Seller’s Insurance Broker Sued for Failing to Add Buyer as Loss Payee

Introduction

It is not uncommon for the buyer of a business to be named as a loss payee on a seller insurance policy whether it be property, liability or business interruption coverage. As part of the process, the seller’s insurance broker usually prepares the paperwork. The broker issues a certificate of insurance to the buyer evidencing that the buyer has been added as a loss payee on the policy and notifies the carrier.

The deal

In this case the buyer, a Houston based environmental services company that recycles used motor oils and other waste products, agreed to buy Colorado based seller’s two facilities in Louisiana, and a facility in both California and Nevada for $31 million in cash and $4 million in buyer stock.

The deal was broken down into two closing: the first occurred in May 2014 and involved the Louisiana and California facilities.  The 2nd closing for the Nevada facility had to wait because it had suffered major damage from a December 2013 explosion. The Nevada deal under the asset purchase agreement would close upon the seller’s satisfaction of certain conditions pertaining to the Nevada facility, including resolution of certain title issues.

As part of the Nevada facility deal the buyer loaned the financially strapped seller about $11 million which was secured by the business interruption proceeds to be paid by the seller’s insurance carrier as a result of the December 2013 explosion.  The security was documented by the buyer being named as a lender’s loss payee under the policy.

The seller’s insurance broker issued the buyer a certificate of insurance showing that the buyer was named as a lender’s loss payee under the seller’s business interruption insurance policy. However, the seller’s insurance broker did not notify the carrier that the buyer was a lender’s loss payee.

The second closing never took place, as the Nevada facility never met the conditions required under the asset purchase agreement. The seller failed to get the Nevada facility operating at the parameters required and was unable to transfer the assets free and clear of liens or other encumbrances.

Worse, the seller, not the buyer, received the insurance proceeds, because the broker did not tell the carrier that the buyer was entitled to the proceeds as a lender’s loss payee. And Seller did not pay the $4.5 million of insurance proceeds over to the buyer.

The lawsuit

Not surprisingly, the buyer sued the insurance broker in a Chicago federal district court for failing to notify the carrier that the buyer was entitled to the insurance proceeds because it was named in the policy as a lender’s loss payee. The buyer claimed that the insurance broker, under Illinois statutory law, owed the buyer a duty of care to notify the carrier of the buyer’s addition as a loss payee on the seller’s policy.

The buyer said that had the insurance broker acted appropriately, the $4.5 million insurance proceeds would have been paid to the buyer, which in turn would have reduced the amount the seller owed the buyer under the $11 million loan.

The insurance broker claimed that it was not liable to the buyer for this result and filed a motion for summary judgment to have buyer’s claims thrown out of court. The court ruled that under the facts the buyer had made out enough of a legal case to permit the litigation to continue.

The insurance broker pointed to the certificate of insurance that it gave the buyer. The certificate stated that the certificate of insurance conferred no rights upon the buyer and that the certificate did not affirmatively or negatively amend, extend or alter the coverage afforded by the policies.

However, the court pointed to the policy itself which said the insurance broker’s issuance to the buyer of a certificate of insurance naming the buyer as a lender’s loss payee automatically added the buyer to seller’s business interruption policy, as loss payee. Furthermore, the policy stated that failure by the insurance broker to notify the carrier did not invalidate the buyer’s status as loss payee.

The insurance broker then argued that the buyer could not be a loss payee since the April 2014 loss payee designation of the buyer occurred after the December 2013 explosion. The court said that the fact that the loss occurred before the loss payee status designation did not matter under Illinois law.

This case is referred to Vertex Refining, Nv, LLC v. National Union Fire Insurance Company of Pittsburgh, Pa, No. 16 C 3498, United States District Court, N.D. Illinois, Eastern Division, (March 19, 2019)

Comment

The risk here was that the broker would not notify the carrier that the buyer was named the loss payee under the policy.  In 20/20 hindsight, the buyer should not have closed the loan until it had confirmed that the carrier was notified of the buyer’s loss payee status. If that happened, the $4.5 million insurance proceeds would have been paid to the buyer, not the seller.

By John McCauley: I help businesses minimize risk when buying or selling a company.

Email: jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

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Posted in asset purchase agreement, certificate of insurance, insurance broker duty, insurance coverage, loss payee Tagged with: , ,

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