## Facts

- Sherry A. Murdock Johnson and Jack D. Murdock, while married, owned a home in Tulsa, Oklahoma, subject to a note and mortgage held by Union National Bank of Arkansas (the Bank).
- In the parties’ divorce, the decree vested title to the home in Jack, ordered him to pay the mortgage debt, and ordered him to hold Sherry harmless on that debt and other marital obligations.
- Sherry executed and delivered a quitclaim deed transferring her interest in the home to Jack; neither the decree nor the deed granted or reserved a lien or other security interest in Sherry’s favor if Jack failed to pay.
- Jack later filed a Chapter 7 bankruptcy. Sherry objected to discharge of Jack’s divorce-related obligations to pay the assigned debts and hold her harmless, but the bankruptcy court held those obligations were dischargeable.
- After Jack’s bankruptcy filing, Sherry applied for and obtained a homeowner’s insurance policy from Allstate Insurance Company on the home in her name, apparently to protect herself from possible liability to the Bank on the note and mortgage.
- The Allstate policy included a standard mortgage/loss-payable clause in favor of the Bank “as its interest appears” and limited Allstate’s liability to Sherry’s insurable interest.
- The home was destroyed by fire. Allstate paid the Bank the full amount due on the note and mortgage.
- Sherry sued Allstate and the Bank (and also named Jack) seeking additional policy proceeds beyond the mortgage payoff, arguing she had a security interest based on Jack’s failure to pay and that Allstate should be estopped from denying her the “excess” proceeds; she also sought attorney fees against the Bank.
- The trial court denied Sherry’s motion for summary judgment, granted Allstate’s motion for summary judgment, and denied Sherry’s request for attorney fees against the Bank. Sherry appealed.

## Issues

1. After quitclaiming the home to her former spouse without reserving a lien, did Sherry have an insurable interest in the home beyond her potential personal liability on the mortgage debt, entitling her to insurance proceeds after the mortgagee was paid?
2. Could Sherry use estoppel or a claimed “security interest” arising from the divorce decree to expand her insurable interest and recover “excess” policy proceeds?
3. Was Sherry entitled to attorney fees from the Bank?

## Decision

- The Oklahoma Court of Civil Appeals affirmed the trial court’s judgment.
- The court held Sherry’s insurable interest was limited to her exposure on the note and mortgage, because she had conveyed all ownership interests and held no lien or other security interest in the home.
- Because Allstate paid the Bank the full balance due, Sherry’s mortgage-liability-based interest was satisfied, and she was not entitled to any additional insurance proceeds.
- The court affirmed the denial of Sherry’s request for attorney fees against the Bank.

## Legal Principles

- A property insurer’s obligation to an insured may be limited to the insured’s insurable interest, measured by the insured’s actual risk of financial loss at the time of the casualty.
- A person who has transferred all title to real property by deed and retained no lien or reserved security interest generally lacks an ownership-based insurable interest in the property’s value.
- When an insured’s only remaining stake in the property is potential personal liability on a mortgage note, the insurable interest may be limited to that liability.
- Payment to the mortgagee under a standard mortgage/loss-payable clause “as its interest appears” can exhaust an insured’s mortgage-liability-based interest when the payment removes the insured’s exposure on the debt.
- Estoppel cannot be used to create coverage or enlarge recovery beyond the policy’s insurable-interest limitation when the insured lacks a legal or equitable property interest (such as a lien) in the premises.

## Conclusion

Johnson held that, after Sherry quitclaimed the home to Jack without any reserved lien or court-ordered security, her only insurable interest under the Allstate policy was her potential liability on the mortgage debt; once Allstate paid the Bank the full mortgage balance after the fire, Sherry had no remaining insurable interest to support recovery of any “excess” proceeds, and she was not entitled to attorney fees from the Bank.


Johnson v. Allstate Insurance Co., 870 P.2d 792 (1993)