–286.)

On this record, however, we are unwilling to hold that, as under the New York Standard policy, the terms of FIE's policy relieved it of liability following the Walker's full credit bid.   FIE's endorsement provides:  “1. Loss or damage, if any, under this policy, shall be paid to the Payee named on the first page of this policy, its successors and assigns, hereinafter referred to as ‘the Lender’, in whatever form or capacity its interests may appear and whether said interest be vested in said Lender in its individual or in its disclosed or undisclosed fiduciary or representative capacity, or otherwise, or vested in a nominee or trustee of said Lender.”  (Italics added.)   In contrast the New York Standard policy simply provides:  “1. Loss, if any, under this policy shall be payable to _ ․ as lender, mortgagee, or trustee, as interest may appear.”) 3  (1, Miller & Lefebure, Miller's Standard Insurance Policies Ann. (Legal Research Sys.1986 ed.)   Form CFLPC, p. 469 (May 1977);  italics added.)   As we have previously noted paragraph 8 of FIE's endorsement also provides a mortgagee coverage “[s]hould legal title to and beneficial ownership of any of the property covered under this policy become vested in the Lender or it agents.”   The New York Standard endorsement does not contain a similar provision.

Our own research has disclosed no case which interprets the significance, if any, of these differences in policy language.   The Walkers argue FIE's endorsement allowed them to take title by whatever lawful means available without prejudice to any of their rights under the policy.   On the other hand FIE contends lender's loss endorsement provides coverage only so long as a borrower's debt remains unpaid.   FIE argues that when the debt is paid the lender's coverage expires.   FIE suggests paragraph 8 of its endorsement merely provides coverage for losses which occur after the lender becomes an owner and does not affect the calculation of losses which occur before ownership has changed.

 Although tempting, at this point we decline to provide an interpretation of FIE's endorsement.   Our hesitance is based in part on the fact that given the particular way the record in this case has developed, the trial court has had no opportunity to consider the language of the endorsement.   Moreover, as we explain in greater detail below, we do not believe an interpretation of FIE's endorsement under which a full-credit bid would extinguish FIE's liability to a lender for a prior loss defeats the Walkers' claim as a matter of law.   The California cases FIE relies upon and the cases which have interpreted the New York standard lenders loss payable endorsement provide no guidance with respect to an insurer's duty to inform its insureds of their rights and obligations under the policy.  “An insurer is under no obligation to explain to the insured all possible legal theories of recovery.   Nonetheless, the terms of an insurance policy must fairly and accurately explain the covered risks.”  (Lawrence v. Western Mutual Ins. Co. (1988) 204 Cal.App.3d 565, 574, 251 Cal.Rptr. 319, fn. omitted.)   Where an insurer has failed to provide the insured with the policy terms which defeat coverage, the insurer is estopped to enforce those terms.  (See Elliano v. Assurance Co. of America (1970) 3 Cal.App.3d 446, 454, 83 Cal.Rptr. 509 (Elliano ).)   In Elliano the insurer attempted to enforce a 12–month contractual limitation on policy claims.   However instead of providing the policy itself, the insurer gave its insured a memorandum which set forth all the policy terms, except the limitation period.  “In these circumstances we hold that the parties to this action stand in essentially the same position as if respondent had delivered to appellant either an original or an exact copy of a policy which omitted the limitation provision here in question.”  (Id. at p. 452, 83 Cal.Rptr. 509.)

 Even when an insurer has met its duty to provide its insured with policy terms which fairly and accurately explain the covered risks, when an insurer has reason to know its insured is nonetheless ignorant of policy terms and that such ignorance threatens the insured's ability to protect its rights under the policy, the insurer must take affirmative steps which will enable the insured to protect its rights under the policy.   As our Supreme Court said in Davis v. Blue Cross of Northern California (1979) 25 Cal.3d 418, 427–428, 158 Cal.Rptr. 828, 600 P.2d 1060 (Davis ):  “In recent years our court has on numerous occasions reviewed the general principles governing the responsibilities of an insurer in relation to a claim filed by its insured.  [Citations.]

“․

“One important facet of the insurer's obligation to give the insured's interest ‘as much consideration ․ as it does ․ its own’ is the duty reasonably to inform an insured of the insured's rights and obligations under the insurance policy.   In particular, in situations in which an insured's lack of knowledge may potentially result in a loss of benefits or a forfeiture of rights, an insurer has been required to bring to the insured's attention relevant information so as to enable the insured to take action to secure rights afforded by the policy.”  (Italics added.)

In Davis the court sustained a finding Blue Cross had breached its obligation to its insureds by failing to advise them at the time it rejected their claims that they had a right to arbitration.   In particular, although the arbitration clause was set forth in Blue Cross policies, the Supreme Court upheld the trial court's determination, “that in the absence of timely and adequate advice as to the arbitration procedure the average insured in all likelihood would not know of a right to arbitration buried in an obscure provision of a hospitalization policy.”  (25 Cal.3d at p. 429, 158 Cal.Rptr. 828, 600 P.2d 1060.)

Davis was followed by Sarchett v. Blue Shield of California (1987) 43 Cal.3d 1, 233 Cal.Rptr. 76, 729 P.2d 267 (Sarchett ).   In Sarchett the insurer denied the plaintiff's claim for hospitalization expenses incurred on the advice of the plaintiff's physician.   After finding the insurer had a right under the policy to retrospectively review the hospitalization expenses and that the policy clearly, conspicuously and unambiguously provided for arbitration, the Supreme Court nonetheless agreed with the trial court the insurer breached its obligation of good faith and fair dealing in failing to advise the insurer of his arbitration right at the time it rejected his claim.  “When a court is reviewing claims under an insurance policy, it must hold the insured bound by clear and conspicuous provisions in the policy even if evidence suggests that the insured did not read or understand them.   Once it becomes clear to the insurer that its insured disputes its denial of coverage, however, the duty of good faith does not permit the insurer passively to assume that its insured is aware of his rights under the policy.   The insurer must instead take affirmative steps to make sure that the insured is informed of his remedial rights.”  [Citation.]

“In the present case, Blue Shield failed to bring relevant information about the right to impartial review and arbitration to its insured's attention at the appropriate time.   In Davis the policy's arbitration provision was obscurely placed in fine print, whereas here it was adequately set out with a bold-face heading.   However, Blue Shield had reason to know that Sarchett was uninformed of his rights, since he repeatedly protested the denial without demanding review by an impartial panel of physicians.   Blue Shield nevertheless denied Sarchett's claim several times without mentioning his right to review by anyone other than the single hired consultant who initially and repeatedly denied the claim.   This course of conduct appears designed to mislead subscribers into forfeiting their contractual right to impartial review and arbitration of disputed claims, and therefore we must affirm the trial court's ruling on this issue.”  (Sarchett, supra, 43 Cal.3d at p. 15, 233 Cal.Rptr. 76, 729 P.2d 267, italics added.) 4

 In our view this record does not establish FIE has met its obligations under Elliano, Davis and Sarchett.   As we have seen, policy terms must be set forth unambiguously and must be provided to the insured.  (Sarchett, supra, 43 Cal.3d at p. 15, 233 Cal.Rptr. 76, 729 P.2d 267;  Elliano, supra, 3 Cal.App.3d at p. 452, 83 Cal.Rptr. 509.)   FIE, however, has asked that we ignore as irrelevant the lender's loss payable endorsement which governs the Walkers' claim.   FIE suggests the rule which would extinguish the Walkers' rights is entirely independent of the coverage provisions of its policy.   We cannot accept FIE's suggestion.   Admittedly in cases involving disputes between creditors and borrowers, our courts have made it plain a creditor's bid at a foreclosure sale fixes the value of the property received and therefore a full-credit bid discharges any debt.  (See Cornelison v. Kornbluth, supra, 15 Cal.3d at 606, 125 Cal.Rptr. 557, 542 P.2d 981.)   However we do not read the protection this rule provides to borrowers as preventing insurers, either at the time a policy is issued or after a loss has occurred, from agreeing to pay losses the lender is able to establish even when the borrower's debt has been discharged.   As the facts alleged by the Walkers demonstrate, through inadvertence, misperception, or expediency a lender may release a borrower from further obligation without in fact obtaining full value for an outstanding debt.   Thus the release of the borrower by way of a full-credit bid does not in all cases preclude a lender from experiencing a loss otherwise compensable under the terms of a casualty policy.   Plainly an insurer may, if it wishes, agree to protect against the risk of such a loss.5  In determining whether an insurer has, in fact, agreed to provide such coverage, we must look to the terms of the insurer's policy.   Although ultimately FIE's endorsement may be interpreted in its favor, it is nonetheless an interpretation of policy provisions which will determine the Walkers' rights.   Accordingly, under Sarchett and Elliano FIE could not meet its burden on a motion for summary judgment without providing the trial court with its endorsement.

 However even if we ignore FIE's objection, consider the face of its endorsement and interpret the endorsement in FIE's favor, FIE is not be entitled to a judgment as a matter of law.   As we have seen, where an insurer is aware of its insured's ignorance of policy terms, it has an affirmative obligation to provide information which will enable its insured to secure rights afforded by its policy.  (Davis, supra, 25 Cal.3d at p. 428, 158 Cal.Rptr. 828, 600 P.2d 1060.)   Even if one were to disregard the fact that many mortgagees are unaware of the risk foreclosure poses to their coverage (see 2 Cal.Insurance Law & Practice, supra, § 35.09(8)), in this case, counsel's letter of May 5, 1985, expressly advised the company of the Walkers' plan to foreclose and“step in the shoes of the Kerrs.”   A finder of fact might reasonably conclude this letter was an expression of the Walkers', and their counsel's, ignorance of the limitations on coverage imposed by FIE's interpretation of its endorsement.   Such a finding would of course be supported by the fact counsel may not have had a copy of the FIE endorsement at the time he wrote the letter.   Thus, on this record, FIE cannot demonstrate it had no duty to promptly advise the Walkers that under the terms of its lender's loss endorsement a full credit bid would forfeit coverage for prior losses.

Because FIE has not demonstrated the Walkers had reasonable notice of the terms of their coverage, FIE was not entitled to summary judgment.6

Accordingly, the judgment in FIE's favor must be reversed;  appellants to recover their costs on appeal.

FOOTNOTES

2.   See also Universal Mortgage Co., Inc. v. Prudential Ins. Co. (9th Cir.1986) 799 F.2d 458, 460–461, holding that under California law foreclosure either before or after occurrence of a loss discharges an insurer's obligation to a lender.   This holding takes a step other courts have been unwilling to take.  (See Federal Nat. Mtg. Ass'n. v. Ohio Casualty Ins. Co. (1973) 46 Mich.App. 587, 208 N.W.2d 573, 576;  Consolidated Mortgage Corp. v. American Secur. Ins. Co. (1976) 69 Mich.App. 251, 254, 244 N.W.2d 434;  Federal National Mtg. Ass'n. v. Hanover Ins. Co. (1979) 243 Ga. 609, 255 S.E.2d 685, 686;  Cherokee Ins. Co. v. First Nat. Bank (1986), 181 Ga.App. 146, 351 S.E.2d 473, 475, where loss occurs after foreclosure, mortgagee protected by New York standard endorsement.

3.   The following version of the New York standard endorsement appears in Miller's Standard Insurance Policies Annotated:  “1. Loss, if any, under this policy shall be payable to _ whose address is _ as lender, mortgagee, or trustee, as interest may appear.“2. It is understood that the lender, mortgagee or trustee now has or will acquire from time to time an insurable interest in certain property insured under this policy as established by warehouse receipts, bills of lading, documentary or other written evidence.“3. This insurance, solely as to the interest therein of the lender, mortgagee or trustee, shall not be impaired or invalidated by any act or neglect of the borrower, mortgagor or owner of the within described property except as provided in the last paragraph hereof, nor by any change in the title or ownership of the property, nor by the occupation of the premises wherein such property is located for purposes more hazardous than are permitted by this policy;  provided that in case the borrower, mortgagor or owner shall neglect to pay any premium due under this policy the lender, mortgagee or trustee shall, on demand, pay the same.“4. Provided, also, that the lender, mortgagee or trustee shall notify this Company of any change of ownership or occupancy or increase of hazard which shall come to the knowledge of said lender, mortgagee or trustee, and unless permitted by this policy, it shall be noted thereon and the lender, mortgagee or trustee shall, on demand, pay the premium for such increased hazard for the term of the use thereof;  otherwise this policy shall be null and void.“5. This Company reserves the right to cancel this policy at any time as provided by its terms, but in such case this policy shall continue in force for the benefit only of the lender, mortgagee or trustee for ten days after notice to the lender, mortgagee or trustee of such cancellation and shall then cease, and this Company shall have the right, on like notice, to cancel this agreement.“6. Whenever this Company shall pay the lender, mortgagee or trustee any sum for loss or damage under this policy and shall claim that, as to the borrower, mortgagor or owner, no liability therefor existed, this Company shall, to the extent of such payment, be thereupon legally subrogated to all the rights of the party to whom such payment shall be made, under all securities held as collateral to the debt, or may, at its option, pay the lender, mortgagee or trustee, the whole principal due or to grow due on the debt with interest, and shall thereupon receive a full assignment and transfer of the debt and of the mortgage and of all such other securities as evidence the interest of the lender, mortgagee or trustee in the within described property;  but no subrogation shall impair the right of the lender, mortgagee or trustee to recover the full amount of its claim against the borrower, mortgagor or owner.“7. All the other terms and conditions of the policy to which this Endorsement is attached and of which it is a part, remain unchanged, which other terms and conditions include the limit(s) of liability named in the policy and the conditions of any Value Reporting, Full Reporting, Total Insurance, Coinsurance, Reduced Rate Contribution or Average Clauses incorporated therein or attached thereto.”  (I Miller & Lefebure, Miller's Standard Insurance Policies Ann., supra, p. 469.)

4.   Sarchett was a plurality opinion written by Justice Broussard with Justices Grodin and Panelli concurring.   Justice Mosk wrote a dissenting opinion in which he found the company had no right to retrospective review of hospitalization expenses.   However, Justice Mosk agreed with the plurality that the company had acted in bad faith in failing to advise the plaintiff of his right to arbitrate.   Chief Justice Bird and Justice Reynoso concurred with Justice Mosk.   Justice Lucas also wrote a dissenting opinion.   He agreed with the plurality that the company had a right to retrospective review, but found no bad faith.

5.   Under such an agreement, the lender's recovery from the insurer would still be subject to claims by the borrower under Cornelison v. Kornbluth, supra, 15 Cal.3d 590, 125 Cal.Rptr. 557, 542 P.2d 981;  however we see no impediment to an insurance contract which leaves resolution of such claims to insurance proceeds to the lender and borrower rather than the insurer.

6.   FIE also relies on the “loss-in-progress” rule which prevents coverage after a loss has occurred.  (See Ins.Code, §§ 22, 250.)   FIE argues evidence the Kerrs discovered damage to their property as early as 1982 prevents coverage under the 1984 policy issued to the Kerrs and the 1985 policy which named the Walkers as insureds.   FIE's argument ignores the fact that its own records disclose FIE's coverage of the respective interests of the Walkers and the Kerrs began in 1977 and continued without interruption until 1986.   Thus while on remand the Kerrs' 1982 knowledge, if established, may defeat coverage under later policies, such knowledge did not defeat the Walkers' claims as a matter of law under the earlier policies.

BENKE, Associate Justice.

WORK, Acting P.J., and NARES, J., concur.