JurisdictionUnited States


The Contract of Personal Indemnity

A. Property Insurance

Contrary to popular belief, property insurance does not insure property. Rather, property insurance insures an individual or entity named as the insured against certain risks of loss faced by property in which the insured has an interest.

As a risk-spreading device, property insurance only insures people, corporations, partnerships, and other entities against the risk of loss of the property described in the policy.

Insurance against the loss of property is a contract of personal indemnity. It only insures the person(s) named in the policy against certain risks of loss to property in which that person has an interest. A person who has an interest in the property but is not named as an insured cannot recover under the policy. Similarly, a person named on a policy who has no interest cannot recover.

As the California Supreme Court observed in Garvey v. State Farm Fire & Cas. Co., 48 Cal. 3d 395, 770 P.2d 704, 257 Cal. Rptr. 292 (Cal. 1989), a first-party insurance policy provides coverage for loss or damage sustained directly by the insured (e.g., life, disability, health, fire, theft, and casualty insurance). A third-party liability policy, in contrast, provides coverage for liability of the insured to a third party (e.g., a CGL policy, a directors’ and officers’ liability policy, or an errors and omissions policy).

The term “perils” in traditional property insurance language refer to fortuitous, active physical forces such as lightning, wind, and explosion, which bring about the loss.1 “[T]he cause of loss in the context of a property insurance contract is totally different from that in a liability policy.”

[T]he right to coverage in the third party liability insurance context draws on traditional tort concepts of fault, proximate cause, and duty. This liability analysis differs substantially from the coverage analysis in the property insurance context, which draws on the relationship between perils that are either covered or excluded in the contract. In liability insurance, by insuring for personal liability, and agreeing to cover the insured for his own negligence, the insurer agrees to cover the insured for a broader spectrum of risks.2

The following case illustrates the concept of personal indemnity contracts. As you read the decision of the Supreme Court of California, determine the following:

Ÿ The factual basis of the dispute.

Ÿ Issues presented to the court to resolve.

Ÿ The legal precedents used by the court.

Ÿ The conclusions reached by the court.

Ÿ The reasons for the conclusions.

Ÿ Was the reasoning of the court overly technical?

Ÿ The effect the decision has on insurance coverage disputes.

Ÿ The trial court’s jury instructions.

Ÿ Why did the California Supreme Court find that the instruction was erroneous?

Ÿ Did the decision follow the lead set by the U.S. Supreme Court in German Alliance Ins. Co. v. Lewis, 233 U.S. 389 (1914), as seen in Chapter 1?

Russell v. Williams
58 Cal. 2d 487, 374 P.2d 827, 24 Cal. Rptr. 859 (Cal. 1962)

Plaintiff appeals from an adverse judgment in her action to recover from the estate of her former husband the proceeds of a fire insurance policy. A hearing was granted by this court, after decision by the District Court of Appeal, Fourth Appellate District, for the purpose of giving further study to the problems presented. After such study we have concluded that the opinion of the District Court of Appeal, prepared by Justice Coughlin and concurred in by Presiding Justice Griffin and by Justice Shepard, correctly treats and disposes of the issues involved, and it is therefore, with certain further comments pertinent to contentions urged, adopted as the opinion of this court.

Such opinion (with appropriate deletions and additions as indicated) is as follows:3

The issue on this appeal is whether a surviving joint tenant may recover from the estate of a deceased joint tenant the proceeds of a fire insurance policy covering improvements on their joint-tenancy property, the policy [ ] [having been] issued to and paid for by the joint tenant who now is deceased, and the loss [ ] [having occurred] prior to his death.

This case was decided upon a stipulation of facts that: Dorothy Mouser, now Dorothy Russell, the plaintiff and appellant herein, and John Mouser, now deceased, whose estate is being administered by the defendant and respondent herein, while husband and wife, owned the subject property as joint tenants; in October 1957, Mrs. Mouser separated from Mr. Mouser and went to Nevada where she obtained a divorce on November 13th of that year; the divorce decree so obtained made no provision respecting any property rights of the parties and they did not enter into any property settlement agreement; the title to the subject property continued in joint tenancy and Mr. Mouser continued to live thereon until his death on June 3, 1958; in the interim, i.e., on November 29, 1957, he obtained a policy of fire insurance covering the improvements on that property, which was issued to him as the sole insured, the premiums being paid from his separate funds; no agreement existed between Mr. And Mrs. Mouser respecting the placing of any fire insurance upon the premises nor concerning the disposition of the proceeds of any such policy, and the subject policy was issued without her knowledge; about six weeks prior to Mr. Mouser’s death, the improvements in question were destroyed by fire, and thereafter the proceeds of the policy, representing the full value of the destroyed premises, were paid to the administrator of his estate.

Mrs. Mouser became the sole owner of the property and brought this action to recover the proceeds in question, alleging that the defendant estate became “indebted to plaintiff for moneys had and received for the use and benefit of plaintiff.”

Primarily, the plaintiff’s claim is based on the contention that the moneys paid by the insurance company under the subject policy constituted proceeds of the property that was destroyed and retains the character of that property. This is a false premise.

It is a principle of long standing that a policy of fire insurance does not insure the property covered thereby, but is a personal contract indemnifying the insured against loss resulting from the destruction of or damage to his interest in that property. (Alexander v. Sec.-First Nat. Bank of Los Angeles, 7 Cal. 2d 718, 722-723 (1936); Corder v. McDougall, 216 Cal. 773, 774 (1932); Davis v. Phoenix Ins. Co., 111 Cal. 409, 414-415 (1896); Fred A. Chapin Lumber Co. v. Lumber Bargains, Inc., 189 Cal. App. 2d 613, 617 (1961); Sievers v. Union Assur. Soc’y of London, 20 Cal. App. 250, 251 (1912); Murray v. Webster, 256 Ala. 248 (1951).) This principle gives rise to the supplemental rule that, in the absence of a special contract, the proceeds of a fire insurance policy are not a substitute for the property the loss of which is the subject of indemnity. (Alexander v. Sec.-First Nat. Bank, supra, 7 Cal. 2d 718, 722; Corder v. McDougall, supra, 216 Cal. 773, 774; Walsh v. Tadlock, 104 F.2d 131, 132 (1939);Montgomery v. Hart, 225 Ala. 471 (1932); Langford v. Searcy College, 73 Ark. 211 (1904) ; Ketcham v. Ketcham, 269 Ill. 584 (1915); Crook v. Hartford Fire Ins. Co., 175 S.C. 42 (1935);Steinmeyer v. Steinmeyer, 64 S.C. 413 (1902); Graham v. American Fire Ins. Co., 48 S.C. 195 (1897).) In Spalding v. Miller, 103 Ky. 405 (1898) the court said, with respect to the payments made under such a policy: “The sum paid ‘is in no proper or just sense the proceeds of the property.’” [See also Anderson v. Quick, 163 Cal. 658, 662 (1912);Benton v. Cravens, Dargan & Co., 188 Cal. App. 2d 637, 642-643 (1961).] As a consequence, the plaintiff has no claim to the proceeds of the insurance paid to Mr. Mouser’s estate upon the ground that they are proceeds of the joint-tenancy property of which she now is sole owner.

There are instances where, because of contractual provisions or equitable considerations, the insured holds the proceeds of a fire insurance policy in trust for or otherwise subject to the claim of others who have an interest in the property covered by the subject policy. (Alexander v. Sec.-First Nat. Bank, supra, 7 Cal. 2d 718, 726 (1936);Hawes v. Lathrop, 38 Cal. 493, 497-498 (1869); Fred A. Chapin Lumber Co. v. Lumber Bargains, Inc., supra, 189 Cal. App. 2d 613, 617 (1961); Rogge v. Menard Cnty. Mut. Fire Ins. Co., 184 F.Supp. 289, 295 (S.D. Ill. 1960); Crook v. Hartford Fire Ins. Co., supra, 178 S.E. 254, 258 (1935); Gibbes Machinery Co. v. Niagara Fire Ins. Co., 119 S.C. 1 (1922).) However, unless the insured has an obligation to insure, or equitable considerations are present, the proceeds of a policy issued to and paid for by the named insured on his separate insurable interest are not subject to the claims of others who also have an interest in the property covered by the policy. (Alexander v. Sec.-First Nat. Bank, supra, 7 Cal. 2d 718, 726 (1936); Corder v. McDougall, supra, 216 Cal. 773 (1932); Board of Education v. Winding Gulf Collieries, 152 F.2d 382, 384 (1945); Montgomery v. Hart, supra, 225 Ala. 471 (1932); Farmers’ Mut. Fire & Lightning Ins. Co. of Andrew Cnty. v. Crowley, 354 (1945); Underwood v. Fortune, 9 S.W.2d 845, 846 (1928).)

There is no obligation upon the part of one cotenant to insure the other cotenant against loss of the latter’s interest in their jointly owned property. (Oglesby v. Hollister, 76 Cal. 136, 140 (1888); Murray v. Webster, supra, 256 Ala. 248 (1951); Bell v. Barefield, 219 Ala. 319 (1929); In re Cochran’s Real Estate, 31 Del. Ch. 545 (Del. Orph. 1949); Schilbach v. Schilbach, 171 Md. 405 (1937).) As to this matter there is no distinction between the various types of cotenancy. Analogously it has been held that there is no duty upon a life tenant to insure for the benefit of the remaindermen. (Corder v. McDougall, supra, 216 Cal. 773, 775(1932); Harrison v. Pepper, 166 Mass. 288,]...

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