Loss Payee’s Interest Valued at Time of Payment, Not Loss

By Don R. Sampen, published, Chicago Daily Law Bulletin February 24, 2020

The U.S. District Court for the Northern District of Illinois recently held that, following a fire loss, a mortgage loss payee under a property insurance policy was entitled to receive the balance of payment on the mortgage owed at the time of payment, rather than the amount owed at the time of loss.

The case is Berkshire Hathaway Homestate Insurance Co. v. Chicago Metropolitan Hospital LLC, 2020 U.S. Dist. Lexis 81 (Jan. 2, 2020). The insurer, Berkshire, was represented by Cozen O’Connor. McKnight & Kitzinger LLC represented the insured debtor, Chicago Metropolitan Hospital, and its mortgagees, Robert and Kathleen Dieleman.

In 2014, the Dielemans lent Chicago Metropolitan $500,000 secured by a mortgage on the hospital’s property. At the time of fire damage in 2017, Berkshire insured the property under a $7.5 million commercial property policy. The policy listed the Dielemans as loss payees.

Following the fire, Chicago Metropolitan submitted a claim for loss, which Berkshire denied because of the failure to maintain an automatic fire alarm system. In response to a claim submitted by the Dielemans for coverage, Berkshire filed this declaratory action seeking a determination of its obligations. The Dielemans counterclaimed for breach of contract and bad faith.

The counterclaim was based on provisions in Berkshire’s policy recognizing a loss payee’s right to coverage even if the insured itself was not so entitled. In the event of payment to the loss payee, the policy provided that the payee’s rights were to be transferred to Berkshire to the extent of the payment and the insured would pay its “remaining debt” to Berkshire. The policy stated that the loss payee’s rights were capped at “its financial interest in the covered property.”

During discovery in the coverage action, evidence developed that Chicago Metropolitan owed $504,000 on the loan at the time of the fire. By July 2019, however, the balance on the loan had dropped to $401,000, which Berkshire then offered to pay under the policy. The Dielemans demanded payment of the $504,000 owing at the time of the loss.

Analysis

On cross-motions for summary judgment, U.S. District Judge Joan H. Lefkow held for Berkshire. She acknowledged that the loss payee provisions were not explicit as to when the Dielemans’ interest should be valued. And she agreed that at the time of the fire the Dielemans’ had a $504,000 interest in the property.

She nonetheless construed the loss payee provisions under Illinois law to mean that the payment could be reduced to the extent the mortgage obligation has been satisfied. She relied in part on “common sense” to support her interpretation, saying that a loss payee should not be entitled to double payment.

The Dielemans argued that Berkshire would receive a windfall if not required to pay the $504,000 owing at the time of the fire in 2017. Lefkow disagreed, observing that if Berkshire paid in 2017 at the time of the loss, it would have taken over the loan and presumably have received the same $100,000 in principal that Chicago Metropolitan since paid the Dielemans.

The Dielemans further argued that they should receive the $504,000 amount to compensate them for their litigation costs and delay in payment. As to that point, Lefkow said that the safeguard against an insurer’s delay in paying a valid claim is not to inflate the insurance claim to make it punitive.

Rather, the remedy is an award of penalties under Section 155 of the Illinois Insurance Code, 215 ILCS 5/155(1). As to the Dielemans’ bad-faith claim under that section, however, neither party had moved for summary judgment. Thus, Lefkow expressed no view regarding the validity of the claim.

In short, the court granted summary judgment to Berkshire limiting Berkshire’s obligation to pay the Dielemans the amount of the mortgage outstanding at the time of payment by Berkshire.

Key point

• A loss payee’s right to recover under a property insurance policy is limited to the amount of its interest in the property at the time of the insurance payment.