Broker’s error in submitting insurance application representing that property was fully occupied, when it was in fact vacant, was not a condition precedent to coverage and innocent mortgagee was entitled to coverage

In Old Second Nat. Bank v. Indiana Ins. Co., 2015 IL App (1st) 140265, the defendant insurance company appealed from an order awarding a monetary judgment and pre-judgment interest to the mortgagee arising from the insurer’s denial of coverage under a policy of insurance. The facts were not disputed. The owner applied for insurance through its broker who had the authority to bind the insurer. In placing coverage the agent made several erroneous statements in the application including that the building was completely owner occupied, when it was in fact vacant, and consisted of only 3990 square feet, when it actually had over 35,000 square feet. The owner had no role in completing the application. After the policy was renewed the mortgagee requested that it be added to the policy as a mortgage holder. The insurance company confirmed the mortgagee’s addition to the policy in writing but did not pass on any of the relevant policy terms. It was undisputed that neither the owner nor the mortgagee ever saw or approved the application. The building then suffered approximately $2.27 million damages from vandalism. Upon receipt from the owner and the mortgagee of a timely proof of loss, the insurer denied coverage based upon the vacancy provision in the policy. Suit followed. The lower court entered judgment for the mortgagee for its full loss and the insurer appealed. The insurer argued that the court misinterpreted the provisions of the insurance policy to require coverage of the mortgagee under the policy’s mortgage clause when the loss at issue was not covered in the first instance. The court noted first that the policy contained a standard mortgage clause which forms a separate and distinct contract between the insurer and the mortgagee, the effect of which is to shield the mortgagee from being denied coverage based upon the acts or omissions of the insured. In an attempt to get around its contract with the mortgagee, the insurer argued that the fact that the building was allowed to remain vacant for sixty days was not an act or default of the insured, but merely amounted to an unacceptable condition of risk. In other words, the vacancy provision was a condition precedent concerning the very attachment of risk in the first instance. Harmonizing the vacancy provision with the mortgage clause, the court found the vacancy clause was a condition subsequent to coverage. The insurer’s interpretation was unreasonable, as it would place a mortgagee in the untenable position of having to guarantee the regular occupation of the premises, effectively placing it at the whim of the insured. Considering the interplay between the policy’s vacancy provision and the mortgage clause, the court relied upon cases from other jurisdictions to hold that the vacancy clause did not relieve the insurer of responsibility to cover the mortgagee, as long as the mortgagee met its responsibilities under the policy. The court concluded that the mortgagee met each of the requirements for coverage and upheld the verdict of the trial court.

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