This case is one that has nothing to do with coverage. However, it has everything to do with money, so it still ended up being litigated.

After a fire destroyed a restaurant, the insurer promptly paid the policyholder for the loss…which turned out to be quite problematic. Post-settlement, a dispute arose from a party regarding whether the payment was handled appropriately. The party in question was the restaurant’s previous owner, who sold it to the policyholder. That party did not appear on the insurance contract.

Click below to read how a court navigated the argument that the seller was denied recovery for the loss created by the restaurant’s destruction.

On the surface, the case under discussion didn’t appear to present any problems. Look at what occurred. A restaurant’s buyer purchased a commercial property policy. The restaurant was listed as the subject of coverage. While the policy was in force, a fire demolished the insured building. The insurer settled the loss by sending payment to the buyer/policyholder. It seems safe to assume that all is well with this situation. Sigh… it turns out that the insurance contract did not operate as intended.

Insurance policies are intended to protect a party that has a valid financial interest in the covered property. The problem here? Well, while a payment covering the damage was paid, it did not handle a party that held a substantial insurable interest. The claim’s payment, at best, failed to efficiently handle the responsibility of indemnification.

Click here for a refresher about key aspects necessary to create a legitimate insurance contract. It is from Gordis on Insurance found in Advantage Plus.

Usually, it’s helpful for a court case summary to provide enough context to frame interpretation. However, though this summary is missing key information, it results in an opportunity for conjecture. Let’s consider a couple of different story angles. First, a question of fraud on the part of the policyholder.

The restaurant seller, via a separate agreement, required the buyer to have the former listed as a payee on the latter’s insurance policy. This would guarantee that, should a significant loss occur, the seller would be paid the balance still owed to it. However, while the policyholder, obviously, secured insurance, the seller was not listed on the policy. Nearly a year later, when a fire occurred, only the policyholder appeared on the policy.

Without reference to more information via the case summary, what explains the buyer arranging for insurance that did not fulfill their agreement? Assuming that periodic payments were being made to the seller, wouldn’t those act as reminders to have the seller added to the policy? Further, the buyer quickly deposited the full amount of the policy proceeds into their own account. These acts, at least, suggest bad faith (contractual breach) on the buyer’s part.

Click here for an article discussing the prevalence of fraud and its impact on the insurance sector. It is from Emarketing for Agents found in Advantage Plus.

Our other consideration is the possibility of oversight, perhaps even negligence, regarding how protection was provided. If an agent was the insertion point of the transaction, what initial questions were asked while pursuing the business? It seems that an agent would be curious about the absence of a mortgage or lienholder on a property insurance policy for a small business.

Though the insurer escaped liability for the lack of payment to the building’s seller, was that the correct outcome? When did the seller notify the insurer in relationship to when the loss payment was made? Was there a failure to assess their payment decision? Knowledge of another party’s legitimate financial interest prior to processing any payment should have affected processing. The final result was that the policyholder was enriched since the loss payment did not accurately reflect their insurable interest.

Click here for an excerpt from a questionnaire containing pertinent areas that could’ve been invaluable. It is from the Commercial Lines Survey found in Advantage Plus.