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Home Federal Savings & Loan Assn. of Chicago v. Republic Ins. Co.

December 23, 1968


Swygert, Fairchild and Cummings, Circuit Judges.

Author: Fairchild

FAIRCHILD, Circuit Judge:

In this action*fn1 a lending institution mortgagee seeks recovery under an errors and omissions insurance policy. The claim is that the mortgagee failed to have requisite fire insurance in force when the mortgaged property was damaged by fire.

The mortgaged property was a shopping center. A builder's risk fire insurance policy ($925,000) had been in force while the shopping center was under construction. A condition in the policy provided that the shopping center was not to be occupied without the endorsed consent of the insurer. No endorsement was obtained, the building was occupied, and a fire (with $737,000 loss) occurred a month later.

There had been activity during the month which gave substance to a claim by the mortgagee that the builder's risk insurer had agreed orally or by conduct to insure after occupancy. The builder's risk insurer ultimately paid $600,000 in settlement. The district court found that valid fire insurance coverage did exist at the time of the fire, and judgment that this "precludes recovery" from the errors and omissions insurer was entered. The mortgagee appealed.

Plaintiff mortgagee is Home Federal Savings and Loan Association of Chicago (Home Federal). Defendant, issuer of the errors and omissions policy ($100,000) covering Home Federal, is Republic Insurance Company. The mortgagor was Lake County Trust Company, as trustee. The beneficial owners of the shopping center were Harold Falcon and Joseph Schuchter. Northern Insurance Company of New York issued the builder's risk policy and allegedly agreed to insure after occupancy.

A complicating factor was Home General Insurance Agency (Home Agency). Home Agency is a partnership composed of persons interested in Home Federal. It operated as an insurance agency, dealing almost entirely in insurance for borrowers from Home Federal, served by personnel of Home Federal, and located in the Home Federal quarters. Home Agency was a licensed agent for Northern in Illinois. The property here involved was in Indiana, but there was a course of dealing between the Home Agency and Northern that when Home Agency produced an Indiana insured for Northern, a policy, signed in blank by a particular firm licensed as an agent for Northern in Indiana, would be delivered by Northern's Chicago office. The commission would be paid to Home Agency.

Otto Preisler was president of Home Federal and a partner in Home Agency. Northern named him as a person authorized to act for Home Agency as Northern's agent in Illinois. Karl Burger was insurance manager for Home Federal, and also performed the details of the work of Home Agency. Preisler and Burger figured in activity material to this case, but it is difficult to distinguish between their acts for Home Federal and those for Home Agency. Home Agency had an errors and omissions policy, issued by an insurer other than Republic, and not a party here.

The shopping center was occupied October 30, 1961. The fire occurred November 29, 1961. Home Federal had received a report in September indicating that the shopping center was nearly completed. Under usual procedure, this fact would have been brought to Burger's attention so that he could arrange for permanent insurance or secure an endorsement on the builder's risk policy, consenting to occupancy. Burger was not alerted, however, and it is clear that this slip up was the kind of error or accidental omission referred to in the Republic policy. It is also clear, however, that Preisler and Burger had knowledge of this omission a few days after October 30 and the policy, by its terms, would not cover loss resulting from a fire taking place more than ten days after Home Federal had knowledge that an error or accidental omission had occurred.

At the opening of the shopping center on October 30, Falcon asked Preisler to place permanent insurance and Preisler told Falcon that Falcon was "bound" by permanent insurance with Northern in the same amount as the builder's risk. Preisler related this to Burger a few days later and on November 8, Burger had a telephone conversation with Mrs. Kuh, office manager of Northern. According to Burger, he informed Mrs. Kuh the building was occupied, and she agreed to determine the appropriate rate for permanent insurance, issue the policy, and bill Home Agency. According to Mrs. Kuh, however, Burger told her the building was completed, as distinguished from occupied, and merely asked her to ascertain the appropriate rate. She obtained the rate, but overlooked informing Burger before the fire.

It appears to be the theory of Home Federal that Burger should have checked his file a few days after November 8, and should have followed it up to secure the issuance of a policy or at least a written binder. Although more than ten days elapsed after several Home Federal-Home Agency people had knowledge of the failure to keep insurance in force at the time of occupancy, it is the theory that Burger's failure to follow up was a new error or accidental omission which did not become known to Home Federal until after the fire, and that the fire loss was therefore covered by the Republic policy.

Of course, in dealing with Northern, Home Federal had asserted that there was fire insurance in force on November 29 by virtue of (1) Preisler's oral binder, even though given in Indiana on Indiana property, or (2) estoppel of Northern to deny coverage under the builder's risk policy, Northern's agents having knowledge of the occupancy of the shopping center and having taken no action, or (3) Mrs. Kuh's agreement with Burger to issue the permanent policy.

The Republic policy sued on contains two sections, each providing coverage on account of error or accidental omission in the insured's customary procedure with respect to insurance of mortgaged real estate. Section I contains an agreement to indemnify loss to the mortgagee's interest. The insuring agreement of Section I of the policy reads in part:

"This Company agrees to indemnify the Insured against loss to the Insured's mortgagee interest (including the Insured's mortgagee interest in any legal fiduciary capacity) in real property arising by reason of error or accidental omission in the operation of the Insured's customary procedure in requiring, procuring and maintaining valid insurance against the risk and perils described below: (a) payable to itself as mortgagee on such real property; and, (b) on such real property during and after foreclosure by the Insured or when sold under a conditional sales agreement or other instrument where title remains with the Insured; if by reason of such error or accidental omission, requisite insurance is not in force at the time of loss."

Section II is an agreement to pay liability of the mortgagee arising out of its failure to procure and maintain insurance for the benefit of the mortgagor:

"This Company agrees with the named Insured to pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages in any mortgagee, mortgage fiduciary or mortgage servicing agency capacity arising by reason of error or accidental omission in the operation of the Insured's customary procedure in procuring and maintaining valid insurance against the risks and perils described below for the benefit of the mortgagor in amounts and under terms and conditions customarily accepted by the mortgagor. . . ."

Home Federal claims primarily that it suffered a loss to its mortgagee interest, and is entitled to recover under Section I. The property was rebuilt after the fire, however, and in connection with the reconstruction, Home Federal advanced additional money to the mortgagor. The $600,000 received from Northern was applied toward repayment, but Home Federal made an allowance to the mortgagor of $120,000, apparently reflecting an acknowledgment of and allowance for Home Federal's liability to the mortgagor for failure fully to protect the latter from the ...

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