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June 20, 2001

We reverse and remand, holding that the doctrine of equitableconversion does not entitle a purchaser/loss payee to a directaction suit against the insurer of lost or damaged property. Additionally, we hold that while a simple loss payable clause in aninsurance policy cannot support a claim by a loss payee directlyagainst an insurer, a loss payee may maintain a direct action inhis own name if he can show that he contracted for the insuranceand paid the premiums.

FACTS

Suburban owned and operated a tavern and restaurant on whichit obtained insurance through a local agent, Town and Country. Acomprehensive property insurance policy was issued by Cincinnatifor a policy period of December 18, 1995, to December 18, 1998.

Suburban entered into an installment sale agreement withPasley on January 14, 1997, for the sale of the tavern. Theagreement provided that Pasley was to make periodic payments forseven years, after which time a deed to the tavern would issue toPasley. Pasley was also required to maintain insurance on theproperty "with loss to be made payable to the parties heretoaccording to their respective interests at the time of loss."

Sometime after Pasley and Suburban entered into theinstallment sale agreement, Pasley was added as "loss payee" via acontract-of-sale endorsement clause to the insurance policy on thetavern issued by Cincinnati. Suburban remained the "namedinsured." The actual events that precipitated the addition ofPasley as loss payee to the policy are disputed by the parties. In the policy issued by Cincinnati, the words "you" and "your"are defined as the "named insured." That section of theendorsement devoted to the addition of loss payees because of acontract of sale provides as follows:

"D. CONTRACT OF SALE

1. The Loss Payee shown in the Schedule or in theDeclarations is a person or organization youhave entered a contract with for the sale ofCovered Property.

2. For Covered Property in which both you and theLoss Payee have an insurable interest, wewill:

    b.  Pay any claim for loss or damage jointlyto you and the Loss Payee, as interestsmay appear.

For Covered Property that is the subject of acontract of sale, the word 'you' includes theLoss Payee."

The endorsement was effective March 19, 1997. On April 6,1997, the tavern was destroyed by fire. After Suburban filed aninitial claim with Cincinnati, disputes arose between Pasley andSuburban regarding who was entitled to the proceeds and who had theright to control the claim process.

PROCEDURAL HISTORY

Suburban filed a complaint seeking a declaration that it wasentitled to the proceeds and alleged that Pasley's only interest,if any, was limited to the amount he paid pursuant to theinstallment sales agreement at the time the building was destroyed. In the complaint, Suburban alleged that it maintained propertyinsurance on the tavern with Cincinnati from December of 1990 up tothe date of the fire, that Pasley failed to keep the propertyinsured at any time, and that Cincinnati caused Pasley to be addedto Suburban's policy as loss payee without Suburban's consent.

In his answer to the complaint, Pasley denied that he did notkeep the property insured. Pasley filed a motion for summaryjudgment, alleging that under the doctrine of equitable conversion,he was the equitable owner of the property and was entitled to theinsurance proceeds to rebuild the tavern. In his memorandum of lawin support of that motion, Pasley alleged that he contacted Townand Country, the same insurance agent utilized by Suburban, uponexecution of the installment sales contract, seeking to insure theproperty through identical coverage as that provided to Suburban. Town and Country sold Pasley such a policy; however, Suburbanremained the named insured while Pasley was added as loss payee. Pasley also alleged that from the date of the contract of sale hepaid all premiums to insure the property while Suburban paid none.

The trial court determined that Pasley's motion for summaryjudgment was, in actuality, a motion for partial summary judgment. Relying upon the doctrine of equitable conversion, the courtgranted the motion, finding that Pasley held equitable title to theproperty and, thus, was entitled to the insurance proceeds subjectto Suburban's interest.

Thereafter, Pasley filed a motion for final summary judgment,requesting that the court order Suburban to endorse a check toPasley, paid by Cincinnati and held in escrow, in the amount of$235,975, constituting the actual value of the lost property. Additionally, Pasley sought a ruling that he was entitled torebuild the property and seek replacement costs directly fromCincinnati for any monies expended above and beyond the actualvalue of the property. Cincinnati filed a motion to dismiss on thebasis that, pursuant to the policy language, only the namedinsured, Suburban, was entitled to seek replacement costs.

The trial court granted Pasley's motion for summary judgmentand denied Cincinnati's motion to dismiss. The court maintainedjurisdiction to allow for any future equitable relief which mightbecome necessary to conclude the controversy. Cincinnati's motionto reconsider was denied by the court, as was its oral request tofile an interlocutory appeal.

Ultimately, Pasley filed a motion for additional relief,requesting the court to order Cincinnati to pay Pasley $135,000 forthe additional costs expended in replacing the lost structure. Thecourt granted that motion in a final and appealable order. Cincinnati timely appealed.

ANALYSIS

The sole issue for our review is whether the trial court erredwhen it granted Pasley's motion for summary judgment and orderedCincinnati to pay Pasley $135,000 in replacement costs.

Summary judgment is appropriate when the pleadings,depositions and admissions on file show that there is no genuineissue of material fact and that the moving party is entitled tojudgment as a matter of law. 735 ILCS 5/2-1005 (West 1998). Anappellate court performs its review of an order granting or denyingsummary judgment de novo. Johnson v. Owens-Corning FiberglassCorp., 284 Ill. App. 3d 669, 672 N.E.2d 885 (1996).

On appeal, Cincinnati suggests that the trial court misappliedthe doctrine of equitable conversion to find that Pasley hadreplaced Suburban as the named insured. Cincinnati also suggeststhat, due to the contract language, only Suburban could rebuild andseek replacement costs; however, because Suburban spent nothing inreplacement costs, Cincinnati is required to pay nothing inreplacement costs.

We turn first to Cincinnati's suggestion that the doctrine ofequitable conversion was misapplied by the trial court.

Under the doctrine of equitable conversion, the seller ofland, at the time a land sale contract is entered into, holds legaltitle to the property in trust for the buyer, while the buyerbecomes the equitable owner of the property. LaSalle Bank, N.I. v.First American Bank, 316 Ill. App. 3d 515, 736 N.E.2d 619 (2000). It is well recognized in Illinois that the doctrine of equitableconversion is only enforceable as between the parties to the salecontract and does not alter the rights and obligations of thirdparties, like insurers. See, e.g., State Farm General Insurance Co.v. Stewart, 288 Ill. App. 3d 678, 681 N.E.2d 625 (1997).

Thus, while the doctrine of equitable conversion would directhow insurance proceeds would be distributed between seller andbuyer, its application has no place with respect to a whollyseparate contract between one or both of the parties to the salecontract and a third party, the insurer. It certainly cannot beutilized to reform the insurance contract to replace Suburban asthe "named insured" with Pasley. Accordingly, we find that thetrial court erred in applying the doctrine of equitable conversionto hold that Pasley was entitled to directly seek recovery underthe insurance policy.

We turn next to Cincinnati's argument that only Suburban, asthe named insured, was entitled to directly seek replacement costsfrom Cincinnati.

In Posner v. Firemen's Insurance Co., 49 Ill. App. 2d 209, 199N.E.2d 44 (1964), the plaintiffs sought insurance proceeds under aloss payable clause similar to the one in this case. The insurancecontract in Posner provided that "[l]oss, if any, to be adjustedonly with the Insured named herein and payable to the Insured and*** [plaintiff, as loss payee,] as their respective interests mayappear." Posner, 49 Ill. App. 2d at 211, 199 N.E.2d at 45.

The court granted insurer's motion to dismiss, holding that aloss payable clause, without more, cannot support a claim by a losspayee directly against an insurer. Rather, there must be more,such as language creating a separate contractual relationshipbetween the insurer and the third party. Posner, 49 Ill. App. 2d at215, 199 N.E.2d at 47. In the absence of such contract language,the rights of a loss payee under a simple loss payable clause arederivative in nature and wholly dependent upon the rights of thenamed insured. Posner, 49 Ill. App. 3d at 216, 199 N.E.2d at 48,citing Barwick v. Westchester Fire Insurance Co., 266 Ill. App.574, 577 (1932)).

What language is sufficient to create a separate contractualrelationship between an insurer and a loss payee was considered inWest Bend Mutual Insurance Co. v. Salemi, 158 Ill. App. 3d 241, 511N.E.2d 785 (1987). In that case, the buyer of certain propertyobtained insurance with a contract-of-sale endorsement naming buyeras the insured and seller as the loss payee.

Buyer intentionally set fire to the property and, thereafter,seller filed a claim for insurance. As in the case currentlybefore this court, insurer contended that seller's rights, as losspayee, were derived from buyer's, as the named insured. Becausebuyer could not recover due to her arson, seller could not either.West Bend, 158 Ill. App. 3d at 245, 511 N.E.2d at 787.

The appellate court disagreed. In distinguishing Posner, thecourt held that seller, even though a loss payee, could maintainher own suit against insurer because seller's rights wereestablished by the contract-of-sale endorsement. That endorsementprovided that "[a] contract for sale of the property described inthis policy having been made between the Insured and [seller] ***the interest of said last named party is also insured hereunder."West Bend, 158 Ill. App. 3d at 246, 511 N.E.2d at 787.

From this language, the court extrapolated a recognition byinsurer that, pursuant to the contract for sale, seller had aninterest in the property separate and distinct from buyer'sinterest. Additionally, insurer's agreement to "also insure[]hereunder" seller's interest gave rise to an independentcontractual relationship between seller and insurer sufficient tosupport recovery directly by seller. West Bend, 158 Ill. App. 3d at247, 511 N.E.2d at 788.

In this case, the contract-of-sale endorsement provided thatfor covered property in which both the named insured and loss payeehave an interest, Cincinnati will "adjust losses with you" and payany claims for loss or damage "jointly to you and the Loss Payee." "You" is defined in the policy as the "named insured" (here,Suburban). While the endorsement recognizes that the loss payeemay also have an interest in the covered property, there is nolanguage similar to that in West Bend wherein Cincinnati agreed to"also insure[] hereunder" that interest. Rather, the endorsementclause at issue utilizes language very similar to that found in theendorsement clause in Posner. Thus, it would appear that Pasley'sinterests are wholly dependant upon Suburban's.

Under the clause of the insurance contract relating toreplacement costs, Cincinnati agreed to pay the least of (1) theinsurance limits; (2) the cost to replace; or (3) the "amount you[the named insured] actually expended" for replacement costs. Because Suburban, the named insured, expended nothing, Cincinnatiwould ostensibly owe nothing.

Our analysis does not end there, however. It is the law inIllinois that when a party contracts for insurance, pays thepremium, and the insurer makes the loss payable to such party, theagreement to pay is a contract with the party who paid theconsideration, and he has a right of action in his own name,despite the fact that the insurance is in the name of another. SeeTraders' Insurance Co. v. Pacaud, 150 Ill. 245, 37 N.E. 460 (1894);Aetna Insurance Co. v. California Union Insurance Co., 136 Ill.App. 3d 288, 483 N.E.2d 550 (1985). Although both Traders' andAetna involved issues relating to "other insurance" clauses, wefind the general statement of the law pertaining to the rights ofloss payees who pay the insurance premiums equally applicable tothis case.

Though Suburban alleged, in its complaint for declaratoryjudgment, that Pasley never kept the premises insured, Pasleydenied that allegation in his answer to the complaint. Additionally, in his memorandum of law in support of his motion forsummary judgment, Pasley alleged that he obtained a policy ofinsurance from Cincinnati and that he paid all premiums. We do notfind in the record any conclusive evidence as to whether Suburbanor Pasley paid the insurance premiums. Accordingly, we find thata genuine issue of material fact existed and that summary judgmentwas therefore inappropriate. Having determined so, we reverse thetrial court's order directing Cincinnati to pay Pasley $135,000 asreplacement costs under the insurance policy and remand this caseto the trial court.

For the foregoing reasons, the judgment of the circuit courtof Tazewell County is reversed and this cause is remanded forfurther proceedings consistent with this opinion.

Reversed and remanded.

HOLDRIDGE and McDADE, JJ., concur.