Commerce Bank vs. West Bend Mutual Insurance Company

In February 2011, Commerce Bank was added to an insurance policy issued by

West Bend to 12345 Portland Buildings, LLC (the “owner” or “policyholder”) for the

building at 12345 Portland Avenue in Burnsville. The policy insured the property

against, among other things, property damage caused by vandalism. The policy contains

two clauses that are at the center of this dispute: a standard mortgage clause and a

vacancy clause. Under the heading “Property General Conditions” and the subheading

“Mortgageholders,” the policy contains the following provision: d. If we deny your claim because of your acts or because you have failed to comply with the terms of this policy, the mortgageholder will still have the right to receive loss payment if the mortgageholder: (1) Pays any premium due under this policy at our request if you have failed to do so; [and] (2) Submits a signed, sworn proof of loss within 60 days after receiving notice from us of your failure to do so . . . . . . . . All of the terms of this policy will then apply directly to the mortgageholder.

This provision is a so-called “standard mortgage clause” or “union mortgage clause,” in

that it allows the mortgageholder to recover in some circumstances when the insured

cannot. See Allen v. St. Paul Fire & Marine Ins. Co., 167 Minn. 146, 149-50, 208 N.W.

816, 817-18 (1926) (discussing the distinction between a union mortgage clause and an

open mortgage clause). The policy designated Commerce Bank as a mortgageholder.

Under the heading “Property Loss Conditions” and the subheading “Vacancy,” the

policy contains the following provisions:

a. Description Of Terms

(1) As used in this Vacancy Condition, the term building and the term vacant have the meanings set forth in Paragraphs (a) and (b) below:

. . . .

(b) When this policy is issued to the owner or general lessee of a building, building means the entire building. Such building is vacant unless at least 31% of its total square footage is:

(i) Rented to a lessee or sub-lessee and used by the lessee or sub-lessee to conduct its customary operations; and/or (ii) Used by the building owner to conduct customary operations.

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(2) Buildings under construction or renovation are not considered vacant.

b. Vacancy Provisions

If the building where loss or damage occurs has been vacant for more than 60 consecutive days before that loss or damage occurs:

(1) We will not pay for any loss or damage caused by any of the following even if they are Covered Causes of Loss:

(a) Vandalism; (b) Sprinkler leakage, unless you have protected the system against freezing; (c) Building glass breakage; (d) Water damage; (e) Theft; or (f) Attempted theft.

(2) With respect to Covered Causes of Loss other than those listed in Paragraphs (1)(a) through (1)(f) above, we will reduce the amount we would otherwise pay for the loss or damage by 15%.

In February 2011, when Commerce Bank was added to the policy, the building

was vacant and had been so since November 2010; i.e., for more than 60 days.

Commerce Bank was aware that the building was vacant.1 West Bend, however, was not

so aware.

The building remained vacant and, on September 15, 2011, it was vandalized.

Commerce Bank made a claim for the damage, which West Bend denied based on the

vacancy clause. Commerce Bank sued for breach of the insurance contract.

1 Indeed, in the summer of 2010, Commerce Bank submitted a claim for damage due to vandalism to the building’s previous insurer, The Hartford. That claim was denied under a nearly identical vacancy provision.

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On cross-motions for summary judgment, the district court granted West Bend’s

motion, denied Commerce Bank’s motion, and dismissed the action. The court

determined that West Bend never assumed the risk of vandalism to a vacant building, that

vacancy was not a violation of the terms of the policy, and that the vacancy was not

caused by a breach or violation by the property owner. The court acknowledged the

mortgage clause, but held that West Bend “is only liable to the mortgagee for covered

losses,” and that “[i]n this case, there was never any coverage offered for a vacant

building, so [Commerce Bank] cannot recover.”

The court of appeals reversed. Commerce Bank v. W. Bend Mut. Ins. Co., 853

N.W.2d 836 (Minn. App. 2014). The court held that Commerce Bank could recover

because “under a standard mortgage clause, ‘the insurance with respect to the mortgagee

shall not be invalidated by the mortgagor’s acts or neglect.’ ” Id. at 841 (quoting Am.

Nat’l Bank & Trust Co. v. Young, 329 N.W.2d 805, 810 n.1 (Minn. 1983)). Thus,

“[w]hile the owner had no coverage under the policy for its violations, under

Commerce’s separate and independent policy with West Bend, the vacancy provision

applies only when Commerce is guilty of breaching it.” Id. at 842. In this case, the court

said, “it was the owner’s failure to occupy the property or secure a tenant that comprised

the acts or negligence causing the property to remain vacant for more than 60 days.” Id.

We granted West Bend’s petition for review.

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II.

A.

On appeal from summary judgment, this court reviews de novo whether there are

any genuine issues of material fact and whether the district court erred in its application

of the law to the facts. STAR Ctrs., Inc. v. Faegre & Benson, LLP, 644 N.W.2d 72, 76-77

(Minn. 2002). We view the evidence in the light most favorable to the party against

whom summary judgment was granted—here, Commerce Bank. Id.

The interpretation of an insurance policy and the application of the policy to the

undisputed facts of a case are questions of law that this court reviews de novo. Am.

Family Ins. Co. v. Walser, 628 N.W.2d 605, 609 (Minn. 2001). An insurance policy must

be read as a whole, and unambiguous language must be given its plain and ordinary

meaning. Midwest Family Mut. Ins. Co. v. Wolters, 831 N.W.2d 628, 636 (2013).

Provisions in a policy must be read in context with all other relevant provisions. Smitke

v. Travelers Indem. Co., 264 Minn. 212, 214, 118 N.W.2d 217, 218 (1962).

B.

The mortgage clause in West Bend’s policy is a “standard” or “union” mortgage

clause. As opposed to an “open” mortgage clause, under which the mortgagee simply

stands in the shoes of the mortgagor, a standard mortgage clause creates an independent

contract between the insurer and the mortgagee that prevents the mortgagee’s interest

from being invalidated by the conduct of the mortgagor. Allen, 167 Minn. at 149-50, 208

N.W. at 817-18 (quoting Syndicate Ins. Co. v. Bohn, 65 F. 165, 178 (8th Cir. 1894));

Magoun v. Fireman’s Fund Ins. Co., 86 Minn. 486, 490, 91 N.W. 5, 7 (1902); see 4

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Couch on Insurance 3d (“Couch”) § 65:32 (1996 & 2014 Supp.). For example, if the

mortgagor sets fire to his own building, the mortgagee can still recover under a standard

mortgage clause. See H.F. Shepherdson Co. v. Cent. Fire Ins. Co., 220 Minn. 401, 404

06, 19 N.W.2d 772, 774-75 (1945); 4 Couch § 65:57.

The terms of the mortgagee’s contract are the same as those of the mortgagor’s

policy. See Am. Nat’l Bank & Trust v. Young, 329 N.W.2d 805, 812 (1983); Bankers’

Joint Stock Land Bank v. St. Paul Fire & Marine Ins. Co., 158 Minn. 363, 366, 197 N.W.

749, 750 (1924); 4 Couch § 65:32 (stating that the mortgagee’s contract is “engrafted

upon the main contract,” and “is rendered certain and understood by reference to the

policy”). “[A] mortgagee claiming under a standard mortgage clause asserts his or her

right subject to all the terms and conditions of the contract of insurance, except those

which are expressly waived in the mortgage clause.” 4 Couch § 65:46.

In this case, there was no express waiver of any clause. Indeed, the policy stated

that, under the standard mortgage clause, “[a]ll of the terms of this policy will . . . apply

directly to the mortgageholder.” Under that clause, “provisions of the policy which are

clearly intended to condition the insurance granted by the insurer to both mortgagor and

mortgagee form a part of the contract of insurance with the mortgagee as well as with the

mortgagor.” 4 Couch § 65:49. When a mortgage clause and another provision of a

policy are in tension, they “must be read together and harmonized . . . when reasonably

possible.” Id. § 65:45. However, the mortgage clause

must prevail in the case of an irreconcilable conflict between it and other provisions of the policy. That is, insofar as the provisions of the policy are inconsistent with, and antagonistic to, the clause protecting the interest of

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the mortgagee, they must be regarded as inapplicable to the determination of his or her rights.

Id.

To summarize, Commerce Bank has a separate and independent insurance policy

with West Bend, which includes a standard mortgage clause. See Allen, 167 Minn. at

149-50, 208 N.W. at 817-18. The terms of Commerce Bank’s policy are “identical” to

those of the owner, and thus Commerce Bank’s policy includes the vacancy clause. See

Young, 329 N.W.2d at 812; 4 Couch § 65:46. The question is whether the two clauses

are susceptible to a reasonable interpretation that avoids a conflict.

Commerce Bank takes the position, adopted by the court of appeals, that the

owner’s failure to lease the property and keep it occupied—that is, its failure to prevent

the property from being vacant for 60 days—constitutes an “act” or “failure to comply

with the terms of the policy.” Because the property was vacant for more than 60 days,

Commerce Bank argues, the vacancy was necessarily caused by the property owner’s act.

By contrast, West Bend takes the position, adopted by the district court, that the policy

simply provides no coverage against vandalism during periods when the building is

vacant for more than 60 days, and therefore it makes no difference whether or not the

owner was responsible for the vacancy.

Neither interpretation harmonizes the vacancy clause with the standard mortgage

clause. Therefore, we decline to follow either.

C.

We do not adopt Commerce Bank’s interpretation because it would effectively

read the vacancy clause out of the mortgagee’s policy. As already discussed, the standard

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mortgage clause creates an independent contract between the insurer and the mortgagee,

with the same terms as the contract between the insurer and the owner. The vacancy

clause, like every term and condition in the policy, applies to the mortgagee. Under

Commerce Bank’s interpretation, a vacancy is always caused by the owner’s failure to

ensure that the property is not vacant, so a vacancy would never exclude a claim for

coverage. But “[w]e will not adopt ‘a construction of an insurance policy which entirely

neutralizes one provision . . . if the contract is susceptible of another construction which

gives effect to all its provisions and is consistent with the general intent.’ ” Eng’g &

Const. Innovations, Inc. v. L.H. Bolduc Co., 825 N.W.2d 695, 705 (Minn. 2013) (quoting

Wyatt v. Wyatt, 239 Minn. 434, 437, 58 N.W.2d 873, 875 (1953)).

Commerce Bank is correct that, under a standard mortgage clause, the scope of the

act or omission by an insured that allows a mortgagee to recover is broad. “[A]

mortgagee’s right to recover is not affected or invalidated by the act, neglect, or omission

or default of the mortgagor.” Magoun, 86 Minn. at 490, 91 N.W. at 7; see also Young,

329 N.W.2d at 811 (stating that a contract with a mortgagee created by a standard

mortgage clause “cannot be invalidated by acts or neglect of the mortgagor”); Allen, 167

Minn. at 150, 208 N.W. at 818 (stating that a contract with a mortgagee created by a

standard mortgage clause is “unaffected by any act or neglect of the mortgagor, of which

the mortgagee is ignorant” (quoting Bohn, 65 F. at 178)). We have indicated that the

words “any acts” in a standard mortgage clause should be read broadly, and “do not refer

merely to acts prohibited by the contract or to failure to comply with the terms [of the

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contract], but literally embrace any act of the mortgagor.” Young, 329 N.W.2d at 810 n.1

(quoting 11 G. Couch, Couch on Insurance 2d § 42:685, at 344-45 (1963 & Supp. 1976)).

But, here, Commerce Bank’s position stretches the standard mortgage clause too

far. Not every building vacancy is necessarily caused by the owner’s act or failure to act.

Under this policy, a building is “vacant” unless at least 31% of its total square footage is

being used, by either a lessee or by the building owner, to conduct “customary

operations.” Applying this definition, a building may become vacant despite the owner’s

best efforts. A large tenant may move out with little notice or may stay but no longer

conduct its “customary operations” in the space. Or a vacancy may be caused by a severe

economic downturn. Commerce Bank’s interpretation does not account for such

possibilities.

By contrast, the policy expressly contemplates that the building may become

vacant as a matter of course. Although the policy provides that it will not pay for damage

caused by six particular causes (including vandalism) if the building is vacant, it also

provides that it will pay for other covered causes (such as fire), albeit at a reduced rate of

85%.

Accordingly, the court of appeals’ statement that “it was the owner’s failure to

occupy the property or secure a tenant that comprised the acts or negligence causing the

property to remain vacant for more than 60 days”—essentially a finding of fact—is not

necessarily accurate. In their briefs before this court and the court of appeals, neither

party referred to any facts in the record about how or why the property became vacant.

Our independent review of the record has found none.

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By the court of appeals’ analysis, no inquiry into the actual facts that led to the

vacancy is necessary because “the vacancy provision applies only when Commerce

[Bank] is guilty of breaching it.” See Commerce Bank, 853 N.W.2d at 842 (citing Young,

329 N.W.2d at 812). In Young, there was no question that the policyholder’s acts in

flying an airplane to Colombia, using it in drug trafficking, and making it subject to

seizure by the Colombian government “were the very thing for which the bank’s

insurance was purchased—to protect it against loss caused by . . . the mortgagor.”

Young, 329 N.W.2d at 811 (emphasis added). But our statements in Young that a

mortgagee loses coverage only when the mortgagee has “breached” or “violated” the

terms of a policy should not be read out of context to mean that the scope of coverage

may be disregarded even when the owner’s acts did not cause the loss of coverage.

D.

Although the mortgagee’s interpretation does not harmonize the standard

mortgage clause with the vacancy clause, neither does the insurer’s. West Bend argues,

relying on the decision of the Wisconsin Court of Appeals in Waterstone Bank SSB v.

American Family Mutual Insurance Co., 832 N.W.2d 152 (Wis. Ct. App. 2013), that the

vacancy provision denies coverage “based on the condition of the building, and not

because of any breach or violation of a policy obligation or prohibition by the property

owner.” Id. at 156. Essentially, West Bend argues that the conduct of the owner is

irrelevant: if there is a vacancy at the time of the loss, there is no coverage for anyone,

regardless of the cause of the vacancy.

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We agree with Waterstone Bank that under the terms of the vacancy clause, denial

of coverage is based on the condition of the covered property. Were this a dispute with

the owner, our inquiry would be at an end. But this is not. The policy specifies that the

mortgagee has the right to recover if there is a denial of a claim “because of [the

policyholder’s] acts or because [the policyholder has] failed to comply with the terms of

this policy.”

Nothing in the policy requires the owner to prevent the property from being

vacant, and therefore a vacancy is not necessarily a “fail[ure] to comply with the terms of

[the] policy.” But certainly a property owner could, by the owner’s own act, cause a

vacancy. The owner could, for example, charge grossly above-market rents,

affirmatively make the building unsuitable, or breach leases and lock out tenants. Under

such circumstances, the vacancy would exist, and the owner’s claim would be denied,

“because of” the owner’s acts.

To follow Waterstone Bank wholesale would undercut our decision in Young. In

that case, besides the standard mortgage clause, two policy provisions were at issue: one

that denied coverage for flights involving drug trafficking or smuggling and another that

stated, “this policy applies only to occurrences, accidents and losses which happen during

the policy period while the aircraft is within the Western Hemisphere north of 16º North

Latitude (excluding Cuba).” 329 N.W.2d at 808-09. That geographical provision, like

the vacancy provision in this case, purported to make coverage turn on an objective,

independently verifiable fact about the insured property, rather than any act of the

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insured. But we held that when the act of the insured (flying the plane to Columbia)

triggered the territorial exclusion, the mortgagee was nevertheless covered:

[A] separate policy of insurance was purchased by the bank [through the standard mortgage clause] to prevent losses caused by the acts of the mortgagor. This is what occurred. [The insurer] argues that to allow recovery is to widen the scope of the coverage afforded by the contract between the parties. We disagree.

Id. at 812. West Bend does not ask us to overturn Young, and we can discern no basis to

apply Young’s rule of law to this case. Accordingly, we reject West Bend’s argument

that the owner’s conduct with respect to the vacancy is irrelevant to the mortgagee’s

claim.

West Bend suggests that, by allowing recovery when the owner causes the

property to become and remain vacant, we would create coverage for a risk that it never

assumed. We disagree. Under the plain words of the policy, Commerce Bank is entitled

to coverage when West Bend denies a claim because of the owner’s act or breach of the

policy terms. Under Young, West Bend assumed the risk that the owner would create a

vacancy that would require West Bend to pay the mortgagee.

E.

Having rejected the diametrically opposed interpretations proposed by the parties,

we interpret the policy according to its terms. The standard mortgage clause states that

the mortgagee will have the right to recover if coverage would be denied to the owner

“because of [the owner’s] acts or because [the owner has] failed to comply with the terms

of this policy.” The term “acts” must be construed broadly. See Young, 329 N.W.2d at

810 n.1. Reading the standard mortgage clause and the vacancy clause together, and

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applying Young, the mortgagee has coverage if there is a vacancy because of the acts of

the owner. However, if the vacancy is not due to the acts of the owner, the mortgagee

does not have coverage.

Applying this rule of law to the record in this case, we must reverse the decision of

the court of appeals, which adopted Commerce Bank’s erroneous theory. But we cannot

reinstate the district court judgment, which was based on West Bend’s erroneous theory.

Nor are we able to order entry of judgment. Summary judgment is appropriate

only if “there is no genuine issue as to any material fact” and a “party is entitled to

judgment as a matter of law.” Minn. R. Civ. P. 56.03. Here the parties brought cross

motions for summary judgment, in tacit agreement that there were no disputed issues of

material fact. See Remodeling Dimensions, Inc. v. Integrity Mut. Ins. Co., 819 N.W.2d

602, 610 (Minn. 2012). But that tacit agreement was based on the shared, mistaken

assumption that the cause of the vacancy was irrelevant. The district court did not make

a finding on that issue.

A remand is required. The district court must determine whether the owner’s acts

caused the vacancy. If so, an additional factual issue arises: whether the mortgagee was

aware of the acts. See Allen, 167 Minn. at 150, 208 N.W. at 818 (stating that the

mortgagee’s interest is “unaffected by any act or neglect of the mortgagor, of which the

mortgagee is ignorant” (emphasis added) (quoting Bohn, 65 F. at 178)); Young, 329

N.W.2d at 810. When and by what procedures the remaining issues are litigated and

resolved rests within the sound discretion of the district court.

Accordingly, we reverse the decision of the court of appeals and remand to the

district court for further proceedings consistent with this opinion.

Reversed and remanded.