Story Case

Mr. Roy Severs built a new country house in La Grange, Illinois, and insured it in the Merchants' Fire Insurance Company for $20,000. Mr. Severs was given a special rate when it was understood that no garage, at which gasoline was kept, would ever be maintained within 300 yards of the house. This stipulation was incorporated into the policy, and read that the policy was to become void and of no effect the moment this provision was violated. Mr. Severs tired of his stable and built a garage, sufficient to accommodate four cars, within a hundred yards of his house. He kept from forty to fifty gallons of gasoline on hand at the garage. The garage was maintained in this manner for a year, when Mr. Severs' longing for horses returned, and the garage was converted into a stable. A week later the property was sold to Alexander Irvine, who secured the consent of the Merchants' Fire Insurance Company to the assignment of the insurance. When some months later the house was burned, the company refused to pay, after discovering for the first time that Mr. Severs had so flagrantly violated the agreement. Will this defense of the company avail against Mr. Irvine?

Ruling Court Case. Munns Vs. The Continental Insurance Company, Volume 120 Indiana Reports, Page 30

The insurance company herein, at the request of John Bittle, delivered to him a policy of insurance by which it insured his dwelling house and its contents, consisting of household furniture, etc., and his barn, shed, grainery and their contents, for a period of five years. At the time the policy was issued, Bittle owned a small farm upon which the several buildings insured were situated. The policy contained a stipulation that, should the insured mortgage or otherwise encumber the property, without the consent of the company, the policy would be void. But, notwithstanding this provision, Bittle, without any notice to the company, mortgaged the property to a trust company to secure a loan of $5,000. Later, John Bittle sold the property, subject to the mortgage to Munns, and assigned the policy of insurance to him. Munns, in the course of a few days, presented them to the company for its approval. The company gave its consent and approval. In the course of time, the barn, shed, and grainery and their contents were consumed by fire. After the destruction of the property, the company learned of the mortgage executed by Bittle. It refused payment of the loss, on the ground that placing the encumbrance above mentioned on the property was a violation of the condition of the policy and rendered it null and void.

Mr. Justice Mitchell said: "It is abundantly settled that upon a sale and transfer of property covered by a policy of insurance, and an assignment of the policy to the purchased, duly assented to by the company, a new and original contract of indemnity arises between the insurance company and the assignee, which the latter may enforce without regard to what may have oc-cured, prior to the assignment. The policy, it is said, in such a case expires with the transfer of the estate, so far as it relates to the original holder, but the assignment and assent of the company thereto constitutes an independent contract with the purchaser and assignee, the same in effect as if the policy had been reissued to him upon the terms and conditions therein expressed." Judgment was given for Munns.

Ruling Law. Story Case Answer

The assignment of a policy of insurance constitutes a new contract between the transferee and the insurance company. It is a reasonable deduction that the transferee will not necessarily be affected by what the former owner of the property has done in violation of the terms of the contract of insurance.

Hence, the insurance company in the Story Case cannot refuse to pay Mr. Irvine for his loss, because the policy became previously void by Mr. Severs' violation. Mr. Irvine will recover, not on the old policy, but upon the new agreement of identical purport with the old entered into with the company on their assent to the so-called assignment.