The buyer leased the auto dealership real estate. It purchased fire insurance coverage. After the facility was destroyed the buyer made a claim for coverage. The carrier denied coverage because the buyer did not own the building, nor did the lease require the buyer to purchase insurance.
M&A Stories
June 6, 2023
Introduction:
Businesses face various risks, including the possibility of a devastating fire incident.
Background:
In 2013, the buyer acquired the assets of an auto dealership in northern California, which included leasing the dealership building comprising a showroom, sales offices, and service and parts facilities. As a precautionary measure, the buyer obtained fire insurance coverage.
Unfortunately, an October 2014 fire destroyed the dealership building. The buyer filed a claim with the insurance carrier, but coverage was denied. The carrier argued that the buyer lacked an “insurable interest” in the structure because they neither owned the building nor were required by the lease to purchase fire insurance.
The buyer argued that their franchise agreement compelled them to operate from that location, necessitating the rebuilding of the structure to maintain the franchise. Despite this, the carrier persisted in denying coverage, leading to the closure of the dealership.
Lawsuit:
The buyer took legal action against the carrier in a California state court.
Outcome:
Following the jury trial, a judgment was rendered in favor of the buyer, resulting in damages totaling $7.7 million. This amount included $6.2 million awarded as punitive damages. Furthermore, the buyer was awarded $716,000 in attorney fees, $241,000 in prejudgment interest, and $120,000 in costs.
The buyer’s judgment was affirmed on appeal to the Court of Appeals.
Case Reference:
See Borjon Auto Center King City, Inc. v. Sentry Select Ins. Co., Nos. H048021, H048084, Court of Appeals of California, Sixth District (Filed May 31, 2023).
Comment: It appears that the buyer had taken appropriate steps to manage the risk of fire insurance coverage denial, leaving limited options to prevent this outcome.
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
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