Eagle Sales Company owns a warehouse, subject to a mortgage obtained from First National Bank. Separately, Eagle and First National obtain insurance policies from Good Hands Insurance, Inc., to cover the warehouse. Later, Eagle sells the property to Interstate Distribution Corporation but keeps the insurance policy. First National agrees to act as Interstate's mortgagee, and Interstate obtains an insurance policy from Good Hands to cover the property. A fire destroys the warehouse. Who can recover an amount for its loss?
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You indicate that Eagle Sales Company has sold its interest in the warehouse to Interstate Distribution Corporation but has retained its insurance policy. In all but rare situations, once the interest in a property has been transferred to another owner, the prior owner's ability to insure the property disappears. In other words, an entity cannot insure something in which it has no ownership interest. In this scenario, Eagle no longer has the ability to insure the warehouse.
If Interstate has borrowed money from First National Bank and has obtained an insurance policy in its own name, the bank, as part of the lending transaction, would require that the insurance policy either list the bank as co-insured or that the policy contain what is called a "loss-payable clause" naming the lender as payee to the extent of its secured interest in the property. Its secured interest is the amount of principal and interest the debtor owes at the time of the loss. If the warehouse is destroyed, the bank would then have full access to the insurance proceeds to pay any remaining outstanding amounts (principal and interest) on the loan securing the property. Remaining insurance proceeds would then go to Interstate.
The short answer is Interstate Distribution Corporation can recover the loss amount through their insurance policy with Good Hands Insurance. Eagle Sales Company forfeits their stake in the matter upon selling the property. The owner, or controlling interest, of the building is the only one who can insure the building. This is called insurable interest. Likely, Good Hands Insurance would have noticed the discrepancy and cancelled the original policy.
The notion of insurable interest keeps people from defrauding the system. For example, suppose Eagle Sales Co. needed money and burned the building down. If Good Hands Insurance had to payout both, then Interstate Distribution is indemnified (meaning they have money to rebuild and are not legally harmed by the fire), but Eagle Sales is unjustly enriched (more on that later).
There are three guiding legal principles which come into play when discussing insurance.
The principle of indemnity is a legal construct which prevents people from unfairly profiting from insurance payouts. Without this in place, people may be tempted to destroy the insured property to gain the financial reward.
Unjust enrichment is a principle which bars people from profiting without providing something of value in return. Most insurance contracts will bar unjust enrichment and allow courts to rule against a person seeking the enrichment. This is the primary principle that keeps people from having two insurance policies covering the same property. Once the first company pays out, the second company can use this principle to stay payments on the property.
For example, suppose Company A has a two policies with Insurer 1 and 2 for $500 to cover a building from fire. The building burns and is a total loss. Insurer 1 will review the situation and pay out according to their policy. If Insurer 1 covers the entire amount ($500), then Insurer 2 can argue unjust enrichment in court and not pay out anything on the building. Another scenario is Insurer 1 pays $400 because they deem Company A at fault. Then Insurer 2 will pay $100 due to unjust enrichment if they pay out according to the full policy.
The third part is the principle of contribution. This allows insurance companies to share the cost payout through various agreements. In the above example, Insurer 1 and 2 may contribute an agreed upon percentage of the loss ensuring it will not exceed the total cost of the building, $500.
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