Unpublished Disposition, 886 F.2d 1319 (9th Cir. 1986)

MEMORANDUM^** 

California Casualty Indemnity Exchange (California Casualty) appeals the district court's grant of summary judgment in favor of Federal National Mortgage Association^MA. The District Court held that under the terms of a fire insurance policy issued to Steven and Pamela Norris, the mortgagee, FNMA, could recover insurance proceeds, even though Steven Norris intentionally set fire to the property. We affirm.

FACTS

In July of 1982, California Casualty issued Insurance Policy No. 76-D7-20 to the Norrises. It insured the Norrises' residence in Boring, Oregon against loss by fire. FNMA, as mortgagee, was included in and protected under the policy's Lender's Loss Payable Endorsement.¹  At all times pertinent to this case, the policy remained in full force and effect.

The Norrises fell behind in their mortgage payments, and on February 12, 1986, FNMA purchased the property at a foreclosure sale. Ten days thereafter FNMA became entitled to possession of the property, but when the Norrises failed to leave, it was required to take legal action to evict them. Or.Rev.Stat. Sec. 86.755(5) (1987). As directed by the statutes, it proceeded under the Oregon Forcible Entry and Wrongful Detainer Law (FED). Or.Rev.Stat. Sec. 105.105 et seq. (1987).

The Norrises contested the FED action, and a stipulated judgment of restitution was then entered into between them and FNMA. When the Norrises did not live up to the stipulations, FNMA sought to have them removed from the property, but they obtained a restraining order that stayed FNMA's hand until midnight on July 31, 1986. On July 31, 1986, Steven Norris burned the place down. FNMA demanded payment of the insurance proceeds. California Casualty refused. It filed this diversity action in the district court.

DISCUSSION

The primary issue before us is whether the provisions of the insurance contract protected FNMA in this case. The critical provisions are as follows:

1. Loss or damage ... shall be paid to ... "the Lender", in whatever form or capacity its interests may appear....

2. The insurance under this policy ... as to the interest only of the Lender ... shall not be invalidated nor suspended: (a) by any error, omission, or change respecting the ownership, description, possession, or location of the subject of the insurance or the interest therein, or the title thereto; (b) by the commencement of foreclosure proceedings or the giving of notice of sale of any of the property covered by this policy by virtue of any mortgage or trust deed; (c) by any breach of warranty, act, omission, neglect, or non-compliance with any of the provisions of this policy, ... by the named insured, the borrower, mortgagor, trustor, vendee, owner, tenant, occupant, ... which under the provisions of this policy of insurance ... would invalidate or suspend the insurance as to the named insured, excluding herefrom, however, any acts or omissions of the Lender while exercising active control and management of the property.

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8. Should legal title to and beneficial ownership of any of the property covered under this policy become vested in the Lender, ... insurance under this policy shall continue for the term thereof for the benefit of the Lender but, in such event, any privileges granted by this Lender's Loss Payable Endorsement which are not also granted the insured under the terms and conditions of this policy ... shall not apply to the insurance hereunder as respects such property.

The facts are not in dispute, and the issue presented is one of insurance contract interpretation. We review the grant of summary judgment de novo. Harkins Amusement Enters. v. General Cinema Corp., 850 F.2d 477, 482 (9th Cir. 1988), cert. denied sub nom., 109 S. Ct. 817 (1989).

A. Did the Lender's Loss Payable Endorsement protect FNMA?

In construing an insurance contract, the court must determine whether the terms of that contract are subject to more than one reasonable interpretation. If they are not, the court will not strain to create an ambiguity. However, if they are ambiguous, any reasonable doubt is "resolved against the insurance company and in favor of extending coverage to the insured." Shadbolt v. Farmers Ins. Exch., 275 Or. 407, 551 P.2d 478, 480 (1976). See also Rainey v. Northwestern Nat'l Casualty Co., 44 Or.App. 43, 605 P.2d 294, 296 (1980). Of course, in insurance contracts, as in all other contracts, the court is primarily concerned with ascertaining the parties' intent. See First Far West Transp., Inc. v. Carolina Casualty Ins. Co., 47 Or.App. 339, 614 P.2d 1187 (1980).

In this case, it is clear that the Norrises cannot recover the insurance proceeds. Recovery under the policy is precluded when a loss is caused by "any insured" who intends to cause that loss.

The issue, then, is whether FNMA is also precluded from recovery. That requires construction of the Lender's Loss Payable Endorsement.

The endorsement protects the lender from damage to its interests due to the acts of the Norrises. However, paragraph 8 of the endorsement provides that once the lender has "legal title to and beneficial ownership of" the property, it will continue to be covered by the insurance, but the special protections of the endorsement will cease to exist.

The parties agree that FNMA had legal title to the property once it had foreclosed. Their dispute is over whether FNMA also had beneficial ownership within the meaning of the policy.

The phrase "beneficial ownership" is not free from ambiguity. Both parties have cited Montana Catholic Missions v. Missoula County, 200 U.S. 118, 20 S. Ct. 197, 50 L. Ed. 398 (1905), for the proposition that beneficial ownership reflects the right to use and enjoy a parcel of property.

California Casualty points out that under Or.Rev.Stat. Sec. 86.755(5) (1987) FNMA became entitled to possession ten days after it purchased at the foreclosure sale. California Casualty argues that FNMA then had beneficial ownership.

FNMA counters that it, in fact, could not begin enjoying the property until the Norrises were removed by an FED or other proceeding. Or.Rev.Stat. Sec. 86.755(5) (1987). Before that removal could take place the Norrises had the ability to contest FNMA's right to possession. While title issues cannot normally be raised in an FED proceeding, when those issues are incidental to showing a right to possession they can be raised. See Schraeder v. Woody, 166 Or. 93, 109 P.2d 597 (1941). We are told that the issues were raised in FNMA's proceeding against the Norrises. That is not disputed.

We agree with FNMA. While beneficial ownership in the context of this policy might be taken to mean an immediate entitlement to possession, it might just as well be taken to mean that the lender has fully succeeded in gathering up the whole bundle of sticks that constitute ownership. That is, the lender has truly acquired the property free and clear of the claims of the former owners.

FNMA's argument is particularly persuasive in the context of this policy. While the policy broadly protects the lender, even after foreclosure has commenced, California Casualty's interpretation would cause that special protection to end when the primary insured has the least interest in the proper upkeep of the property. From the end of the ten-day waiting period to the date that the primary insured was successfully removed from the premises, the lender would be at risk. That is the time when the protection of the endorsement is the most needed. It would be very peculiar if it ended at that time.

In short, while "beneficial ownership" may seem perfectly clear in some contexts, it is much less clear in the context of this insurance policy, which purports to protect a lender's security in an owner-occupied parcel of residential real estate.

The most reasonable construction of the policy is that while the lender is still in the process of taking the steps necessary to obtain control over the parcel, it has not stepped out of its shoes and into the shoes of a primary insured. That comports with the parties' intent and is the proper construction of this contract.

B. Attorneys Fees.

In light of the above determination, there is no dispute that FNMA is entitled to recover attorneys fees pursuant to Or.Rev.Stat. Sec. 743.114 (1987).

Therefore, FNMA shall file its request for fees in accordance with the provisions of Ninth Circuit Rule 39-1.6, and with sufficient information to permit a fee determination in accordance with the requirements of Southerland v. International Longshoremen's and Warehousemen's Union, Local 8, 834 F.2d 790, 794-96 (9th Cir. 1987) and Kerr v. Screen Extras' Guild, Inc., 526 F.2d 67 (9th Cir. 1975), cert. denied sub nom., 425 U.S. 951, 96 S. Ct. 1726 (1976).

The judgment of the district court is AFFIRMED.