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Prince v. Royal Indemnity Co.

decided: September 2, 1976.


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division - No. 73 C 3195 WILLIAM J. LYNCH, Judge.

Cummings, Tone and Wood, Circuit Judges.

Author: Tone

TONE, Circuit Judge.

This is a diversity action on a fire insurance policy containing the usual provision that assignment of the policy requires the insurer's consent. The issue is whether under Illinois law the insured had an insurable interest which entitled him to recover for a fire loss after selling the insured property, assigning the policy, and undertaking to forward the assignment to the insurer for acceptance but failing to do so. When the buildings covered by the policy burned and the seller-insured filed a proof of claim, the insurer, not having received the assignment or consented to it before the fire, denied liability on the ground that the sale terminated the seller's insurable interest. The District Court sustained this position. We reach the opposite result.

The case was submitted to the District Court for decision on the following stipulated facts: Plaintiffs are the trustees of Central Manufacturing District (CMD), which is engaged in developing and managing industrial real estate. CMD is the named insured under a fire insurance policy issued by defendant Royal Indemnity Company which covered, among other buildings, a warehouse and garage leased by CMD to A & P Company. Royal had been the insurer of the A & P-leased property since 1966. In 1972 CMD agreed to sell 69 parcels of real estate, including the A & P-leased property, to the Prudential Insurance Company of America. As a part of this transaction it was agreed that CMD would continue to manage the properties transferred. Transfer of ownership was effected in four separate closings. At the fourth closing, on January 4, 1973, title to the A & P-leased property and 16 other parcels was transferred.

Among the documents tendered by CMD to Prudential at each closing were executed assignments of fire insurance policies covering structures on the transferred parcels. At Prudential's request, CMD agreed to forward these assignments to the various insurers to obtain their approvals of the assignments.

CMD neglected to deliver the assignment of the policy covering the A & P-leased property to defendant for acceptance. On May 27, 1973, a fire destroyed the warehouse and damaged the garage, causing a loss which it is agreed amounted to $2,415,729. CMD filed a proof of loss. Defendant denied liability on the ground that CMD's insurable interest terminated when the property was transferred to Prudential.

Some six months after the fire Prudential transferred the A & P property back to CMD and CMD returned the purchase price pursuant to an agreement which recited that it was made "in lieu of determining the amount of damages for which the Trustees are liable to Prudential on account of the fault or neglect of the Trustees . ."

Plaintiffs argue that CMD had an insurable interest in the property by virtue of (1) CMD's liability to Prudential for failure to procure defendant's consent to the assignments and (2) the reconveyance by Prudential to CMD, which plaintiffs argue was a rescission of the original sale of the parcels and relates back to the time CMD transferred them to Prudential.*fn1 In an unpublished memorandum, the District Court held that basing an insurable interest upon CMD's failure to perform

"would serve to deprive the insurance company of its right to consent to any assignment as provided for expressly in the insurance policy, and would serve to exculpate the transferor from liability for its own misfeasance or breach of contract with the transferee at the expense of the insurance company." Prince v. Royalty Indemnity Co., 404 F. Supp. 1076, 1081 (N.D.Ill. 1975)

The court also found the second argument "to be without merit, " and entered judgment for the insurer. We reverse on the basis of plaintiffs' first argument.

We find no authority in Illinois law to support the District Court's view. The existence of an insurable interest in the named insured does not depend upon whether the insurer could have refused to consent to an assignment of the policy to another insured, or whether the named insured breached an obligation to a third party.*fn2 All that is necessary is an "'interest in property by the existence of which [the insured] receives a benefit, or by the destruction of which he will suffer a loss'. . . . 'That the person may suffer loss is a sufficient foundation for his claim to an insurable interest.'" Home Insurance Co. v. Mendenhall, 164 Ill. 458, 464-465, 45 N.E. 1078, 1079-1080 (1897).*fn3 See also Lieberman v. Hartford Fire Insurance Co., 6 Ill.App.3d 948, 949, 287 N.E.2d 38, 40 (1st Dist. 1972). The law elsewhere is in accord. See 3 Couch on Insurance 2d ยง 24:13; Parks v. Federal Crop Insurance Corp., 416 F.2d 833, 839 (7th Cir. 1969). Neither legal title nor possession is required. Beddow v. Hicks, 303 Ill.App. 247, 258, 25 N.E.2d 93, 98 (3d Dist. 1940); Welch v. Northern Assurance Co., 223 Ill.App. 77, 83 (1st Dist. 1921). Thus Illinois courts have held that an insurable interest exists in a variety of situations in which the insured lacks either title or possession, or both. Griffin v. Pfeffer Lumber Co., 285 Ill. 19, 120 N.E. 583 (1918) (lessee of real estate); Danvers Mutual Fire Insurance Co. v. Schertz, 95 Ill.App. 656 (3d Dist. 1900) (owner of equitable title); Whelan v. Massachusetts Bonding & Insurance Co., 205 Ill.App. 122 (2d Dist. 1917) (mortgagor and mortgagee of same property); Home Insurance Co. v. Peoria & P.U.R. Co., 178 Ill. 64, 52 N.E. 862 (1899) (bailee); Welch v. Northern Assurance Co., supra, 223 Ill.App. 77 (shareholder in a solvent company). The reason for the requirement of an insurable interest is "to prevent the use of insurance for illegitimate purposes. It should not be extended beyond the reasons for it by excessively technical construction." Womble v. Dubuque Fire & Marine Insurance Co., 310 Mass. 142, 147, 37 N.E.2d 263, 266 (1941), quoted with approval and followed by this court in Lititz Mutual Insurance Co. v. Lengacher, 248 F.2d 850, 853 (7th Cir. 1957).

Accordingly, if CMD might have suffered a loss by reason of the destruction of the property, it had an insurable interest. CMD argues that there was such a risk of loss arising from the undertaking to forward the executed assignment of the insurance policy to the insurer and to obtain the latter's consent. That undertaking created a duty to forward the assignment and seek the insurer's consent and to notify Prudential if consent was not obtained. Because of its breach of this duty, CMD argues, it was liable to Prudential when the insured property burned, and CMD therefore had an insurable interest.

The defendant insurer's strongest response to CMD's argument is based on several early cases, one decided by an Illinois court, in which the liability of sellers for failure to effect transfers of insurance on the property sold was limited to the value of the policy before the fire.*fn4 This argument relates, of course, to the amount of the insurable interest, not to its existence, but we are in any event not persuaded that these cases should control here. The Illinois case is easily distinguishable,*fn5 and, whether or not the others represent ...

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