Reversed and Remanded and Opinion filed May 15, 2014.




                                     In The

                    Fourteenth Court of Appeals

                             NO. 14-12-01116-CV

                         SWE HOMES, LP, Appellant
                                       V.
            WELLINGTON INSURANCE COMPANY, Appellee

                   On Appeal from the 334th District Court
                           Harris County, Texas
                     Trial Court Cause No. 2012-08897

                                OPINION


      This appeal presents the question of whether a standard mortgage clause in a
residential insurance policy provides coverage to a mortgagee for a loss by fire
when the policy also contained a vacancy clause and the mortgagor had left the
property vacant. Mortgagee SWE Homes, LP appeals from the trial court’s grant
of summary judgment favoring insurer Wellington Insurance Company, by which
the court held that SWE’s loss was not covered. We reverse and remand.
                                    Background

      There is very little dispute regarding the facts in this case. Edgar Sadberry
purchased a residential property with a mortgage from SWE. He bought a Texas
Dwelling Policy from Wellington covering the property and naming SWE as the
mortgagee. The effective dates of the policy ran from August 11, 2010 until
August 11, 2011. The policy covered losses from various hazards including fire.
It further contained a Mortgage Clause, which reads in pertinent part as follows:

      19. Mortgage Clause . . . .
      b. We will pay for any covered loss of or damage to buildings or
      structures to the mortgagee shown on the declarations page as
      interests appear. . . .
      d. If we deny your claim because of your acts or because you have
      failed to comply with the terms of this policy, the mortgagee has
      the right to receive loss payment if the mortgagee:
            (1) at our request, pays any premiums due under this policy, if
            you have failed to do so.
            (2) submits a signed, sworn statement of loss within 91 days
            after receiving notice from us of your failure to do so.
            (3) has notified us of any change in ownership, occupancy or
            substantial change in risk known to the mortgagee.
      All of the terms of this policy will then apply directly to the
      mortgagee. Failure of the mortgagee to comply with d.(1), d.(2) or
      d.(3) above shall void this policy as to the interest of the mortgagee.
(emphases added).
      As pertinent to this case, the policy also included as a condition a Vacancy
Clause, which stated:

      16. Vacancy. During the policy term, if an insured building is vacant
      for 60 consecutive days immediately before a loss, we will not be
      liable for a loss by the perils of fire and lightning or vandalism or
      malicious mischief. Coverage may be provided by endorsement to
      this policy.

                                         2
       Sadberry’s property was damaged in a fire apparently set by an unknown
arsonist on December 23, 2010. Sadberry made a claim on his insurance policy,
but after he admitted the property had been left vacant for over a year prior to the
fire, Wellington denied the claim under the policy’s Vacancy Clause.1 SWE then
filed a claim pursuant to the Mortgage Clause. When Wellington failed to respond,
SWE filed suit. In its motion for summary judgment, Wellington argued that there
was no “covered loss”—as required for a claim under the Mortgage Clause—
because the property had been left vacant for over 60 consecutive days
immediately before the loss occurred. In response, SWE argued that under the
policy, coverage for the mortgagee could not be defeated by the mortgagor’s
actions triggering the Vacancy Clause when SWE had no knowledge of those
actions. The trial court granted Wellington’s motion and this appeal followed.

                                   Standards of Review

       In a summary judgment case, the issue on appeal is whether the movant met
its burden by establishing that no genuine issue of material fact exists and that the
movant is entitled to judgment as a matter of law. Tex. R. Civ. P. 166a(c); Mann
Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844, 848 (Tex.
2009). We review a grant of summary judgment de novo. Travelers Ins. Co. v.
Joachim, 315 S.W.3d 860, 862 (Tex. 2010). We take as true all evidence favorable
to the nonmovant, and we indulge every reasonable inference and resolve any
doubts in the nonmovant’s favor. 20801, Inc. v. Parker, 249 S.W.3d 392, 399
(Tex. 2008); Provident Life & Accident Ins. Co. v. Knott, 128 S.W.3d 211, 215
(Tex. 2003).

       Texas courts generally interpret insurance policies according to the general

       1
         Sadberry is not a party to this appeal. We assume, without deciding, that the denial of
his claim and the application of the Vacancy Clause by Wellington were proper.

                                               3
rules of contract interpretation. See State Farm Lloyds v. Page, 315 S.W.3d 525,
527 (Tex. 2010). A court’s primary goal is to determine the contracting parties’
intent as expressed by the policy’s written language interpreted through the
application of established rules of construction. See id. Contracts should be
construed as a whole, harmonizing and giving effect to all of the provisions so that
none are rendered meaningless, no single provision taken alone will be given
controlling effect, and all the provisions will be considered with reference to the
whole instrument. In re Serv. Corp. Int’l, 355 S.W.3d 655, 661 (Tex. 2011); J.M.
Davidson, Inc. v. Webster, 128 S.W.3d 223, 235 (Tex. 2003).

      When a policy permits only one reasonable interpretation, we construe it as a
matter of law and enforce it as written. Upshaw v. Trinity Cos., 842 S.W.2d 631,
633 (Tex. 1992).     Whether a particular provision or the interaction between
provisions creates an ambiguity is a question of law. State Farm Lloyds v. Page,
315 S.W.3d 525, 527 (Tex. 2010). The court decides whether an ambiguity exists
by looking at the contract as a whole in light of the circumstances present when the
contract was entered into and by applying proper canons of construction. See id.
When a policy is ambiguous, however, Texas courts generally apply the canon of
interpretation that courts should “construe [the policy’s] language against the
insurer in a manner that favors coverage.” State Farm Life Ins. Co. v. Beaston, 907
S.W.2d 430, 433 (Tex. 1995).

                                Parties’ Positions

      In its sole issue, SWE contends that the trial court erred in granting summary
judgment favoring Wellington. The parties’ only real dispute on appeal revolves
around whether SWE’s claim under the Mortgage Clause is defeated by operation
of the policy’s Vacancy Clause. Wellington focuses on language in the Mortgage
Clause, specifically in Paragraph 19(b), where it states that Wellington “will pay

                                         4
for any covered loss . . . .” Wellington interprets this language as meaning that
because Sadberry triggered the Vacancy Clause by leaving the property vacant for
a prolonged period, the fire damage the property sustained was not a “covered
loss,” and thus, SWE was not entitled to recover under the Mortgage Clause.
SWE, on the other hand, points out that this interpretation renders other sections of
the Mortgage Clause meaningless, e.g., the statement, in section 19(d) that if
Sadberry’s claim is denied due to his actions, SWE has the right to receive the loss
payment under certain circumstances, including the condition that SWE inform
Wellington of any change in occupancy or substantial change in risk that was
known to SWE.2 We agree with SWE.

                                         Analysis

       There are two common types of loss payable clauses in insurance policies
relevant to our discussion. One is the “open” clause, which states simply that any
loss is payable to the mortgagee “as its interest may appear.” See Old Am. Mut.
Fire Ins. Co. v. Gulf States Fin. Co., 73 S.W.3d 394, 396 (Tex. App.—Houston
[1st Dist.] 2002, pet. denied); Don Chapman Motor Sales, Inc. v. Nat’l Sav. Ins.
Co., 626 S.W.2d 592, 595 (Tex. App.—Austin 1981, writ ref’d n.r.e.). Under the
open clause, the mortgagee stands in the shoes of the insured, enjoying the same
rights as the insured, no more, no less—meaning, if coverage is defeated due to an
act of the insured, the mortgagee likewise would be denied recovery.                    See
Ingersoll-Rand Fin. Corp. v. Employers Ins. of Wausau, 771 F.2d 910, 913 n.3 (5th
Cir. 1985).    The other common type of loss payable clause, the “standard”
mortgage clause, provides that “this insurance . . . shall not be invalidated by any

       2
          SWE contended below that it had no knowledge of Sadberry’s having vacated the
premises or any other substantial change in risk, and Wellington produced no evidence to the
contrary; therefore, the duty for SWE to notify Wellington of the change in occupancy or
substantial change in risk under paragraph 19(d)(3) of the policy was not triggered.

                                             5
act or neglect of the mortgagor.” Don Chapman, 626 S.W.2d. at 594.3 Under the
standard clause, the mortgagee has rights to recover even when the insured does
not.4 See Stadium Auto, Inc. v. Loya Ins. Co., No. 08–11–00301–CV, 2013 WL
3214618, at *4 (Tex. App.—El Paso June 26, 2013, no pet.); Old Am., 73 S.W.3d
at 396. In Don Chapman, for example, the loss payee/mortgagee was allowed to
recover even though the insured’s claim was denied because the insured had
allowed an excluded driver to drive the insured vehicle. 626 S.W.2d. at 596–97. It
is sometimes said that the standard mortgage clause creates a separate contract
between the insurer and the mortgagee, in this case Wellington and SWE. See id.
at 595-96.       Therefore, under these types of clauses, acts committed by the
mortgagor generally will not constitute a defense to an action by the mortgagee.
See id. at 595.5

       Both parties agree that the Mortgage Clause at issue here contained the latter
type of loss payable clause, a standard clause. Indeed, while the policy contains
the open clause language, “[w]e will pay for any covered loss . . . to the mortgagee
. . . as interests appear,” it adds the standard language that “[i]f we deny your claim
because of your [the insured’s] acts or because you [the insured] have failed to
comply with the terms of this policy, the mortgagee has the right to receive loss
payment.” Of course, as discussed above, the coverage for the mortgagee is also


       3
         The standard clause is sometimes referred to as the “union” or the “New York” clause.
For ease of reference, we refer to it here only as the “standard” clause.
       4
         Under the standard clause, the mortgagee may become liable to pay the premium to the
insurer; in return, it is freed from policy defenses that the insurer may have against the
mortgagor. Don Chapman, 626 S.W.2d. at 595.
       5
         As one of our sister courts succinctly phrased it: “Being a separate insurance contract
on the mortgagee’s interest, its validity . . . is not affected or invalidated by any act or neglect of
the mortgagor in violation of the terms and conditions of the policy that are unknown to the
mortgagee.” Travelers Indem. Co. v. Storecraft, Inc., 491 S.W.2d 745, 747 (Tex. App.—Corpus
Christi 1973, no writ).

                                                  6
subject to certain requirements, such as providing the insurer with notice of any
change in occupancy or substantial change in risk known to the mortgagee.

       Wellington nevertheless insists that application of the Vacancy Clause of the
policy—which states, among other things, that Wellington is not liable for a loss
due to fire if the damaged building was vacant for 60 consecutive days
immediately before the loss—means that there was no “covered loss” that would
require proceeds be paid to SWE under the Mortgage Clause. We do not agree
with this interpretation of the policy, as it does not construe the document as a
whole, harmonizing all of the provisions so that none are rendered meaningless.
See In re Serv. Corp., 355 S.W.3d at 661; J.M. Davidson, 128 S.W.3d at 235.
Unquestionably, the policy covers damage from fire.6 It is Wellington’s burden to
prove an exclusion applicable to SWE. While under the Vacancy Clause, there is
no coverage for Sadberry for fire damage when the property has remained vacant
for the specified period, the clear import of the standard loss payable language in
the policy means that the Vacancy Clause does not operate to defeat coverage for
SWE as mortgagee, so long as SWE meets the required conditions, such as
informing Wellington of any change in occupancy or substantial change in risk that
was known to SWE. This is true because it was Sadberry’s actions as property
owner that left the property vacant for the relevant time period and SWE had no
knowledge of the vacancy. See Don Chapman, 626 S.W.2d. at 595. Under this



       6
          Generally speaking, when an insured sues for coverage under an insurance policy, the
“insured bears the initial burden of showing that there is coverage under [the] policy and the
insurer bears the burden of proving the applicability of an exclusion that permits it to deny
coverage.” See, e.g., Venture Encoding Serv., Inc. v. Atlantic Mut. Ins. Co., 107 S.W.3d 729,
733 (Tex. App.—Fort Worth 2003, pet. denied). If the event were not a covered loss, there
would be no need to deny coverage. A vacancy clause operates as an exclusion as it excepts a
specific property condition from coverage. See Farmers Ins. Exch. v. Greene, 376 S.W.3d 278,
282 (Tex. App.—Dallas 2012, pet. granted).

                                              7
reading, all policy provisions are harmonized and given effect.7

       Moreover, even if the interpretation proffered by Wellington and favored by
the trial court were correct, the provisions barring coverage would be rendered
void by operation of Texas Insurance Code section 862.055, which states:

       § 862.055. Fire Insurance: Interest of Mortgagee or Trustee

       (a) The interest of a mortgagee or trustee under a fire insurance
       contract covering property located in this state may not be invalidated
       by:
              (1) an act or neglect of the mortgagor or owner of the property;
              or
              (2) the occurrence of a condition beyond the mortgagor’s or
              owner’s control.
       (b) A provision of a contract that conflicts with Subsection (a) is
       void.

Again, the Wellington policy clearly covered fire as a hazard. If, as Wellington
contends, certain language in the Mortgage and Vacancy clauses operates together
to deny fire coverage to SWE as mortgagee based on Sadberry’s action in leaving
the property vacant, such provisions would be rendered void by operation of
section 862.055.

                                       Conclusion

       The trial court erred in granting summary judgment favoring Wellington
based on application of the Vacancy Clause. Accordingly, we sustain SWE’s sole
issue, reverse the trial court’s grant of summary judgment favoring Wellington,


       7
         The Vacancy Clause still would operate to deny coverage to Sadberry when he left the
property vacant, as indeed it so applied in this case. Furthermore, the Vacancy Clause could
apply to defeat SWE’s coverage should it be established that SWE had knowledge of the
vacancy (a “change in occupancy”) and neglected to inform Wellington.

                                             8
and remand for further proceedings in accordance with this opinion.8




                                        /s/       Martha Hill Jamison
                                                  Justice



Panel consists of Chief Justice Frost and Justices Boyce and Jamison.




      8
         Although SWE sought and was denied a partial summary judgment on the issue of
coverage in the trial court, SWE has not assigned error on appeal regarding this ruling.

                                              9
