A bank, carrying mortgagee's E&O insurance with underwriters at Lloyds, claimed that it was entitled to recover the difference between replacement cost of property that was destroyed by fire and the amount received from the mortgagor's insurer. The borrower's insurer had settled on an actual cash value basis, the building having not been repaired or replaced. The settlement amount had been determined by appraisers; the ACV determination was not disputed by the parties. The bank brought legal action under its policy for the difference between its recovery under the mortgagor's policy and the amount of the loan, almost twice the amount of the recovery. It appealed from trial court judgment in favor of the underwriters.

The appeal court found that the bank's policy covered "loss," and made no reference to replacement cost. The insured could not collect more by way of insurance than the loss to property. It said: "A lienholder's insurable interest is not greater than the security to which it attaches."

The insured indicated that the substantial loan was made because of anticipated appreciation in real estate values; the market had been depressed. The court was not persuaded. It said: "Had the bank foreclosed and sold the property immediately prior to the loss, it would have realized no more than its then fair market value. It is not entitled to a greater recovery because the property was damaged by fire."

The judgment of the trial court was affirmed in favor of the underwriters and against the bank.

(ABINGTON SAVINGS BANK, Plaintiff v. ROCK, Defendant. MAAppeal Court. No. 90-P-1069. Jan. 21, 1992. 32 MA. App. Ct. 23. CCH 1993 Fire and Casualty Cases, Paragraph 3975.)