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Court of Appeal, First District, Division 4, California.

Louis BABOW and Theodore Babow, Plaintiffs and Appellants, v. The HOME INSURANCE COMPANY, a corporation, Defendant and Respondent.

Civ. 32344.

Decided: September 20, 1973

H. R. Lloyed, Jr., Hoge, Fenton, Jones & Appel, Inc., San Jose, for respondents.

Plaintiffs were the owners of a $72,000 promissory note secured by a second deed of trust on a 96-unit apartment building. A first deed of trust on the same property was held by the Citizens Federal Savings and Loan Association in the sum of $560,000. Plaintiffs' agent, upon discovering that the owner of the apartment building had allowed an existing fire insurance policy on the property to lapse, obtained from defendant insurance company a $75,000 California standard form fire insurance policy (Ins.Code, § 2071) to protect plaintiffs' interests as holder of the second deed of trust.

A fire occurred in the apartment house on August 31, and plaintiffs timely filed proof of loss. It was stipulated between plaintiffs and the defendant that the cost of repairing the fire damage was $29,245.

On October 6, 1969, at trustee's sale held pursuant to the terms of the second deed of trust, plaintiffs became the purchasers of the property secured by the second deed of trust for the sum of $40,000, which plaintiff Louis Babow testified represented about one-half of the amount due plaintiffs on the $75,000 note.

On January 23, 1970, Citizens Federal Savings and Loan Association purchased the property at a trustee's sale, pursuant to the terms of their deed of trust, for the sum of $710,000. This amount was less than the amount claimed by Citizens Federal Savings and Loan Association to be due them under the terms of their promissory note. Citizens Federal Savings and Loan Association caused the fire damage to be repaired, advanced the necessary funds for that purpose and, in accordance with the terms of their deed of trust, added it to the balance secured by the first deed of trust. These expenses were incurred after October 6, 1969 (the date when plaintiffs acquired ownership of the property as a result of the foreclosure sale of the second deed of trust).

Defendant insurance company refused to pay plaintiffs the amount of the claimed fire damage ($29,245), and plaintiffs then filed the instant action to recover that amount.

Trial was had without jury. At the trial, defendant introduced the testimony of plaintiffs' agent, R. W. Sukan, and defendant's agent, Fred Gund, which testimony indicated that both parties intended that the policy of fire insurance was to protect plaintiffs' security to the extent of $75,000, and it was apparent that the plaintiffs claimed no interest in the property save and except that they desired to protect their security against any diminution by fire. Defendant insurance company took the position, in the trial, that it is a requirement of California law that before a holder of a policy of fire insurance may recover, he must demonstrate that he suffered a loss (Smith v. Jim Dandy Markets, Inc., 9 Cir., 172 F.2d 616) and, in support of their position, offered the testimony of three qualified experts on valuation, all of whom testified that the market value of the property subsequent to the fire, even before the damage was repaired, was well in excess of the combined total of the first and second mortgages, and therefore, since the plaintiffs had suffered no diminution in value of their security, they could not demonstrate a loss. The trial court accepted this testimony, and made the following findings: ‘6. The fair market value of the subject property immediately following the fire exceeded the interests of the first mortgagee and second mortgagees. 7. The plaintiffs' interests as second mortgagees were not impaired by the fire.’

Plaintiffs contend that, regardless of whether the property had a value greater than the combined liens against it, this was not the proper method to determine whether or not plaintiffs had suffered a loss, that obviously a fire which occasioned $29,245 to the security reduced the security in that amount, and they should be paid that sum to make them whole. In support of their theory, plaintiffs point to their purchase of the owner's interest in this property for $40,000 at the trustee's sale. By implication, appellants contend that the sales prices at the foreclosure sales should be used as a measure of the value of the property, rather than the value found by the trial court. However, ‘[i]t is the universal rule that the market value of property is measured by the highest price estimated in terms of money which the land would bring if exposed for sale in the open market, with reasonable time allowed in which to find a purchaser, buying with knowledge of all the uses and purposes to which it was adapted and for which it was capable.’ (Milton Kauffman, Inc. v. Smith (1947) 82 Cal.App.2d 302, 304, 186 P.2d 11, 12; see also Daly v. Smith (1963) 220 Cal.App.2d 592, 603, 33 Cal.Rptr. 920.) A foreclosure is a ‘forced sale’ and the amount for which property is sold thereat may be well below the fair market value. (See Rose v. Arnwine (1952) 112 Cal.App.2d 37, 40, 245 P.2d 325.)

Before considering the positions of the respective parties, it should be noted that here we are not dealing with a policy of fire insurance upon the property as a whole and which, in the event of fire damage, will pay to the parties as their interests may appear. This is the conventional approach to protecting the owner and the holders of the first and second deeds of trust, and by their contracts it is clear to whom and in what amounts a loss will be paid. In this case we deal with the situation where the holder of the second deed of trust insures only his security against diminution by fire loss.

Plaintiffs cite and rely upon, among others, the following cases: Savarese v. Ohio Farmers' Ins. Co. of Le Roy (1932) 260 N.T. 45, 182 N.E. 665; Whitestone Savings and Loan Assn. v. Allstate Insurance Co. (1971) 28 N.Y.2d 332, 321 N.Y.S.2d 862, 270 N.E.2d 694. Neither the facts nor the law upon which they depend are similar to the facts and the law pertaining to the case at hand. In Savarese, the question before the court was whether the repair of premises by the owner after a fire, prevented the mortgagee from recovering insurance payable to him under a standard mortgagee clause. There the premises sustained fire damage in the amount of $4,230. The owner subsequently had the premises repaired for approximately $1,178. The mortgagee then sought to recover the full amount of the loss, $4,230, under the mortgagee clause of the insurance policy, which provided that ‘Loss or damage . . . under this policy, shall be payable to [the mortgagee], as interest may appear . . .’ (id., 182 N.E. at p. 666). The court first reasoned that under the insurance policy clause, the mortgagee's interest was insured as if he had taken out a separate direct policy. New York law then provided that ‘recovery may be had by the mortgages on his insurance policy, although his security under the mortgage is perfectly good valid’ (id., 182 N.E. at p. 666). This was because of the terms of the contract. The acts of the owner by repairing the property were acts (of a third party) which could not modify the insurance policy. The mortgagee was thus allowed to recover his pro rata share of the original fire damage. The court noted, however, that the ‘mortgagor benefits by such payment as the insurance money reduces the amount of the mortgage debt’ (id. 182 N.E. at p. 667).

Subsequently, in Whitestone, the New York Court of Appeals said that the rule in the Savarese case ‘stands simply for the proposition that a mortgagee under a mortgagee loss payable clause does not lose the right to recover or his insurable interest because the security has been restored in value or even increased beyond what it was worth just before the fire. And of course this is quite true; a secured creditor is never diminished in his rights to look to the security because it has been increased in value by way of repairs or otherwise. Hence, he is entitled to recover on the insurance although the proceeds are not necessary to restore the premises since repaired but to reduce the amount of the debt.’ (Whitestone Savings and Loan Assn. v. Allstate Insurance Co., supra, 321 N.Y.S.2d at pp. 866–867, 270 N.E.2d at p. 697; emphasis added.) The Whitestone court reiterated the ‘well settled rule that the rights under a fire insurance policy are fixed both as to amount and standing to recover at the time of the fire loss.’

Thus, neither Savarese nor Whitestone is inconsistent with the lower court's disposition of the present case. The trial court found that the value of the property after the fire was still high enough to protect appellants' security interest. Thus appellants never sustained any loss. Unlike New York, California requires a loss to have been sustained before recovery on a fire insurance policy may be had. (Smith v. Jim Dandy Markets, supra.) Similar to this reasoning, a mortgagee who has insured only his interest cannot recover where his security under the mortgage has not been diminished. Additionally, in the present case there was apparently no intent on the part of appellants to use any money so recovered to lessen the amount due them on the mortgage. This aspect would make any contrary result inequitable. New York's practice of allowing recovery where the security remains intact is done only in the context of an equal lessening of the debt due to the mortgagee.

There are no California cases with facts similar to those in this case. However, Smith v. Jim Dandy Markets, supra, supports defendant's position and declares California law on the subject as follows: ‘Under California law, which we are required to follow, a fire insurance policy is a personal indemnity contract and a showing of pecuniary damages is prerequisite to recovery thereon. Davis v. Phoenix Insurance Co., 111 Cal. 409, 415, 43 P. 1115; Alexander v. Security-First Natl. Bank, 7 Cal.2d 718, 723, 62 P.2d 735; 14 Cal.Jur. 464, § 37.’ (172 F.2d at p. 618.) Hence, the trial court's finding No. 7, that plaintiffs' interests as second mortgagees were not impaired by the fire, which finding is supported by competent evidence, may not be disturbed by an appellate court.

The judgment for defendant is affirmed.



MOOR*, Associate Justice. FN* Assigned by the Chairman of the Judicial Council.

DEVINE, P. J., and BRAY*, J., concur.