## Facts

- Homeowners Glenn and Grace Althauser owned a house encumbered by two mortgages and insured it under a homeowners policy issued by Northwest Farm Bureau Insurance Company (NFB).
- The policy provided fire coverage on the dwelling and contained a standard (union) mortgage clause making loss payable to named mortgagees “to the extent of their interests,” protecting mortgagees even if the mortgagors breached the policy.
- A fire severely damaged the house in 1981.
- NFB paid the first mortgagee the full balance of the mortgage debt and received an assignment of that mortgage.
- NFB paid the remaining structural-loss proceeds to the second mortgagee.
- In earlier litigation over personal-property coverage, NFB asserted defenses including arson and material misrepresentation; a jury found no arson but found the Althausers knowingly misrepresented or concealed a material fact relating to the loss claim, resulting in judgment for NFB.
- After the fire, the Althausers stopped making mortgage payments.
- NFB filed a foreclosure action asserting it was subrogated to the mortgagees’ rights because it paid them under the mortgage clause and the Althausers were in default.
- The trial court granted summary judgment for NFB and entered a foreclosure judgment; the Althausers appealed.

## Issues

1. Whether an insurer that pays mortgagees under a standard mortgage clause, after the insureds’ material misrepresentation voids coverage as to them, is equitably subrogated to the mortgagees’ rights and may foreclose upon the insureds’ default.
2. Whether the insurer’s payments to mortgagees extinguish the mortgage debts or preserve them for enforcement through subrogation.
3. Whether the prior judgment finding material misrepresentation precludes the insureds from relitigating coverage in the foreclosure action to avoid subrogation-based enforcement.

## Decision

- The Oregon Court of Appeals (en banc) affirmed summary judgment and the foreclosure judgment for NFB.
- The court held that NFB was equitably subrogated to the mortgagees’ rights to the extent of NFB’s payments and could foreclose when the Althausers defaulted.
- As to the first mortgage, NFB also held an assigned mortgage interest.
- As to the second mortgage, equitable subrogation applied even without a formal assignment.

## Legal Principles

- A standard (union) mortgage clause creates a separate and independent contractual obligation between insurer and mortgagee that is not defeated by the insured mortgagor’s breach.
- An insurer that pays a mortgagee under such a clause is not a volunteer; equity permits the insurer to step into the mortgagee’s shoes to the extent necessary to prevent the mortgagor from benefiting from a debt discharge funded by the insurer.
- When insureds forfeit coverage by material misrepresentation, they cannot claim policy benefits to treat the insurer’s mortgagee payment as extinguishing their mortgage obligations.
- Equitable subrogation preserves the mortgage debt for enforcement against the party primarily liable (the mortgagor), shifting the creditor’s identity from the mortgagee to the insurer to the extent of payment.
- Issue preclusion bars insureds from collaterally attacking a prior adjudication that they materially misrepresented facts and thereby breached the policy as to their own claims.

## Conclusion

Because the policy’s standard mortgage clause obligated NFB to pay the mortgagees despite the insureds’ breach, and because the insureds remained primarily liable on the mortgage debts after their material misrepresentation barred their own coverage, NFB was equitably subrogated (and, for the first mortgage, also assignee) and could foreclose upon the Althausers’ default.


Nw. Farm Bureau Ins. Co. v. Althauser, 90 Or. App. 13, 750 P.2d 1166 (Or. Ct. App. 1988)