CREDIT UNIONS ‑- CHATTEL MORTGAGE NON-FILING INSURANCE ‑- COVERAGE AS TO CHATTEL MORTGAGES OF FURNITURE AND AUTOMOBILES

CREDIT UNIONS ‑- CHATTEL MORTGAGE NON-FILING INSURANCE ‑- COVERAGE AS TO CHATTEL MORTGAGES OF FURNITURE AND AUTOMOBILES

Subject to express exclusions therein set forth, form of policy submitted indemnifies assured members of Washington Credit Unions' League against loss sustained as mortgagees under chattel mortgages of automobiles and furniture, through being prevented from enforcing such instruments "solely as the result of the failure of the assured duly to record or file the instrument with the proper public officer or public office."  Nevertheless, there must be full compliance with the provisions of section 6312-7, Rem. Rev. Stat., relating to chattel mortgage on automobiles.

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                                                                 October 3, 1950

Honorable A. O. Kent, Supervisor
Division of Savings and Loan
Public Lands-Social Security Building
Olympia, Washington                                                                                                              Cite as:  AGO 49-51 No. 356

Dear Sir:

            By letter of September 6, 1950, you submitted a duplicate certificate of "chattel mortgage non-filing insurance" issued under date of August 1, 1950, by D. R. MacDonald & Company, insurance brokers in Seattle, on behalf of Lloyd's of London.  The assureds under the coverage indicated in this certificate are the "Various members of Washington Credit Unions League" as listed and set forth in the endorsements to the certificate.

            We quote your letter in part as follows:

            "We should like your written opinion whether or not our credit unions, as mortgagees under chattel mortgage covering automobiles and furniture as security, are, actually protected.

             [[Orig. Op. Page 2]]

            "We specifically refer to cases whereby the Sheriff may possess a car for satisfaction of debtors other than the mortgagee.  In such a case, the mortgage not being filed in the County, would possibly not be constructive notice of the mortgage obligation.  Is the mortgage recorded with the State License Department sufficient constructive notice.  * * *"

            Our conclusion is as follows:

            Subject to "Exclusions" A to F inclusive, the assureds are indemnified against loss sustained by them as mortgagees under chattel mortgages of automobiles and furniture, through being prevented from enforcing such instruments "solely as the result of the failure of the assured duly to record or file the instrument with the proper public officer or public office."  Notwithstanding such coverage, there must be a compliance with the statutory provision relating to the reissuance of license registration and ownership certificates with respect to mortgaged motor vehicles.

                                                                     ANALYSIS

            A reading of the policy submitted seems convincing that, as applied to chattel mortgages covering automobiles and furniture, the purpose of the coverage provided by this type of insurance is to relieve the mortgagee of the necessity of complying with the provisions of chapter 284, Laws of 1943, section 1, et seq. (3780 et seq. Rem. Supp. 1943) relating to the filing of chattel mortgages with the auditor of the county in which the mortgaged property is located and with the Secretary of State or the auditor of the county to which such property has been removed.  Ordinarily, of course, the mortgagee must fully comply with these statutory provisions in order to secure proper protection against the intervening claims of third parties.  The terms of the contract of insurance under consideration indemnifies the assured mortgagee against loss as the result of being prevented from enforcing the mortgage "solely as the result of the failure of the assured duly to record or file the instrument with the proper public officer or public office."  (Emphasis supplied).  It contemplates that the assured may fail to file its mortgage instrument as required by the statute (Sections 3781 and 3782 Rem. Supp. 1943) and that by reason of such failure the superior rights of third parties may intervene which will prevent the enforcement of the assured's mortgage, thereby resulting in loss to the assured.

             [[Orig. Op. Page 3]]

            The contract of insurance, however, is "warranted free of all claim" for losses designated "A" to "F" under the heading "Exclusions".  It is to be noted that under "B" of such exclusions, coverage is eliminated "for any lossunless the property represented by the instrument has been located by the assured at the time claim is made under this policy."  (Emphasis supplied).

            With respect to chattel mortgages on motor vehicles, section 6, chapter 164, Laws of 1947 (§ 6312-7 Rem. Supp. 1947) provides in part as follows:

            "If, after a certificate of ownership is issued, a mortgage is placed on the vehicle described in the certificate of ownership, the registered owner shall within ten days thereafter,present his application to the Director of Licenses, signed by the mortgagee, to which shall be attached the certificate of license registration and the certificate of ownership last issued covering said vehicle, which application shall be upon a form provided * * *  The Director of Licenses,if he is satisfied that there should be a reissue of said certificates, shall note such change upon his records and issue to the registered owner a new certificate of license registration andto the mortgagee a new certificate of ownership.  * * *" (Emphasis supplied.)

            In the case ofMerchants Rating and Adjusting Company v. Skaug 4 Wn. (2d) 46, 102 P. (2d) 227, decided in 1940, our Supreme Court held that where a mortgagee of a motor vehicle complied with the statutory provisions requiring that the mortgage be filed with the auditor of the county in which the vehicle was located, but who failed to see to it that the provisions of section 6312-7, Rem. Rev. Stat., Vol. 7A (the pertinent provisions of which are the same as section 6312-7 Rem. Supp. 1947, supra) were complied with, such mortgagee lost its rights as against an intervening innocent purchaser who fully complied with section 6312-7.  The court quoted the material provisions of section 6312-7 as then enacted and said:

             [[Orig. Op. Page 4]]

            "It will be noted, however, that the mortgagee is made a participant in the matter.  Note the words 'signed by the mortgagee,' which we have italicized in quoting the statute.  When a mortgage is made, a new certificate must be issued upon an application made by the mortgagor and signed by the mortgagee.  The mortgagee thus has some responsibility in the matter.

            "* * *

            "It is a matter of common knowledge that a large number of new motor vehicles are sold annually.  The volume of second-hand sales is much greater, as many motor vehicles are resold again and again.  A large percentage are sold on credit, secured by conditional sales contracts or chattel mortgages.  It would be very difficult, and sometimes impossible, for a purchaser of a used motor vehicle to safely guard against the purchase of an encumbered car by searching the chattel mortgage and conditional sale registers of the county in which the purchase is made.  As distinguished from most articles of personal property of equivalent value, motor vehicles are extremely mobile, and pass from county to county almost in the twinkling of an eye.

            "There are difficulties apart from those flowing from the extreme mobility of this class of property.  * * * A purchaser who depended upon a search of county indices to protect himself against encumbrances, would be compelled to ascertain the name and residence of every former owner, and might well have to search the records of a half dozen or more counties."

             [[Orig. Op. Page 5]]

            Under paragraph "5" of the "Agreements, Limitations and Conditions" of the contract of insurance, the assured is required "to use due diligence and do and concur in doing all things reasonably practicable to avoid or diminish" any loss arising under the policy.  However, assured's intentional or unintentional failure to "record or file" the mortgage instrument with the proper public officer or office is expressly excluded from the requirements of this clause.

            As will be noted, the provisions of section 6312-7 do not require the mortgagee to "file" or "record" the mortgage instrument.  It requires merely that an "application" be filed with the Director of Licenses for the "reissuance" of the certificates of license registration and of ownership.  Such application is to be made by the mortgagor rather than the assured mortgagee, the process involved requiring that the application be merely signed by the mortgagee.  We are of the opinion that compliance with section 6312-7 does not involve a "filing" or "recording" of the mortgage instrument by the "assured" mortgagee within the terms of the insurance contract, and that any loss resulting from a failure to fully comply with the provisions of this section would not be covered.  Under paragraph 5 of the "Agreements, Limitations and Conditions" of the policy above referred to, the assured mortgagee, it seems to us, must see to it that the provisions of section 6312-7,supra are fully complied with, all as pointed out in theSkaug case, supra.

            The last part of your inquiry as above quoted raises the question as to whether the reissuance of the certificates of license registration and of ownership under section 6312-7 is "sufficient constructive notice" in the absence of a filing of the mortgage with the proper county auditor as otherwise provided by statute.  This question would not be involved where the insurance coverage under consideration is in effect, as the protection afforded the assured is indemnity against loss arising solely as the result of the assured's failure to so file the mortgage instrument and to thus give the statutory constructive notice.  Where such insurance coverage is not in force, however, it would appear to be extremely hazardous for a mortgagee to fail to comply with the statutory provisions relating to the filing of chattel mortgages with the proper county auditor.  Although the court in theSkaug case, supra did not find it necessary to pass on the question, the opinion in that case indicated that the court viewed compliance with the provisions of section 6312-7 relating to the reissuance of registration and ownership certificates as being an additional and cumulative step required with respect to mortgages of motor vehicles.  It was there said:

             [[Orig. Op. Page 6]]

            "* * * It may well be that the legislature concluded that, on account of the extreme mobility of that kind of chattels, something above and additional to the mere constructive notice provided by filing the mortgage in the office of a county auditor should be required for the protection of subsequent purchasers and emcumbrancers of motor vehicles.  * * *"

            We return herewith the duplicate certificate submitted by you in connection herewith.

Very truly yours,

SMITH TROY
Attorney General

FRED L. HARLOCKER
Assistant Attorney General