Real Property Notes Blog

Insurer Who Pays Proceeds to Mortgagee after Full-Debt Bid Liable for Conversion

In Howard v American Surety Ins. Co., an unpublished Michigan Court of Appeals case, residential property caught fire.  The insurance company issued checks for the claim with both the mortgagor and the mortgagee named on the check.  The mortgagors never endorsed the check.

The mortgagors defaulted on the underlying mortgage and the mortgagee foreclosed, submitting a bid for the full amount of the debt.  After the redemption period expired, the mortgagee prevailed on the insurance company to stop payment on the initial checks and issue new checks in the name of the mortgagee only.  The mortgagors sued both the mortgagee and the insurance company for common-law and statutory conversion.  The trial court found both liable on both counts.

The insurance company appealed, arguing that it had not committed conversion.  The Court of Appeals affirmed the finding of common-law conversion, but reversed the finding of statutory conversion, holding that there was no evidence that the insurance company converted the insurance proceeds to its own use (a required element of statutory conversion).

Once a mortgage company issues a full-debt bid at a foreclosure sale, the debt is deemed satisfied and the mortgage company was no longer entitled to receive the insurance proceeds.  By prevailing upon the insurance company to reissue checks without the mortgagor’s name, the mortgagee and the insurance company converted the mortgagor’s property (the insurance proceeds) to their own use.

This author wrote an article many years ago about the hazards of a lienholder bidding on property which has had a casualty before payment of the insurance proceeds.  A full-debt bid extinguishes the underlying debt, and by extension any right to insurance proceeds for a pre-foreclosure loss.

© Steve Sowell 2018