April 10, 2015
AIG CENTENNIAL INSURANCE COMPANY, Plaintiff - Counter Defendant - Appellee,
J. BRIAN O'NEILL, CAROLINA ACQUISITION LLC, Defendants - Counter Claimants - Appellants, BANK OF AMERICA N.A., a.k.a. Bank of America Corp, Defendant - Appellant
[Copyrighted Material Omitted]
Appeals from the United States District Court for the Southern District of Florida. D.C. Docket No. 0:09-cv-60551-WJZ.
For AIG CENTENNIAL INSURANCE COMPANY, Plaintiff - Appellee: Andrew Warren Anderson, Chartwell Law Offices, LLP, MIAMI, FL; Adria G. Notari, McAlpin Conroy, PA, MIAMI, FL; Michelle Otero Valdes, Law Office of Michelle O. Valdes, CORAL GABLES, FL.
For J. BRIAN O'NEILL, CAROLINA ACQUISITION LLC, Defendants - Appellants: Ross Warren Bergethon, Bergethon, LLC, ATLANTA, GA; Hayden Pace, Stokes Wagner Hunt Maretz & Terrell, ATLANTA, GA.
For BANK OF AMERICA, N.A., Defendant - Appellant: James Randolph Liebler, Tricia Julie Duthiers, Reid Alan Schaeffer, Liebler Gonzalez & Portuondo, PA, MIAMI, FL.
Before TJOFLAT and JULIE CARNES, Circuit Judges, and DuBOSE,[*] District Judge. DuBOSE, District Judge, concurring in the judgment.
TJOFLAT, Circuit Judge:
This case involves a disputed marine insurance policy covering a sixty-six foot sport-fishing vessel, the Bryemere. It comes to us on appeal from an eight-day bench trial conducted in the United States District Court for the Southern District of Florida. Finding no reversible error, we affirm.
Brian O'Neill first set his sights on the Bryemere in 2006. He signed a purchase-and-sale agreement for the vessel in March 2007, which fixed its price at $1.575 million plus the trade of another vessel valued at $700,000. O'Neill's acceptance was contingent on a successful marine survey and sea trial to examine the Bryemere before purchase. O'Neill hired Thomas Price, a marine surveyor, to conduct the pre-purchase investigation. Price documented his findings and issued an initial report estimating the Bryemere 's market value at approximately $1.875 million. O'Neill's project manager for the transaction, L.J. Gallagher, later contacted Price to request an increase in the vessel's valuation. Price acquiesced, reissuing the initial pre-purchase investigation but upping the Bryemere 's market value to $2.35 million. The survey also revealed that the vessel was in working condition but in need of repairs. O'Neill knew he would be on the hook for procuring these improvements, so he sought a reduction in the purchase price. The seller agreed, lowering the cost of the vessel by $150,000 for an adjusted sale price of $2.125 million.
As he negotiated the Bryemere 's price, O'Neill began laying the ground work for its eventual purchase. He incorporated a limited-liability company in the state of Rhode Island, Carolina Acquisition, LLC (" Carolina" ) to take ownership of the vessel. O'Neill is Carolina's only shareholder, and Carolina is the Bryemere 's registered title owner. With Carolina at his side, O'Neill turned his focus toward two remaining tasks: financing and insuring the Bryemere.
O'Neill applied for a preferred ship mortgage--a specific type of mortgage governed by federal law --with Bank of America, N.A. (" BOA" ) to fund the Bryemere 's cost. Acting through a mortgage broker, Beacon Marine Credit (" Beacon" ), O'Neill submitted to BOA an initial loan request for $1.83 million. BOA granted the loan. Although it was O'Neill who filed the original application, O'Neill signed the mortgage in his capacity as managing member of Carolina. With
Carolina as the mortgagor, O'Neill assumed the role of guarantor in his personal capacity. The Bryemere, meanwhile, served as collateral: the loan agreement gave BOA a security interest in the vessel such that, in the event of default, BOA could repossess the Bryemere, sell it, and use the proceeds to pay down any outstanding debt. 46 U.S.C. § 31325(b)(1) (" On default of any term of the preferred mortgage, the mortgagee may enforce the preferred mortgage lien in a civil action in rem . . . ." ).
After submitting the initial application, O'Neill, acting through Beacon, asked for an increase in the loan amount from $1.83 million to $1.976 million; BOA granted that request. The loan amount was set, and the preferred ship mortgage was signed and dated on April 18, 2007.
As a condition of the loan, BOA required proof of insurance for the Bryemere. In addition, BOA requested that the insurance policy contain a mortgage clause that would protect BOA's interests as a mortgagee in the event the underlying insurance policy was found void. Unfortunately for all parties involved, this straightforward request quickly turned Sisyphean.
It all started when O'Neill's insurance broker, Willis of Pennsylvania, Inc. (" Willis" ), sought an insurance quote for the Bryemere from AIG Centennial Insurance Company (" AIG" ). Susan Bonner, an underwriter, handled the application process on behalf of AIG. Sharon King, a broker, was assigned to O'Neill's case on behalf of Willis. The first problem arose when, instead of working directly with King, O'Neill delegated the task of obtaining insurance for the Bryemere to his executive secretary, Desiree Foulds. And the problem was compounded when, instead of explaining the insurance-application process to Foulds, King forwarded the application to Foulds without comment and returned the application Foulds had completed to Bonner without reviewing it for accuracy or completeness. Needless to say, this was a recipe for error.
As she filled out the insurance application, Foulds made three mistakes that are relevant to this appeal. First, she listed O'Neill as the owner of the vessel. Carolina, in fact, held legal title to the Bryemere. See supra part I.A. Second, in response to a question about whether the owner or captain had ever suffered any " losses," she disclosed one prior loss in 2003, when O'Neill lost a boat due to a fire. But in the marine-insurance context, the term " loss" encompasses not only the total physical loss of a vessel but also any damage causing injury to the property insured. Under this rubric--and by his own admission at trial--O'Neill had suffered two additional losses that went undisclosed: propeller damage to his Ocean yacht and a blown engine on his sailing vessel. Third, Foulds listed the Bryemere 's purchase price as $2.35 million. The closing statement, however, reflects a purchase price of $2.125 million.
Foulds sent the completed application to King; King then forwarded it to Bonner at
AIG. Bonner received the application and, in reliance thereon, sent King an insurance quote over email on April 17, 2007. The quote listed O'Neill as the named insured. Bonner's email, to which the insurance quote was attached, contained a request that O'Neill submit a signed letter of compliance, indicating that he would complete the repairs to the Bryemere recommended by Price's initial marine survey. Two days later, on April 19, 2007, at 5:07 p.m., King sent an insurance binder to Foulds. An insurance binder is " [a]n insurer's memorandum giving the insured temporary coverage while the application for an insurance policy is being processed or while the formal policy is being prepared." Black's Law Dictionary 190 (9th ed. 2009). The binder listed O'Neill as the named insured. Four minutes later, King sent a revised binder to Foulds listing Carolina as the named insured. King testified, and the District Court found, that she changed the named insured on the binder in response to a request made by BOA. But King never informed Bonner that Carolina--not O'Neill--should have been the named insured on the policy.
The next day, April 20, AIG issued the final policy. The declarations page of that policy listed O'Neill as the named insured and the policy's effective date as April 19, 2007. As BOA requested, the policy also contained a standard mortgage clause. In contrast with the preferred ship mortgage, there is no indication that O'Neill took out the insurance policy in his capacity as managing member of Carolina LLC. The insurance application names only " J. Brian O'Neill" as the insured under the policy.
Following the Bryemere 's purchase, O'Neill invested $225,000 to pay for the repairs recommended by Price's marine survey. On June 29, 2007, the Bryemere departed Palm Beach, Florida, for Newport, Rhode Island. During the voyage, the crew " noticed considerable flexing in the vessel's hull." Upon arrival in Rhode Island, several marine experts inspected the Bryemere and concluded that it suffered from a number of structural defects rendering the vessel, in the words of one marine surveyor, " un-seaworthy, dangerous and unsafe for any use."  O'Neill then submitted a claim to AIG for coverage under his insurance policy.
In response, AIG filed in the United States District Court for the Southern District of Florida a declaratory judgment action seeking affirmation that the insurance policy was void ab initio as to both O'Neill and BOA. After an eight-day bench trial, the District Court issued an order finding that neither O'Neill nor BOA could recover under the policy. As for O'Neill,
the District Court held that the misrepresentations regarding O'Neill's prior loss history and the Bryemere 's purchase price--contained in the application for insurance completed by Foulds on O'Neill's behalf--rendered the policy void ab initio under the maritime doctrine of uberrimae fidei, or utmost good faith. As for BOA, the District Court held, among other things, that the named insured on the policy, O'Neill, was not the mortgagor on the loan and that BOA had no rights under the standard mortgage clause as a result. O'Neill and BOA timely appealed.
On appeal, O'Neill and BOA advance two lines of argument. O'Neill contends that the District Court erred in holding that his misrepresentations on the insurance application violated the duty of utmost good faith--and thus voided the insurance policy--because the terms " purchase price" and " loss history" were ambiguous and because, in any event, the misrepresentations were not material. As a corollary to this argument, O'Neill says that the District Court improperly addressed the misrepresentation of his loss history, an issue he claims rested outside the scope of the pleadings and the pretrial stipulation.
BOA, meanwhile, maintains that the standard mortgage clause is a valid contract binding on both BOA and AIG. And like O'Neill, BOA also identifies a procedural misstep: the District Court, BOA argues, should not have ruled on the validity of the standard mortgage clause in the first place because it, too, was outside the scope of the pleadings and the pretrial stipulation. We address these arguments in turn.
Marine insurance is a curious legal creature, bearing the markings of both the state common law of contracts and the federal common law of admiralty. Although the Admiralty Clause of the United States Constitution vests the federal courts with jurisdiction to hear maritime-contract cases, " it does not follow . . . that every term in every maritime contract can only be controlled by some federally defined admiralty rule." Wilburn Boat Co. v. Fireman's Fund Ins. Co., 348 U.S. 310, 313, 75 S.Ct. 368, 370, 99 L.Ed. 337 (1955). In the absence of a " judicially established federal admiralty rule," we rely on state law when addressing questions of marine insurance. Id. at 314, 320-21, 75 S.Ct. at 370, 373-74.
The age-old federal marine-insurance doctrine of uberrimae fidei governs
O'Neill's argument and provides " the controlling federal rule even in the face of contrary state authority." Steelmet, Inc. v. Caribe Towing Corp., 747 F.2d 689, 695 (11th Cir. 1984); see also HIH Marine Servs., Inc. v. Fraser, 211 F.3d 1359, 1362 (11th Cir. 2000) (" It is well-settled that the marine insurance doctrine of uberrimae fidei is the controlling law of this circuit." ). Uberrimae fidei reflects " an enlightened moral policy" based upon the presumption that " the party procuring insurance, is not . . . in possession of any facts, material to the risk which he does not disclose." M'Lanahan v. Universal Ins. Co., 26 U.S. 170, 185, 7 L.Ed. 98 (1828). Indeed, " [i]t is the duty of the [insured] to place the underwriter in the same situation as himself." Sun Mut. Ins. Co. v. Ocean Ins. Co., 107 U.S. 485, 510-11, 1 S.Ct. 582, 600, 27 L.Ed. 337 (1883) (quotation marks omitted). And from duty springs obligation: an insured must " fully and voluntarily disclose to the insurer all facts material to a calculation of the insurance risk." Fraser, 211 F.3d at 1362. To decide whether a fact is material, we inquire whether it could " possibly influence the mind of a prudent and intelligent insurer in determining whether he would accept the risk." Kilpatrick Marine Piling v. Fireman's Fund Ins. Co., 795 F.2d 940, 942-43 (11th Cir. 1986). In this way, we have clarified, materiality is a concept " broadly defined." Fraser, 211 F.3d at 1363-64.
An insured who conceals or misrepresents a material fact commits " manifest fraud, which avoids the policy." M'Lanahan, 26 U.S. at 185. That holds true regardless of whether the misrepresentation is " [willful] or accidental, or result[s] from mistake, negligence or voluntary ignorance." Steelmet, 747 F.2d at 695 (quotation marks omitted). Commonsense dictates such an approach--" the law has placed the burden of good faith disclosure with the person in the best position to know all the facts: the insured." Fraser, 211 F.3d at 1363.
The duty of utmost good faith will thus render this insurance policy void ab initio if (1) O'Neill made a misrepresentation to AIG and (2) that misrepresentation was material. " Mixed questions of law and fact, such as questions of materiality, . . . involve assessments peculiarly within the province of the trier of fact and hence are reviewable under the clearly erroneous rule." Lucas v. Fla. Power & Light Co., 765 F.2d 1039, 1040-41 (11th Cir. 1985). " A finding is 'clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. U.S. Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948).
The District Court determined that O'Neill misrepresented the purchase price on his application for insurance. We cannot say this finding was clearly erroneous.
Elementary mathematics explains why. O'Neill paid $1.575 million for the Bryemere, plus the trade of another vessel valued at $700,000, for a total cost of $2.275 million. Anticipating the cost of future repairs following the Bryemere 's purchase, O'Neill negotiated a $150,000 adjustment downward in the price, for an adjusted sale price of $2.125 million. This figure is reflected in the closing statement for the
vessel and is not disputed by the parties. Instead of providing that number, however, O'Neill's insurance application lists the purchase price at $2.35 million, a $225,000 misrepresentation.
But O'Neill objects to this calculation. He says we should include in the purchase price an additional $225,000 for the repairs AIG required him to make as a prerequisite for obtaining insurance. Adding $225,000 on to the adjusted sale price of $2.125 million, O'Neill contends, means the true purchase price of the Bryemere was accurately reflected in his insurance application at $2.35 million.
As the District Court noted, however, O'Neill had already obtained a $150,000 reduction in the purchase price in anticipation of having to fund the repairs recommend by the Price survey report. So O'Neill wants to have it both ways: he wants to benefit from negotiating a lower price, but he does not want that lower price to appear on the insurance application, presumably so he can benefit from an increase in the value of the insurance policy. After all, adding the cost of intended repairs to the actual purchase price would inflate the value of the unrepaired vessel. Underwriters use the purchase price to determine the hull value at the time the policy issues. If the purchase price were inflated to account for intended repairs, the true value of the hull at the time of purchase would be skewed.
O'Neill offers one additional point for us to consider. Relying on state contract law, he argues that the term " purchase price" on the insurance application was ambiguous and therefore should be interpreted in favor of the insured. Purchase price is not an ambiguous term. It simply means the value given in return for an item. But even assuming the term is ambiguous, it matters not. The federal maritime doctrine of uberrimae fidei --not state contract law--governs this dispute, and it provides no refuge in claiming ambiguity. See Steelmet, 747 F.2d at 695 (noting that a misrepresentation, even if it is a result of " mistake, accident, or forgetfulness, is attended with the rigorous consequences that the policy never attaches and is void" (quotation marks omitted)).
The District Court proceeded to hold that this misrepresentation was material and thus voided the policy. The District Court did not clearly err in so holding.
Our circuit has stressed that questions of materiality must be evaluated from the perspective of a reasonable insurer. We ask whether a fact could " possibly influence the mind of a prudent and intelligent insurer in determining whether he would accept the risk." Kilpatrick, 795 F.2d at 942-43; see also Black's Law Dictionary 670 (9th ed. 2009) (defining a material fact as " [a] fact that is significant or essential to the issue or matter at hand" ).
Under that formulation, the District Court could have found that O'Neill's misrepresentation of the Bryemere 's purchase price was material. O'Neill misrepresented the price of the vessel by almost a quarter-million dollars. The District Court heard testimony indicating that a vessel's purchase price would hold sway over the mind of an insurer when determining whether to assume the underwriting risk. For example, underwriters Sean Blue and Susan Bonner testified that insurance companies routinely rely on the vessel's purchase price in determining coverage
limits for a given vessel and in determining the amount of coverage provided under a mortgage clause. This makes good business sense: the vessel's purchase price, after all, " provides an objective measure of the vessel's worth." N.H. Ins. Co. v. C'Est Moi, Inc., 519 F.3d 937, 939 (9th Cir. 2008)
In fact, our circuit has concluded, in an unpublished opinion, that the misrepresentation of a vessel's purchase price has the potential to be material so as to void an insurance policy under the duty of utmost good faith. Markel Am. Ins. Co. v. Nordarse, 297 F.App'x 852, 853 (11th Cir. 2008) (per curiam) (unpublished) (affirming the grant of summary judgment in favor of an insurer in light of a $54,000 misrepresentation in purchase price on a vessel worth, at most, $126,000).
The District Court did not clearly err in its determination that O'Neill committed a material misrepresentation rendering void ab initio his insurance policy with AIG. As a result, we need not--and do not--consider O'Neill's arguments regarding the District Court's determination that the policy was also void for O'Neill's misrepresentation
of his prior loss history. See id. at 853 n.5 (" The district court found that only one misrepresentation is necessary . . . to void the policy, and that therefore it need not consider the other three alleged misrepresentations. We agree." (citation omitted)).
BOA claims that the District Court erred in finding that BOA was not covered under the terms of the insurance policy's standard mortgage clause. BOA also says that the District Court should not have reached this issue in the first place because it was outside the scope of the pleadings and the pretrial stipulation.
In contrast to O'Neill's dispute, there is no judicially established federal admiralty rule governing the formation and the interpretation of a standard mortgage clause. As such, we turn to state law. Wilburn Boat Co., 348 U.S. at 320-21, 75 S.Ct. at 370, 373-74. The District Court concluded, and the parties do not currently dispute, that Pennsylvania law should guide our analysis.
BOA believes that in considering the validity of the standard mortgage clause, the District Court permitted trial-by-ambush because that issue was outside the scope of the pleadings and the pretrial stipulation. To be sure, we have held that " parties are bound by their stipulations and a pretrial stipulation frames the issues for trial." G.I.C. Corp. v. United States, 121 F.3d 1447, 1450 (11th Cir. 1997). But we have also cautioned that " [w]e are not inclined to disturb the district court's interpretation of a stipulation agreed upon by the parties during pretrial proceedings and approved by the court." Risher v. United States, 465 F.2d 1, 5 (5th Cir. 1972);  see also W. Peninsular Title Co. v. Palm Beach Cnty., 41 F.3d 1490, 1493 (11th Cir. 1995) (per curiam) (" [W]e owe great deference to the trial judge's interpretation and enforcement of pretrial stipulations." ).
BOA's characterization of the proceedings below is simply unsupported by the record. The pretrial stipulation agreed to by all of the parties raises the very question the District Court considered. Under the heading " A Concise Statement of Issues of Law which remain for Determination by the Court," the parties framed the issue as follows: " Notwithstanding any alleged acts or omissions of O'Neill, or flaws in the Bryemere, whether [BOA] is nonetheless covered under the terms of the mortgagee clause." So drafted, it is difficult to imagine how the pretrial stipulation could not have put BOA on notice that the extent of its rights under the standard mortgage clause was one of the subjects to be litigated at trial. The District Court did not abuse its discretion in ruling on this issue.
BOA goes on to argue that it can find refuge under the insurance policy's standard mortgage clause, O'Neill's misrepresentation aside. The text of that clause reads:
It is understood and agreed that in the interest of the Mortgagee(s) $1,976,000, shall not be impaired or invalidated by any act or omission, or neglect of the mortgagor, owner, master, agent or crew of the vessel(s) insured by this policy, or by failure to comply with any warranty or condition over what the Mortgagee has no control.
We construe the terms of an insurance policy in accord with their plain meaning. E.g., Steuart v. McChesney, 498 Pa. 45, 444 A.2d 659, 661 (Pa. 1982). The clause at issue here purports to protect BOA's interest, as a mortgagee, in the loan on the Bryemere. Pennsylvania law recognizes two types of mortgage clauses, both of which safeguard a mortgagee's interest in the event of a loss, but which differ vastly in the level of protection they afford.
The first is an " open" or " simple" mortgage clause. A simple mortgage clause " places the mortgagee . . . in the shoes of the insured" such that the mortgagee " is simply a party appointed to receive the insurance proceeds to the extent of its interest, and its right to recovery is no greater than the right of the insured." Cardwell v. Chrysler Fin. Corp., 2002 PA Super 215, 804 A.2d 18, 24 (Pa. S.Ct. 2002). As a result, the mortgagee " is subject to such defenses as the insurer may have against the mortgagor." Id. So when an insured-mortgagor's misconduct bars recovery under the policy, that misconduct will bar recovery by the mortgagee as well.
The second is a " union" or " standard" mortgage clause. A standard mortgage clause protects the mortgagee so that " the insurance [policy] shall not be invalidated by any act or neglect of the mortgagor or owner of the property." Gallatin Fuels, Inc. v. Westchester Fire Ins. Co., 244 F.App'x 424, 429 (3d Cir. 2007) (unpublished) (quotation marks omitted) (applying Pennsylvania law). Unlike a simple mortgage clause, a standard mortgage clause " provides more coverage for the mortgagee . . . because the insurance policy expressly indicates that any act or neglect by the insured will not invalidate coverage." Cardwell, 804 A.2d at 24.
An examination of the policy's plain language makes abundantly clear that, under Pennsylvania law, the clause can be fairly characterized as a standard mortgage clause. The clause explicitly and unambiguously protects BOA's interest in the loan on the Bryemere even if the underlying insurance policy is " impaired or invalidated by any act or omission, or neglect of the mortgagor." See Cardwell, 804 A.2d at 24 (" If the clause contains such language as to indicate that coverage of the mortgagee . . . will not be invalidated by the acts or omissions of the insured, it is a standard loss payable clause." ).
Having identified a standard mortgage clause, we must determine what effect such a clause has, if any, on the relationship between BOA and AIG under the policy. " Where a policy is issued to the owner and a [standard] mortgagee clause is attached, the [insurance] company is, in effect, making two contracts. First, it is agreeing to indemnify the owner for the loss of the property and, second, it is insuring the creditor's security for his debt." Freystown Mut. Fire Ins. Co. v. Whited, 41 Pa. D. & C. 605, 609 (Ct. Com. Pl. 1941). This means that " a standard mortgagee clause . . . creates a separate, distinct and independent contract of insurance in favor of [the] mortgagee." Guarantee Trust & Safe Deposit Co. v. Home Mut. Fire Ins. Co., 180 Pa.Super. 1, 117 A.2d 824, 825 (Pa. S.Ct. 1955).
For this reason, a standard mortgage clause " is unaffected by the misrepresentations or false statements of the mortgagor." 4 Steven Plitt et al., Couch on Insurance 3d § 65:65 (2011). And more still, " [a] standard mortgage clause has been held effective to protect the interest of the mortgagee even though the policy was itself void as to the mortgagor ab initio." Id. § 65:50.
As a result, although O'Neill's misrepresentation rendered the policy void ab initio as to him, BOA's fate under the insurance
policy does not necessarily rise or fall with the propriety of O'Neill's conduct. To evaluate BOA's rights under the policy, then, we must look instead to basic principles governing the standard mortgage clause under Pennsylvania law.
The District Court determined that the mortgage clause does not cover BOA under the insurance policy. " We review conclusions of law made by a district judge following a bench trial de novo." Renteria-Marin v. Ag-Mart Produce, Inc., 537 F.3d 1321, 1324 (11th Cir. 2008).
The District Court properly regarded this case as sui generis. That is because we are confronted with a scenario in which the named insured is neither the owner of the property insured by the policy nor the mortgagor on the loan for which the property serves as collateral. In what appears to be a case of first impression, we must decide what rights--if any--BOA maintains amid these circumstances.
Were O'Neill the owner of the vessel and the mortgagor on the loan, our answer would be quite straightforward: under Pennsylvania law, BOA would, at the least, have the potential for coverage, O'Neill's misrepresentation notwithstanding. See supra part III.B.2.a. There is no dispute that O'Neill is the named insured. But O'Neill does not own the vessel--Carolina does. And O'Neill is not the mortgagor on the loan--Carolina is.
Yet the assumption undergirding the reasoning of the case law in this area is that " mortgagor" is synonymous with " named insured." E.g., Overholt v. Reliance Ins. Co., 319 Pa. 340, 179 A. 554, 556 (Pa. 1935) (" The so-called standard mortgage clause . . . creates in favor of the mortgagee a contract of insurance separate, distinct, and independent from that constituted between the mortgagor and the insuring company by the other provisions of the policy." (emphasis added)); Willits v. Camden Fire Ins. Ass'n, 124 Pa.Super. 563, 189 A. 559, 561 (Pa. S.Ct. 1937) (noting that a standard mortgage clause protects the mortgagee against conduct by " the insured mortgagor or owner" (emphasis added)); see also, e.g., Guarantee Trust & Safe Deposit Co. v. Home Mut. Fire Ins. Co., 180 Pa.Super. 1, 117 A.2d 824 (Pa. S.Ct. 1955) (discussing a standard mortgage clause on a policy where the named insured was also the mortgagor); Abbottsford Bldg. & Loan Ass'n v. William Penn Fire Ins. Co., 130 Pa.Super. 422, 197 A. 504 (Pa. Super Ct. 1938) (same); Risha v. Farmers Fire Ins. Agency, 56 Pa. D. & C.4th 194 (Ct. Com. Pl. 2001) (same); Benchoff v. W. Mut. Fire Ins. Co., 8 Pa. D. & C.2d 471 (Ct. Com. Pl. 1954) (same). That assumption does not hold here. Carolina, a corporate entity, is the mortgagor but--critically, in our view--is not the named insured on the policy.
The difference between O'Neill and Carolina is no mere technicality. The corporate form matters: even though O'Neill is Carolina's sole shareholder, " the general rule is that a corporation shall be regarded as an independent entity even if its stock is owned entirely by one person." Lumax Indus., Inc. v. Aultman, 543 Pa. 38, 669 A.2d 893, 895 (Pa. 1995). Moreover, " property of a limited liability company is owned by the company itself rather than nominally or otherwise by the members." 15 Pa. Cons. Stat. Ann. § 8923 cmt. 1994.
To be sure, Pennsylvania courts have long held that an insurance policy " is on the insured's interest in the property, not the property itself." Mut. Benefit Ins. Co. v. Goschenhoppen Mut. Ins. Co., 392 Pa.Super. 363, 572 A.2d 1275, 1277 (Pa. S.Ct. 1990). And we have no doubt that O'Neill possesses an insurable interest in the Bryemere, even if he does not hold legal title to the vessel. See Luchansky v. Farmers Fire Ins. Co.,
357 Pa.Super. 136, 515 A.2d 598, 599 (Pa. S.Ct. 1986) (" The general rule is that anyone has an insurable interest who derives pecuniary benefit or advantage from the preservation or continued existence of the property or who will suffer pecuniary loss from its destruction." ). But that does not change the fact that the entire logic of the standard mortgage clause--protection for the mortgagee from acts or omissions by the mortgagor--unravels when the mortgagor is not the named insured under the very policy purporting to insure the mortgagee's interest. Cf. 4 Steven Plitt et al., Couch on Insurance 3d § 65:8 (2011) (explaining that a standard mortgage clause protects the mortgagee " against loss from any act or neglect of the mortgagor or owner so that it shall not defeat the insurance so far as the interest of the mortgagee is concerned" (emphasis added)). Indeed, the District Court rightly noted that " the mortgagee's interest clause clearly relies on the presumption that the mortgagor is . . . the named insured . . . ."
So it bears emphasis that AIG and Carolina never entered into an insurance contract at all. O'Neill signed the mortgage in his capacity as managing member of Carolina; the insurance policy, by contrast, is in O'Neill's name alone. For this reason, the District Court made the factual determination that O'Neill acted on his own behalf--not on behalf of Carolina LLC--in procuring the insurance policy.
The mortgage clause, moreover, was part and parcel of the deal BOA struck with Carolina, and BOA ran the risk that Carolina would err in how it obtained coverage. BOA was in the best position to take care that the two parties central to the proper formation of a standard mortgage clause--the named insured and the mortgagor--aligned so as to protect its interest in the loan. But they did not. Accordingly, BOA cannot rely on the independent contractual status ordinarily conferred upon the standard mortgage clause by Pennsylvania law.
To hold otherwise would render the plain language of the clause internally incoherent. By its terms, the clause protects BOA from five different actors whose conduct might impair or invalidate the insurance policy: the mortgagor, the owner, the master, an agent, or the crew of the Bryemere. In this case, O'Neill is the relevant actor, but the mortgage clause appears to afford BOA no protection from his behavior, which rendered the policy
void ab initio. Carolina is the mortgagor and owner. The District Court found, and BOA does not contest, that the record contains no evidence to indicate that O'Neill acted as either the master or crew member of the vessel in obtaining the policy. For the clause's plain language to protect BOA from O'Neill's misrepresentation, we would have to reach the puzzling conclusion that O'Neill, in procuring the insurance policy, acted not to safeguard his own insurable interest, but rather as an " agent" of the Bryemere, a vessel that cannot be an " insured" in the first place. E.g., In re Gorman's Estate, 321 Pa. 292, 184 A. 86, 87 (Pa. 1936) (" The [property] itself is not insured; the indemnity is provided for the insured and for his interest in the property." ).
In sum, an analysis of Pennsylvania law and the insurance policy's plain language reveals a fundamental assumption underlying the standard mortgage clause: that the mortgagor and the named insured are one and the same. This assumption was not satisfied here. As a result, the District Court correctly concluded that BOA is not covered under the policy.
For these reasons, we AFFIRM the judgment of the District Court.
DuBOSE, District Judge, concurring in the judgment:
I concur fully with the majority's opinion that O'Neill cannot recover under the AIG policy. As to BOA, I also agree with the majority's opinion that the District Court did not abuse its discretion in ruling on the validity of the mortgage clause.
I concur in the judgment only as to the determination that BOA cannot recover under the policy. I would affirm based on the District Court's determination that in view of BOA's unique involvement with the procurement of insurance, no contract was formed in favor of BOA. This is because BOA rejected the offer of insurance by requesting that the insured's name be changed from O'Neill to Carolina.
I write to take exception to two of the majority's determinations as it relates to BOA's claim. First, the majority determined that in order for a mortgage clause to be valid, Pennsylvania law requires that an owner or mortgagor be the named insured. It is true that when discussing mortgage clauses, Pennsylvania courts have used the terms insured, mortgagor and owner interchangeably. However, under the facts of the cited cases, the terms were interchangeable. I do not agree that
the interchangeable use of owner and insured in Pennsylvania law is a basis for holding that an insured must be the owner or mortgagor of the collateral to have a valid mortgagee clause included in the policy.
Second, the majority determined that the policy's plain language requires that the insured be the mortgagor/owner. The basis for this determination was because none of the five actors named in the mortgagee clause (from whose conduct the mortgagee is protected), was the named insured. Thus, the majority concludes that the mortgagee clause would be rendered internally incoherent because the clause would not provide protection to the mortgagee from the acts of the insured.
I do not construe the mortgagee clause to require that the insured be the mortgagor/owner. It should be noted that the mortgage clause also provides that the mortgagee's interest is not invalidated " by failure to comply with any warranty or condition over what the Mortgagee has no control." (D.C. Doc. 478-1 at 23). This phrase is not modified by reference to specific actors, but certainly would include the insured. Thus, if O'Neill failed to meet a condition of the policy over which the Mortgagee had no control, then the Mortgagee would be protected.