§ 153. Subrogation to contract rights. Suppose A owns a house worth $10,000 and gives a mortgage to B for $7000, and B takes out an insurance policy as mortgagee. Suppose then the property is totally destroyed and B recovers the $7000 from the insurance company. Ought the company, on payment of B's claim to be subrogated to B's mortgage right as against A? There is clearly a difference between this case and the case which we have just been considering. In that case there was a direct connection between the loss suffered by the company in payment of the claim and the wrongful act of the tort feasor, against whom they ask the subrogation right. Here there is no such relation. The argument against allowing subrogation in this case was well stated in a Massachusetts case in the middle of the last century, as follows:

"But it is said, and in this certainly lies the strength of the argument, that it would be inequitable for the mortgagee first to recover a total loss from the underwriters, and afterwards to recover the full amount of his debt from the mortgagor, to his own use. It would be, as it is said, to receive a double satisfaction. This is plausible, and requires consideration; let us examine it. Is it a double satisfaction for the same thing, the same debt or duty?

"The case supposed is this: A man makes a loan of money, and takes a bond and mortgage for security. Say the loan is for ten years. He gets insurance on his own interest, as mortgagee. At the expiration of seven years the buildings are burnt down; he claims and recovers a loss to the amount insured, being equal to the greater part of his

debt. He afterwards receives the amount of his debt from the mortgagor, and discharges his mortgage. Has he received a double satisfaction for one and the same debt?

"He may surely recover of the mortgagor, because he is his debtor and on good consideration has contracted to pay. The money received from the underwriters was not a payment of his debt; there was no privity between the mortgagor and the underwriters; he had not contracted with them to pay it for him, on any contingency; he had paid them nothing for so doing. They did not pay be cause the mortgagor owed it; but because they had bound themselves, in the event which has happened, to pay a certain sum to the mortgagee.

"But the mortgagee, when he claims of the underwriters, does not claim the same debt. He claims a sum of money due to him upon a distinct and independent contract, upon a consideration, paid by himself, that upon a certain event, to wit, the burning of a particular house, they will pay him a sum of money expressed. Taking the risk or remoteness of the contingency into consideration (in other words, the computed chances of loss), the premium paid and the sum to be received are intended to be, and in theory of law are, precisely equivalent. He then pays the whole consideration, for a contract made without fraud or imposition; the terms are equal, and precisely understood by both parties. It is in no sense the same debt. It is another and distinct debt, arising on a distinct contract, made with another party, upon a separate and distinct consideration paid by himself. The argument opposed to this

view seems to assume that it would be inequitable, because the creditor seems to be getting a large sum for a very small one. This may be true of any insurance. A man gets $1000 insured for $5 for one year, and the building is burnt within the year; he gets $1000 for $5. This is because, by experience and computation, it is found that the chances are only one in two hundred that the house will be burnt in any one year, and the premium is equal to the chance of loss. But suppose-for in order to test a principle we may put a strong case-suppose the debt has been running for twenty years, and the premium is at five per cent, the creditor may pay a sum equal to the whole debt, in premiums and yet never receive a dollar of it from either of the other parties. Not from the underwriters, for the contingency has not happened, and there has been no loss by fire; nor from the debtor, because, not having authorized the insurance at his expense, he is not liable for the premiums paid.

"What, then, is there inequitable, on the part of the mortgagee, towards either party, in holding both sums? They are both due upon valid contracts with him, made upon adequate considerations paid by himself. There is nothing inequitable to the debtor, for he pays no more than he originally received, in money loaned; nor to the unterwriter, for he has only paid upon a risk voluntarily taken, for which he was paid by the mortgagee a full and satisfactory equivalent" (38).

§ 154. Same: Practical considerations. While it is impossible as a matter of logic to deny the force and cor

(38) King v. Insurance Co., 7 Cush. (Mass.) 1.

Sa 148

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rectness of this reasoning there are nevertheless strong reasons of policy against it. If the mortgagee can recover on his policy contract from the insurance company, an also on his mortgage contract from the mortgagor, it is obvious that he has an extremely strong incentive to cause the property to be burned, and no incentive the other way. These reasons have led most courts in this country to apply the doctrine of subrogation to this class of cases, and to hold that, where the mortgagee has recovered from the insurance company, the company is then subrogated to his rights as against the mortgagor (39). This doctrine has since been declared by statute, even in Massachusetts. However, this result is not entirely satisfactory. The company collects premiums on the theory that it is to stand the total loss, and, regardless of any question of subrogation, it retains those premiums. Consequently, if the mortgagor is solvent, the ultimate loss falls entirely upon him, and the insurance company has the premiums collected by it as a clear profit. The unfairness of this has induced many courts, in the analogous case of vendor and vendee, to refuse to apply the doctrine of subrogation, and to hold that, where the vendor has insurance and collects the face of the policy, he holds any sum, beyond what may be necessary to reimburse him for the balance due from the vendee, as trustee for the benefit of the vendee. The consequence of this doctrine of course is that the loss falls ultimately upon the company, which has been collecting premiums as payment for taking just that chance

(39) Kernochan v. Insurance Co., 5 Duer (N. Y.) 1.

(40). Of course, if the vendor states in his policy that it is to cover both the interests of himself and the vendee, there is not the slightest reason for objection to this doctrine, and this would be equally true in the case of insurance by the mortgagee, if he intends in fact to cover the interest of the mortgagor (41). In cases, however, where there is no such intention on the part of the vendor, to allow him under those circumstances to recover more than enough to indemnify him and then as to the balance to hold him as trustee for the vendee, is a pure fiction on the part of the courts, indulged in by them to accomplish what seems more nearly substantial justice.

SECTION 3. LIFE AND ACCIDENT INSURANCE.

§ 155. Not contracts of indemnity. Life and accident insurance differ materially in one respect from fire and marine insurance. They are not contracts of indemnity. The courts have given as a reason for this difference, although it is perhaps not a very satisfactory one, that it is impossible to indemnify for the loss of life or limb, and that the only purpose of the policy is to bind the insurer to pay a certain amount upon the happening of the contingency provided for. Be the reason what it may, the law is well settled that these policies are merely agreements to pay on the happening of the contingency, and that no question can be raised as to the amount of the damage actually suffered by the insured. This is strikingly illustrated in the case where a creditor takes out,

(40) Insurance Co. v. Updegraff, 21 Pa. 513. See also, § 148, above. (41) Insurance Co. v. Race, 142 Ill, 338.