Auto Owners' Protective Exchange v. Edwards , 82 Ind. App. 558 ( 1922 )

The Code of Civil Procedure requires that: "All persons having an interest in the subject of the action, and in obtaining the relief demanded" shall be made parties. § 263 Burns 1, 2. 1914, § 262 R.S. 1881; see, also, 1 Watson's Revision Works' Practice, ch. 7. It must be noted that the complaint contains the averments that the plaintiff's interest in the property covered by the insurance exceeds the amount due on the policy; and that John Hecht has no interest whatever in any sum recoverable on the policy. Those averments state an issuable matter between the plaintiff and Hecht. Presumably Hecht is vitally interested in those averments, and on those averments, he has a legal right to be heard. On that feature, there can be no adjudication until Hecht has had his day in court. Whether or not Hecht has an interest in the insurance cannot be determined in an action to which he is not a party. It ought to be clear that if Edwards is permitted to maintain his action in spite of the objection presented by the demurrer to the complaint, then, by the same token, Hecht may bring an action on the policy without making Edwards a party and aver in his complaint that Edwards has no interest in the subject of the action. On that basis, the insurer may be subjected to the expense, annoyance and hazard of another action, notwithstanding the record in the case at bar. Under the decisions in this jurisdiction, Edwards had the right to institute his action as sole plaintiff; but, as against an objection properly presented, he could not rightfully maintain the action and prosecute it to final judgment without making John Hecht a party. § 344 Burns 1914, Acts 1911 p. 415; Franklin Ins. Co. v. Wolff (1899), 23 Ind. App. 549. The demurrer to the amended complaint should have been sustained on the ground that there is a defect of parties.

It should be noted also that it is averred in the amended complaint that Hecht acquired the automobile from Edwards by virtue of a contract of conditional sale. That averment 3. means that Hecht became the equitable owner while Edwards retained the legal title. The rider attached to the policy does not make Edwards the insured. The contract of insurance continues to be a contract between the insurer and Hecht. The effect of the rider is to give Edwards an interest in the money which may become due on the policy in the event of loss, which interest may not exceed his interest in the property insured. In other words, it is a contract made by Hecht with the insurer for the benefit of Edwards to the extent of the latter's interest in the subject of the insurance. The policy continued to be an executory contract and recovery thereon is at all times subject to be defeated by the conduct of the insured. If Hecht has violated any material condition of the contract, or if he has failed to perform any of the conditions on his part to be performed, then neither he nor Edwards can recover. As mortgagee, Edwards might have procured insurance in his own right; but under the plan adopted, his right to recover depends on Hecht's right to recover. The duty rests on Edwards to show by the averments in his complaint that the insured has performed all the conditions of the contract on his part to be performed; for the insurer may make any defense against Edwards which it could make against Hecht. Because of the failure to aver full performance of the contract by the insured, the amended complaint does not state facts sufficient to constitute a cause of action. § 376 Burns 1914, § 370 R.S. 1881; 1 Watson's Revision Works' Practice § 362.

The erroneous ruling on the demurrer to the amended complaint requires a reversal of the judgment; and since there must be a reformation of the issues, there is another question presented by the record which probably will arise again. That question is, Did the court err in sustaining the demurrer to the fifth paragraph of the answer?

The general rule is that where the tortious conduct of a third party is the cause of a loss within the terms of a policy of insurance, then, upon payment of the loss, the insurer 4. becomes subrogated by operation of law to whatever right the insured may have against the wrongdoer. Pittsburgh,etc., R. Co. v. German Ins. Co. (1909), 44 Ind. App. 268, 87 N.E. 995; Pittsburgh, etc., R. Co. v. Home Ins. Co. (1915),183 Ind. 355, Ann. Cas. 1918A 828; 14 R.C.L. 1404, and cases there cited; 26 C.J. 455, and cases there cited; 37 Cyc 361. The wisdom of that rule is apparent. To permit the insured to receive payment from both the wrongdoer and the insurer would be to give him double compensation for his loss. The wrongdoer cannot be permitted to shield himself on the theory that the loss is covered by insurance; for the contract of insurance was not made for his benefit. Manifestly it would be unjust to compel the insurer to suffer the consequences of the wrongful act of another.

The provision of the policy requiring the insured to assign in writing his claim or cause of action against the wrongdoer gives the insured no greater right with respect to subrogation 5, 6. than the law would confer if the contract were silent on that subject. By the terms of the contract, the insured is under no obligation to make the assignment until the insurer has paid the indemnity. The utmost that the insurer can demand under the terms of the contract is that the assignment shall be made simultaneously with the payment of the indemnity. Since there is no averment in the fifth paragraph of the answer that the insurer has paid the indemnity, it follows in strict logic that it has acquired no right of subrogation. Nevertheless there must be a way to enforce the rights and liabilities of the parties as they existed at the time of the loss; for it would be folly to permit the beneficial purpose of the rule to be defeated merely because, in the matter of paying the loss, the wrongdoer went ahead of the insurer. There is, therefore, an additional and supplementary rule applicable to such cases. That rule is that any payment as damages received by the insured from the wrongdoer before settlement with the insurer, reduces, by operation of law, the liability of the insurer to the extent of the payment; and where the insured releases his right of action against the wrongdoer before settlement with the insurer, that release destroys, by operation of law, his right of action on the policy.Insurance Co., etc., v. Fidelity, etc., Co. (1888), 123 Pa. St. 523, 16 A. 791, 10 Am. St. 546, 2 L.R.A. 586; Packham v.German Fire Ins. Co. (1900), 91 Md. 515, 46 A. 1066, 80 Am. St. 461, 50 L.R.A. 828; 26 C.J. 459, and authorities there cited;Mobile Ins. Co. v. Columbia, etc., R. Co. (1894),41 S.C. 408, 19 S.E. 858, 44 Am. St. 725, and note thereto. If the stipulation concerning the assignment of the insured's claim against the wrongdoer be given its full significance, yet the insurer need not plead payment or tender as a condition precedent to its right to have the benefit of the settlement with the wrongdoer. To require the insurer's plea to aver payment or tender in order to entitle it to an empty assignment of an extinguished right, would be quite unreasonable.

It was error to sustain the demurrer to the fifth paragraph of the answer.

The judgment is reversed; and the trial court is directed to grant a new trial, to sustain the demurrer to the complaint, and to permit the parties to reform the pleadings.

McMahan, J., not participating.