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08/17/94 DONNA ELLEGOOD v. AMERICAN STATES

August 17, 1994

DONNA ELLEGOOD, PLAINTIFF-APPELLANT,
v.
AMERICAN STATES INSURANCE COMPANY, DEFENDANT-APPELLEE.



Appeal from the Circuit Court of McHenry County. No. 90-L-515. Honorable Michael J. Sullivan, Judge, Presiding.

Released for Publication September 19, 1994.

Inglis, McLAREN, Quetsch

The opinion of the court was delivered by: Inglis

PRESIDING JUSTICE INGLIS delivered the opinion of the Court:

Plaintiff, Donna Ellegood, appeals the order of the circuit court of McHenry County denying her motion for summary judgment and granting summary judgment to defendant, American States Insurance Company, on a complaint for breach of contract and declaratory judgment. On appeal, plaintiff contends that the court erred in (1) determining that defendant had validly cancelled the policy, even though it had failed to notify the mortgagee; (2) refusing to apply a statutory amendment retroactively which required the insurer to give notice of cancellation to the mortgagee; and (3) finding that no issue of fact existed regarding defendant's failure to notify the mortgagee. We affirm.

Defendant issued to plaintiff a fire insurance policy which was to be effective from May 1, 1989, to April 30, 1990. The policy contains lengthy provisions regarding cancellation of the policy due to, among other reasons, nonpayment of the premiums. In relevant part, the policy provides that defendant will give 10 days' notice to the mortgage holder if it wishes to cancel the policy for that reason.

Plaintiff paid the first three premium installments, but missed the fourth. As a result, on or about February 2, 1990, defendant sent plaintiff a notice of cancellation. The parties do not dispute that plaintiff failed to make the fourth installment payment or that she received the notice of cancellation. As discussed below, the parties dispute whether defendant informed the mortgage holder, McHenry State Bank, of the impending cancellation of the policy.

At the time the policy was issued, Illinois statutes did not require the insurer to provide notice of the cancellation of the policy to the mortgagee. The legislature amended the relevant statute, effective August 30, 1989, to provide:

"No notice of cancellation of any policy of insurance * * * shall be effective unless mailed by the company to the named insured and the mortgage or lien holder, at the last mailing address known by the company." 215 ILCS 5/143.14 (West 1992).

On April 19, 1990, fire damaged the building covered by the policy. Plaintiff filed a claim which defendant denied. Plaintiff thencommenced this litigation. Her amended complaint contains three counts. Count I alleges that defendant breached the contract represented by the policy by failing to pay plaintiff's claim. Count II seeks a declaratory judgment that defendant's purported cancellation was ineffective for violating section 143.14. Count III also alleges a breach of contract and seeks damages alleged to result specifically from defendant's failure to notify the mortgage holder. Plaintiff alleges that had defendant notified the bank of the impending cancellation, the bank would have either paid the premium, charging it to plaintiff, or covered the property under a blanket policy maintained for that purpose.

The parties filed cross-motions for summary judgment. Defendant disputed plaintiff's allegation that it failed to notify the mortgagee but argued that as a matter of law, any such failure would not affect the validity of the cancellation as to plaintiff. Alternatively, defendant disputed plaintiff's allegation that it failed to notify the mortgagee. The court granted defendant's motion for summary judgment and denied plaintiff's motion. Plaintiff perfected this appeal.

On appeal, plaintiff first contends that the court erred in implicitly finding that defendant did not breach its contract with plaintiff by failing to notify the mortgagee that it was about to cancel the policy. Relying on Smith v. Richard (1985), 134 Ill. App. 3d 378, 89 Ill. Dec. 377, 480 N.E.2d 859, plaintiff asserts that in order to cancel a policy for nonpayment of the premium, the insurer must comply strictly with the terms of the policy. Plaintiff further contends that she can establish damages as a direct result of defendant's failure to notify McHenry State Bank. Defendant responds that the duty it owed to the mortgage holder is separate from its duty to the insured and that the insured may not rely on its failure to notify the mortgagee to avoid cancellation of the policy as to her.

In Dunbar v. National Union Fire Insurance Co. (1990), 203 Ill. App. 3d 661, 149 Ill. Dec. 172, 561 N.E.2d 450, the court held that although the relevant statute required notice to third-party lienholders, the requirement was irrelevant to any duty owed to the insured. ( Dunbar, 203 Ill. App. 3d at 665.) Therefore, the insurer's failure to notify the third-party lienholders did not affect the proper notice given to the insured. Dunbar, 203 Ill. App. 3d at 665.

Although the parties do not cite, and our research has not disclosed, any Illinois case which has addressed the precise issue presented here, the rationale of Dunbar appears to apply here as well. The vast majority of cases from other jurisdictions have held that the failure to notify the mortgagee does not affect an otherwise validcancellation as against the named insured. Some courts have gone so far as to hold that the requirement of notice to the mortgagee has the effect of making an independent contract with the mortgagee. (See National Security Fire & Casualty Co. v. Mid-State Homes, Inc. (Miss. 1979), 370 So. 2d 1351.) The purpose of the requirement of separate ...


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