vs Index #H-08000


COMPANY, a wholly subsidiary of






(Mark J. Schaefer, Esq.

of Counsel) for Plaintiff


Attorney for Defendant



This is an action commenced by Plaintiff to recover

under a policy of fire insurance for losses incurred as a

result to tornado damage to a building in which he had a

mortgagee and leasehold interest.

The insurer rejected the claim contending that

Plaintiff did not have an insurable interest in the


The parties agreed to have the Court sit as an

arbitrator and on November 30, 1995 an informal arbitration

proceeding was held by the Court.

The parties submitted a stipulated statement of facts

which is appended to this Decision and Order as Exhibit 1.

Defendant contends that at best, plaintiff's insurable

interest is limited to the $40,000 plaintiff expended as

tenant to restore the leasehold.

Defendant argues that because the other insurance paid

off the equivalent of the mortgage indebtedness, plaintiff

did not sustain a security loss.

The Court does not agree with this rationale.

Citing Section G2 under Commercial Property Conditions

and Section A2k under Personal Property Coverage, Defendant

contends the limit of liability of defendant would be the

difference between the amount collected under the buyer's

policy in which plaintiff was named as mortgagee, and the

liability limits of plaintiff's $100,000 policy.

To put this in perspective, one must first consider

defendant's limits of liability as if there had been no

other insurance, and, then, its liability prior to any

payment by the owner's insurer.

Under the first assumption, defendant would have been

responsible for the $65,000 mortgage, plus the leasehold

interest of $58,000 (plaintiff's $40,000 costs plus the

$18,000 value of the elevator). In this example, defendant

would have been liable for the $100,000 limit of the


Under the second assumption, the "Other Insurance"

clause, page 1 of 3, Form CP 79 01, would have applied

resulting in a pro rata contribution on the losses

requiring defendant to assume 55% of the following losses:

Plaintiff's mortgage $ 65,000

Plaintiff's leasehold 58,000


TOTAL $123,000

55% $ 67,650

The policy provides:

"If there is other insurance covering the

same loss or damage, we will pay only for the

amount of covered loss or damage in excess of the

amount due from that other insurance, whether you

can collect on it or not. But we will not pay

more than the applicable Limit of Insurance."

See G2.

The covered property under Plaintiff's policy does not

restrict coverage to personal property and/or improvements

and betterments only as Defendant claims.

The Court holds that Plaintiff is entitled to collect

$67,650 under his insurance policy; he had an insurable

interest as a result of the mortgage and leasehold


"Where the owner of realty, after having

obtained a fire policy covering the property,

conveyed the property, retaining a mortgage on

it, and thereafter the same property was covered

by a second fire insurance policy, both insurers

were liable to the owner pro rata as the amount

the coverage of each bears to the total

insurance, since the owner after the conveyance

still had an insurable interest to the extent of

his mortgage. " 71 NYJur2d 1892, page 222, citing

BrewervNorthRiverInsCo 1950),Sup) 268 NYS


The insurable interest must be calculated as of the

time of loss.

Because the mortgagor's policy would have paid off the

mortgage but its proceeds were instead used to repair the

property; the owners have always been current on their

payments; and, at no time was a default declared or

foreclosure proceedings considered, Defendant says it

should not have to pay anything for Plaintiff's interest on

the mortgage.

Defendant relies on SaveresevOhioFarmersInsCo,

260 NY 45 and also cites WriedtvBeckenhauer, 159 NW2d

822, a Nebraska case which held:

"Where the mortgagee procures insurance on

his separate interest, for his own benefit and at

his own cost, and without any agreement with the

mortgagor with respect thereto, the mortgagee is

entitled to the proceeds, the mortgagor having no

interest therein."

But, then that court goes on to say:

"In the event of a loss by fire of the

insured property, or a part thereof, the

mortgagee is entitled to be compensated by his

insurance, but if the mortgage indebtedness is

subsequently paid in full, he has not sustained a

security loss and insurer is entitled to recover

the insurance paid."

Thus, Defendant seems to be saying that because the

Plaintiff elected to allow the mortgagor/owner to receive

the proceeds from the owner's insurance policy, Plaintiff

is not entitled to recover under his own policy.

Defendant argues that Plaintiff could have used the

proceeds of the owner's policy to extinguish the mortgage

interest and hence he would have had no insurable interest.

This argument begs the question and ignores Plaintiff's

interest as a leaseholder.

The Court does not agree with this rationale.

Defendant was the drafter of the insurance contract;

the policy must be construed with every benefit of doubt

given to Plaintiff.

The mortgage was $65,000 and the promissory note was

for $14,900. There is an insurable interest to the extent

of the debt owed. See SchultzvBeulahLandFarm, 181 AD2d


Plaintiff claims the note presents a "further lien

interest" in the property. However, there is nothing to

indicate any such lien interest.

Here, the owner/mortgagor was paid under his policy.

The proceeds were paid to both the mortgagee and mortgagor,

placed in an account from which repairs were made on the


Plaintiff had a right, if not a duty, to hold the

proceeds until repairs were completed to secure his

interest pursuant to RPL 254(4)(a). See also GradyvUtica

MutualInsCo 69 AD2d 668.

The repairs owners made were to the entire building,

not just the part Plaintiff had a lease on.

Clearly, the owner was in no position to make repairs

if the proceeds of the owner's policy were applied to

satisfy the mortgage. As it was, repairs were never fully

completed due to a lack of funds.

Plaintiff's standing to recover is not affected by

actions of 3rd persons since he suffered a loss and did not

waive his rights as mortgagee and maintained an interest as


The Court in WhitestoneSavings, 321 NYS2d 866 and

AlexandraRestaurantvNHInsCo, 272 AD 346, affd 297 NY

858 held;

"...the fact that improvements on land may

have cost the owner nothing, or that, if

destroyed by fire, he may compel another person

to replace them without expense to him, or that

he may recoup his loss by resort to a contract

liability of a 3rd person, in no way affects the

liability of an insurer, in the absence of any

exemption in the policy."

"Nor are his damages to be diminished

because he had collateral contracts or relations

with 3rd persons which relieve him wholly or

partly from the loss against which the insured's

company agreed to indemnify him."

"Defendant's policy insured the property and

not the debt due the insured from its landlord.

The policy did not contain a clause specifically

granting the insurer subrogation to contract

rights belonging to is difficult to

see why under the subrogation clause in question,

the ultimate loss should fall upon the landlord

while the insurance company ...should have no

obligation or liability whatever."

Federal courts have taken the same position. See

CitizensInsCovFoxbiltInc 226 F.2d 641, WaltervMarine

OfficeofAmerica 537 F.2d 89.


The tornado rendered plaintiff's leasehold interest a

total loss. In addition, Plaintiff had an option to renew

for a second 5 year term under his lease and claims

compensation for the full 10 years.

Defendant says any insurable interest would not extend

to the second term, citing L&ERestaurantandLoungeInc.v

TheHomeInsCoofIndiana, a Supreme Court decision of

Hon. Penny Wolfgang, J.S.C. in Erie County. Judge Wolfgang

held that because the tenant never exercised his option to

renew, his insurable interest was limited to the term in

which his property was destroyed. See also Vendriescov

AetnaCasualtyandSuretyCo 68 AD2d 946.

This Court holds that those cases do not apply in this

case where the insured sold the property for less than its

market value, took back a mortgage and promissory note, and

reserved a leasehold interest. Moreover, the policy

contemplates consideration of renewal options. See Page 7,

item 7. Valuation, which provides:

"If your lease contains a renewal option,

the expiration of the renewal option period will

replace the expiration of the lease in this


To deal with proper assessment of damages to Plaintiff

regarding the loss of the leasehold, it is necessary to

discuss some financial issues and the actual terms of

Plaintiff's policy.

The owners received $80,000 under their policy. The

liability limit of Plaintiff's policy was $100,000.

Plaintiff claims the leasehold is worth $63,900 at

$4.00 per square foot rental value. He has spent to date

$40,200 out of pocket to partially restore the leasehold.

The measure of damages under the policy must be the

actual cost of restoration of the leasehold along the lines

of the method set out in the policy as set forth in the

improvements and betterments clause.

Under this method, at least the $40,000 already spent

would be included, plus the cost of the freight elevator.

It would cost $80,000 to repair or replace the

elevator. Plaintiff says that the elevator would have

added a dollar a square foot to the value of the leasehold

for two five year terms which translates into a discounted

value of $18,000 for the leasehold. This is a proper

measure of damages.

The generally accepted rule even before the standard

policy was introduced is that an insured may not recover

the full value of the property but will be limited in his

recovery to the value of his actual interest in the

property damaged or destroyed. See BeekmanvFulton&

MontgomeryCountyFarmers'MutualFireInsAssn, 66 AD 72,

73 NYS 110; LarnervCommercialUnionAssurCo, 127 Misc 1,

215 NYS 151.

A party possessing a special interest in the subject

matter insured may always recover the value of the special

interest, on an insurance of the entire subject matter; the

insured is entitled to recover according to his real

interest in the property, whether his title is absolute or

qualified. See 71 NYJur2d Sec 1754, page 127, notes 60 and

61, citing VanNattaVMutualSecurityInsCo 4 NY Super Ct

490; GirardvTaylor, 6 AD2d 359.

The Court holds that Plaintiff is entitled to collect

$67,650 under his insurance policy, plus the legal rate of

interest from the date of the loss.


Dated: January , 1996

Mayville, New York



Supreme Court Justice

To all Counsel:

Please take notice that a DECISION and ORDER of

which the within is a copy, is duly granted in the above

entitled action on the day of , 1996, and

duly entered in the office of the Clerk of the County of

Chautauqua on the same date.