Foremost Insurance v. Allstate Insurance 439 Mich. 378

Riley, J.

We granted leave to appeal to resolve a conflict in the Court of Appeals1 over whether a *381lienholder may recover under a loss payable clause where the insured breached an insurance contract, by intentionally destroying his property and misrepresenting the loss to his insurer.2 In cases involving nearly identical loss payable clauses, two Court of Appeals panels agreed that a standard loss payable clause operates as a separate contract of insurance between the lienholder and the insurer, yet differed over the coverage conferred upon the lienholder.3 The Boyd Court concluded that a lienholder’s right of recovery is no greater than that of the insured, and because the insured’s intentional act of destroying her automobile was excluded under the terms of the policy, the lien-holder could not recover under the loss payable clause when the insured intentionally destroyed her vehicle.4 However, in the instant case, the Foremost panel concluded that because the lien-holder has a separate contract with the insurer, it is entitled to recovery under the loss payable clause even when the insured was excluded from recovering under the same policy.5 We are persuaded that the Foremost panel correctly concluded that the insured’s acts of arson do not preclude the lienholder’s recovery from the insurer, and now affirm.

i

The parties stipulated the following set of facts pursuant to MCR 2.116(A)(2).

On July 24, 1985, Bobby Taylor executed an installment note with the State Employees Credit *382Union. The note was secured by a 1982 Be[e]ch-craft motor home. The State Employees Credit Union was named as a lienholder on the title to the motor home. On the same date, Bobby Taylor entered into a separate contract with Allstate Insurance Company (Allstate) to provide motor vehicle insurance for the motor home. The declaration sheet and the certificate of insurance designated State Employees Credit Union as a lien-holder.

In recognition of State Employees Credit Union’s interest in Bobby Taylor’s vehicle, Allstate Insurance Company issued to the Credit Union a "Loss Payable Clause,” which reads in pertinent part as follows:

"Loss or damage, if any, under the policy shall be payable as interest may appear to [State Employees Credit Union] and this insurance as to the interest of the Bailment Lessor, Conditional Vendor, Mortgagee or other secured party of Assignee of Bailment Lessor, Conditional Vendor, Mortgagee or other secured party [herein called a Lien-holder] shall not be invalidated by any act or neglect of the Lessee, Mortgagor, Owner of the within described automobile or other Debtor nor by any change in the title or ownership of the property; provided, however, that the conversion, embezzlement or secretion by the Lessee, Mortgagor, Purchaser or other Debtor in possession of the property insured under a bailment lease, conditional sale, mortgage or other security agreement is not covered under such policy unless specifically insured against and premium paid therefor . . . .”

On August 25, 1985, the motor home was destroyed by an incendiary fire. Bobby Taylor filed a claim with Allstate for insurance proceeds. It is undisputed that Bobby Taylor committed arson in an effort to defraud the Company. In addition, Mr. Taylor committed fraud and false swearing. His acts amounted to a material breach of contract, and on June 11, 1986, Allstate expressly and unequivocally denied his claim.

*383State Employees Credit Union, in its letter of April 22, 1986, requested Allstate to provide coverage under the policy issued to Bobby Taylor based on its interest in the motor home as a lienholder. On June 16, 1986, State Employees Credit Union’s request for coverage under the insurance policy issued to Bobby Taylor was denied.

On February 10, 1988, Foremost Insurance Company, as subrogee of State Employees Credit Union, filed a Complaint against Allstate seeking to recover for the loss of the motor home.

II

In general, there are two types of loss payable clauses, otherwise known as mortgage clauses, contained in insurance policies which protect lien-holders. The first type, commonly known as an ordinary loss payable clause, directs the insurer to pay the proceeds of the policy to the lienholder, as its interest may appear, before the insured receives payment on the policy.6 Under this type of policy, the lienholder is simply an appointee to receive the insurance fund to the extent of its interest, and its right of recovery is no greater than the right of the insured.7 There is no privity of contract between the two parties because there is no consideration given by the lienholder to the insured.8 Accordingly, a breach of the conditions of the policy by the insured would prevent recovery by the lienholder.9

The second type of loss payable clause is known *384as a standard loss payable clause.10 Under this type of clause, a lienholder is not subject to the exclusions available to the insurer against the insured because an independent or separate contract of insurance exists between the lienholder and the insurer.11 In other words, there are two contracts of insurance within the policy — one with the lien-holder and the insurer and the other with the insured and the insurer. Under the standard loss payable clause, the consideration for the insurer’s contract with the lienholder is that which the insured paid for the policy itself.12

Traditionally, insurers have undertaken the risk that the insured will commit fraud against them by inserting a standard loss payable clause in the insurance contract for the lienholder’s protection.13 The lienholder, usually the financial or lending institution, is assured, through the incorporation of the clause, that they will not be required to evaluate the borrower’s insurance claim history when approving a loan.14 Thus, the lender protects its interest by requiring the borrower to obtain insurance with a loss payable clause made payable to the lender prior to purchasing the vehicle that will protect the lender against the defenses that *385could be asserted against the borrower by the insurer.

In the instant case, both parties agree that the loss payable clause used by Allstate is a standard loss payable clause. Allstate, however, argues that its clause does not operate as a standard loss payable clause in the traditional sense because it provides less than complete protection: it excludes coverage where the insured converts, embezzles, or secretes the property.15 Thus, Allstate would have us read the loss payable clause in reference to the underlying insurance policy that defines "loss” as a "direct and accidental loss” and take the coverage for the lienholder out of its hands. We do not agree.

We believe that Allstate’s argument misses the mark because it runs contrary to the language and the purpose of the standard loss payable clause in its policy.16

*386We are persuaded that under Allstate’s theory of the case the inclusion of the specific prohibition against recovery in a standard mortgage clause— where the insured converts, embezzles, or secretes the property — would be rendered either redundant or meaningless.17 The exclusions in the standard loss payable clause would be rendered meaningless because losses in the described circumstances are never accidental. Embezzlement, conversion, and secretion require an intentional act by the defendant of dominion or control over the property that is inconsistent with an owner’s property rights.18 Moreover, it would be redundant to provide for the three exclusions because these acts are already excluded from coverage in the underlying policy of the insured.

We also believe that under Allstate’s theory of the case, an insurer would be able to avoid its basic promise to hold the lienholder harmless from any act or neglect by the insured and, therefore, the lienholder would only be entitled to recover for an accidental loss. Allstate has failed to recognize the significance of the fact that we are evaluating two separate contracts of insurance. The Boyd Court’s analysis is illustrative of the problems that arise by not recognizing the significance of the two contracts when evaluating the standard loss payable clause at issue.

In 1981, Boyd entered into a standard installment sales agreement with General Motors Acceptance Corporation to finance the purchase of her *387new automobile.19 As part of this agreement, gmac, the lienholder, conditioned the financing of the vehicle upon her obtaining insurance while the vehicle was being financed.20 Boyd insured the car with Auto Club Insurance Association and listed gmac as the loss payee in its standard loss payable clause.21 Acia’s standard loss payable clause is almost identical to the clause used by Allstate in the instant case.22

A few years later, Boyd reported the car stolen and filed a claim with acia.23 Acia denied her claim, alleging that Boyd intentionally destroyed the car, and also denied the claim of gmac as the security lienholder under the loss payable clause, on the basis of its belief that a lienholder is subject to the same exclusions as the insured because it is part of the same insurance policy and does not provide any greater coverage than that provided in the policy._

*388In reversing the trial court’s grant of summary disposition for gmac, the Court of Appeals held that the loss payable clause would only protect gmac with regard to risk otherwise covered in the acia policy.24 The Court reasoned that because Boyd’s intentional destruction of the vehicle was not a covered risk under the policy, and because the loss payable clause only protected gmac from covered risk, gmac was not entitled to any insurance proceeds.

The Boyd Court, as does Allstate, misinterprets the nature of the standard loss payable clause in relation to the policy issued to the insured by the insurer.25 As we have previously noted, there are two contracts of insurance involved in this case. One covers risk and outlines exclusions for the insured and the insurer. The other operates as an independent contract for the limited purpose of preventing the loss of coverage by any act or neglect between the insurer and the insured.26 The prevention of recovery under the contract between the insured and the insurer does not prohibit the recovery by the lienholder under its separate contract of insurance with the insurer because the *389exclusions in the standard loss payable clause do not apply.27

We are not alone in the conclusion we reach today. Every jurisdiction that has considered this issue in light of the same or similar standard loss payable clauses has concluded that the lienholder’s interest in the insured’s property will not be avoided by any acts, representations, or omissions of the insured.28

Thus a policy payable to the mortgagee as his interest may appear, and which contains clauses of the character under consideration, is to be construed so as to effectuate the parties’ interests, and so constitutes two separate contracts of indemnity which relate to the same subject matter, but cover distinct interests therein, and it effects a new and independent insurance which protects the mortgagee as stipulated, and which cannot be destroyed or impaired by the mortgagor’s acts or by those of *390any person other than the mortgagee or someone authorized to act for him and in his behalf.[29]

III

Allstate suggests that if we find that their loss payable clause operates as a traditional standard loss payable clause, coverage should be denied to Foremost because Bobby Taylor converted the State Employees Credit Union’s interest in the motor home when he intentionally destroyed it.

The crux of Allstate’s argument is that the conversion proviso refers to State Employees Credit Union’s lien or security interest. Foremost, however, argues that it refers to Bobby Taylor’s motor home. The pertinent part of Allstate’s standard loss payable clause provides:

"[provided, however, that the conversion, embezzlement or secretion by the Lessee, Mortgagor, Purchaser or other Debtor in possession of the property insured under a bailment lease, conditional sale, mortgage or other security agreement is not covered under such policy, unless specifically insured against and premium paid therefor . . . .” [Emphasis added.]

We are persuaded that the exclusion simply provides that the insured will not be covered when he converts his own property. In other words, the conversion provision focuses on the insured’s property and not on State Employees Credit Union’s lien.30 Having so concluded, we must now deter*391mine whether Bobby Taylor converted the mobile home when he intentionally destroyed it.

In the civil context, conversion is defined as any distinct act of domain wrongfully exerted over another’s personal property in denial of or inconsistent with the rights therein.31 In general, it is viewed as an intentional tort in the sense that the converter’s actions are wilful, although the tort can be committed unwittingly if unaware of the plaintiff’s outstanding property interest.32

In the instant case, we believe that Bobby Taylor’s intentional destruction of his motor home, as well as his fraud and false swearing to his insurer, Allstate, cannot be considered conversion. In each of the cases referred to above, the property converted belonged to another person who had original ownership or possession. In this case, however, the alleged converter owned the item that Allstate contends was converted. We agree with the Court of Appeals in the instant case that "a person can[not] 'convert’ his own property,” and therefore we reject Allstate’s second argument.33

IV

Allstate’s final argument is that public policy should preclude recovery by the lienholder because allowing recovery will encourage automobile own*392ers to intentionally burn their vehicles, and will invite collusion between borrowers and lenders in the conventional automobile financing arrangements. We find this argument untenable.

Allowing a lienholder to recover its interest in the property that was intentionally destroyed by the insured under a standard loss payable clause simply protects the lienholder’s insurable interest in accordance with what the insurer promised to do. That is, the insurer promised to cover the lienholder’s security interest in the insured’s automobile regardless of any act or neglect of the insured. Thus, rejection of Allstate’s public policy arguments, which endorse the holding in Boyd, would at most simply return lenders and insurance companies to the traditional role they play in the commercial marketplace. Lenders will be returned to the role of evaluating credit risk associated with the making of commercial loans, and insurance companies will be returned to their traditional role of evaluating every conceivable risk of loss in order to price their respective premiums for policyholders.34

*393We, therefore, conclude that the insured’s acts of arson and misrepresentation to Allstate did not preclude Allstate’s coverage to State Employees Credit Union under the standard loss payable clause. Thus, to the extent inconsistent with this opinion, we overrule Boyd v General Motors Acceptance Corp and its progeny.35 The Court of Appeals decision in the instant case is affirmed.

Levin, Griffin, and Mallett, JJ., concurred with Riley, J.

Boyle, J.

I concur except as to the issue discussed in part m as to which I concur with Justice Brickley’s part n.

Brickley, J.

(concurring). I agree with the majority’s conclusion that because a lienholder has a separate contract of insurance with an insurer, pursuant to a standard loss payable clause, it is entitled to recovery under the policy even when the owner of the insured property was excluded from recovery. I write separately to address more directly the language of the insurance contract and to further explain my reasoning.

i

Relying on Boyd v General Motors Acceptance Corp, 162 Mich App 446; 413 NW2d 683 (1987), Allstate argues that the standard loss payable clause included in its policy issued to Bobby Taylor does not allow Foremost to recover where there has been no covered "loss” from the perspective of Bobby Taylor. The loss payable clause provides, in pertinent part:

*394Loss or damage, if any, under the policy shall be payable as interest may appear to [State Employees Credit Union] and this insurance as to the interest of the [lienholder] shall not be invalidated by any act or neglect of the Lessee, Mortgagor^ Owner of the within described automobile or other Debtor nor by any change in the title or ownership of the property ....

Allstate argues, and the Boyd Court held, that because "loss” is defined in the policy as "direct and accidental loss of or damage to” the automobile, Bobby Taylor’s intentional destruction by fire of his vehicle did not result in a "loss” according to the meaning of that term as used in the policy. Thus, according to the Boyd analysis, because the loss payable clause only allows recovery where there is "[l]oss or damage, if any, under the policy,” the lienholder has no right of recovery where the owner of the insured vehicle intentionally destroys it. Boyd, supra at 453.

The majority rejects Allstate’s argument as being contrary to the purpose of a standard loss payable clause because it would allow an insurer to "avoid its basic promise to hold the lienholder harmless from any act or. neglect by the insured . . . .” Ante at 386. I reject Allstate’s argument as being contrary to the language of the standard loss payable clause in its policy.

A

I agree with Allstate that Foremost cannot recover unless there has been a loss under the policy. Therefore, to the extent that the majority relies on the "any act or neglect” language of the loss payable clause, I disagree. As the Boyd Court noted, supra at 455, there is a difference between acts that invalidate coverage and acts that result in an exclusion from coverage:

*395"A condition subsequent is to be distinguished from an exclusion from the coverage: the breach of the former is to terminate or suspend the insurance, while the effect of the latter is to declare that there never was insurance with respect to the excluded risk. Accordingly, the suicide clause in a life insurance policy is not a condition subsequent but rather suicide is simply not a risk insured against.” [Id. at 455, quoting 7 Couch, Insurance, 2d (rev ed), § 36:49, p 483.]

The loss payable clause in Allstate’s policy provides that the lienholder’s coverage "shall not be invalidated by any act or neglect” of Bobby Taylor. However, an intentional act that results in the destruction of the insured property is not an act that invalidates the coverage; rather, such an act of destruction is not included in the coverage of the policy. Thus, the "any act or neglect” language in the loss payable clause protects the lienholder only from Bobby Taylor’s acts or neglect that would invalidate the policy. Therefore, the loss payable clause provides for recovery only where there has been loss or damage under the policy, and the "any act or neglect” language cannot create a covered loss where there is none.

B

Although I agree with Allstate and the Boyd panel with respect to the construction of the "any act or neglect” language, I conclude that Foremost can recover under the loss payable clause because the loss was "accidental” from the perspective of the lienholder. Implicit in the Boyd Court’s holding is the conclusion that the policy definition of "loss” as "accidental” means that a loss must be accidental from the perspective of the insured. I agree. Clearly, the definition of loss as "accidental” *396would negate coverage under the policy for all loss or damage that results from intentional acts by parties other than the insured if a loss must be accidental from everyone’s standpoint. If that were the case, the owner of the car could not recover when a third party intentionally destroyed his car and, further, theft coverage under the policy would be meaningless. Thus, under Allstate’s policy, whether a loss is "accidental” must be determined from the perspective of the insured.

While the Boyd Court stated it had no quarrel with other decisions holding that the standard loss payable clause constitutes a separate contract of insurance, id. at 453, the Court failed to grasp the significance of this fact. The majority correctly finds that the standard loss payable clause differs from an ordinary loss payable clause where the lienholder is merely an appointee and has no right of recovery greater than the right of the owner of the insured property. Ante at 383-384. In contrast, under a standard loss payable clause the lienholder’s right of recovery is not derivative because, as the majority notes, "there are two contracts of insurance within the policy — one with the lien-holder and the insurer and the other with the insured and the insurer.” Id. at 384.1 Like the Boyd panel, in concluding that Foremost can re*397cover, the majority misses the significance of the two separate contracts of insurance.

Because the standard loss payable clause creates a separate contract of insurance between the lien-holder and the insurer, the lienholder is also clearly an insured under the policy. The Boyd Court was correct in its conclusion that a covered loss must be accidental from the perspective of the insured. However, in determining the meaning of "accidental” loss only through the eyes of the owner of the automobile, Boyd ignored the fact that the insured making a claim under the policy in that case was the lienholder and not the owner of the intentionally destroyed vehicle. Had the lienholder in Boyd applied for insurance independently of the car owner’s insurance, the lienholder’s recovery surely would not turn on whether a loss was accidental from the perspective of a party insured under a separate policy. Likewise, where a standard loss payable clause creates a separate contract for insurance between the lienholder and the insurer, equivalent to a policy obtained independently of the car owner’s policy, it is the lien-holder’s perspective that governs in terms of whether there has been accidental loss or damage under the policy. Thus, the correct interpretation of "accidental” loss in Allstate’s policy must be from the perspective of the insured who is making a claim, which in this case is Foremost, as subrogee of the lienholder, and not Bobby Taylor.2

II

Allstate’s second argument, in support of its assertion that Foremost is barred from recovery, is *398that arson is included in the meaning of the conversion proviso in the standard loss payable clause, which provides:

[T]he conversion, embezzlement or secretion by the Lessee, Mortgagor, Purchaser or other Debtor in possession of the property insured under a bailment lease, conditional sale, mortgage or other security agreement is not covered under such policy, unless specifically insured against and premium paid therefor ....

Allstate argues that Bobby Taylor "converted” the lienholder’s interest in his vehicle by intentionally destroying it. The majority rejects Allstate’s argument, concluding that the conversion proviso focuses on the property insured and not the lien-holder’s interest in that property. Ante at 390. Thus, according to the majority, because a person cannot convert his own property, by intentionally destroying it or otherwise, the conversion proviso does not prevent Foremost from recovering on the basis that Bobby Taylor intentionally destroyed his vehicle. Id. at 390-391.

The majority’s interpretation of the conversion proviso renders it meaningless. The proviso specifically excludes coverage where there has been "conversion, embezzlement or secretion by the Lessee, Mortgagor, Purchaser or other Debtor in possession of the property insured . . . .” (Emphasis added.) Therefore if, as the majority concludes, the proviso refers only to the conversion of the insured property, and a person cannot convert his own property, the proviso is clearly without any effect.

I conclude that the better interpretation of the conversion proviso follows from the purpose of the loss payable clause to protect the lienholder’s intangible interest in the insured property.

*399That a lien holder of such character has an insurable interest is not open to question. . . . "Wherever property, either by force of law or by the contract of the parties, is so charged, pledged, or hypothecated that it stands as a security for the payment of a debt or the performance of a legal duty, each of the parties — the owner of the lien, and the person against whose property it exists— has an insurable interest in the property. The interest of a lien holder is an insurable one despite the fact that he may sue his debtor personally or that the interest is subject to contingencies.” [Booker T Theatre Co v Great American Ins Co of New York, 369 Mich 583, 587; 120 NW2d 776 (1963), quoting 29 Am Jur, Insurance, § 453, p 790.]

Thus, because the standard loss payable clause protects the lienholder’s interest in the property insured — the lien — the proviso must refer to the conversion, embezzlement, or secretion of the lien-holder’s interest. This interpretation is consistent with the language of the proviso as well. While the proviso clearly refers to conversion by the owner of the insured property, the wording is less clear with regard to what must be converted, embezzled, or secreted in order to prevent coverage under the policy without the payment of an additional premium. However, because the majority’s interpretation would render the exclusion a nullity, the wording must be read to refer to the lienholder’s interest.3

Thus, the issue that must be addressed is *400whether, as Allstate argues, arson is included in the meaning of "conversion, embezzlement or secretion.” A b.road interpretation of "conversion” might support Allstate’s argument that Bobby Taylor converted the lienholder’s interest in his vehicle by intentionally destroying the vehicle. However, it is a familiar and well-established principle of law that courts give to an insurance policy, couched in language chosen by the insurer, a construction most favorable to the insured. Pietrantonio v Travelers Ins Co, 282 Mich 111, 116; 275 NW 786 (1937). Further, exceptions from coverage are strictly construed against the insurer. Id.

A strict reading of the words "conversion, embezzlement or secretion” does not support Allstate’s argument. While, as Allstate notes, Bobby Taylor’s action in destroying the car was inconsistent with the lienholder’s interest in the property, Allstate’s use of theft-related terms in its standard mortgage clause cannot be strictly construed to include the act of arson. As another court has found, the terms conversion, embezzlement, and secretion "suggest crimes falling within the general category of theft or larceny . . . .” Nat'l Casualty Co v General Motors Acceptance Corp, 161 So 2d 848, 852 (Fla App, 1964). Thus, as that court held,

An insurer will not be allowed by the use of *401obscure phrases or exceptions to defeat the purpose for which the policy was procured, and where two interpretations are available the one allowing the greater indemnity will prevail.

Therefore, although the conversion exclusion in the standard loss payable clause could be broadly interpreted in a general tort sense to apply to arson committed by the owner of the insured property, when read strictly the proviso is no more than a limit on the theft coverage of the policy.

Thus, as one commentator has argued, the conversion proviso in the standard loss payable clause is intended to prevent a lienholder from recovering where the owner of a vehicle fails to make payment and removes the vehicle from the reach of the lienholder.4 In such a case, the inability of the lienholder to enforce its security interest results from a credit problem rather than a risk of loss of or damage to the property for which the lienholder obtained insurance.5 Therefore, in a case where the purchaser of an automobile under a conditional sales contract tendered a bad check to the seller and thereafter absconded with the car, the California Supreme Court held that the conversion exclusion in the insurance policy6 prevented recovery by the lienholder. Fiske v Niagara Fire Ins Co of New York, 207 Cal 355; 278 P 861 (1929). The Fiske court reasoned that the parties, through the conversion exclusion, intended to exclude as a risk insured against the dishonest act of *402an automobile purchaser against the seller of that automobile who voluntarily put the vehicle in the hands of the purchaser under a conditional sales contract. Id. at 357. Thus, under this interpretation of the conversion exclusion, the lienholder retains the risk that a mortgagor might be a bad credit risk, despite the fact that through the standard loss payable clause the lienholder does not assume the risk that the mortgagor might intentionally destroy the insured property.

Therefore, under the required strict construction of the conversion exclusion in Allstate’s standard loss payable clause, the terms 'Conversion, embezzlement or secretion” do not include within their meaning the intentional destruction of the insured property by arson. I agree with the majority that if Allstate wishes to exclude from the lienholder’s coverage loss or damage that results from such an intentional act by the owner of the insured property, it may do so by expressly stating that "arson” committed by any insured is not a covered risk under the policy, or in broader terms by providing that the lienholder’s right to recovery is no greater than that of the property owner.

CONCLUSION

The standard loss payable clause in the policy protects a lienholder from loss of coverage, where the owner of the insured property intentionally destroys it, because such a loss is "accidental” from the lienholder insured’s perspective and therefore is covered under the policy. Thus, a lienholder can recover when the loss is accidental from its perspective, but cannot recover, for example, when the lienholder colludes with the car owner to intentionally destroy the car. Further, *403when the loss is accidental from the perspective of both the lienholder and the property owner, the lienholder’s right to recovery will not be defeated by an act or neglect of the property owner that would otherwise invalidate the policy. Finally, a lienholder will not be entitled to recovery on the claim of a theft loss under the policy, when the property owner converts, embezzles, or secretes the lienholder’s interest in the insured property.

I believe the foregoing analysis best fulfills the mandate that an insurance contract, like any other contract, must be construed as a whole so that all its parts are harmonized, and if possible every word must be given effect. Associated Truck Lines, Inc v Baer, 346 Mich 106, 110; 77 NW2d 384 (1956).

I concur in the result reached by the majority.

Cavanagh, C.J., concurred with Brickley, J.