Sierra Equipment leased heavy
construction equipment to LWL Management. The lease agreement required LWL to
insure the leased equipment, deliver a copy of the insurance policy to Sierra,
and obtain a policy in form and content satisfactory to Sierra.
The lease agreement did not require
that the policy name Sierra as an additional insured, or contain a loss payable
clause listing Sierra.
LWL filed for bankruptcy about a
year after Sierra and LWL had entered in the lease agreement. After the filing,
Lexington Insurance Company issued a property insurance policy with LWL as a
named insured. The policy did not mention
Sierra.
During the bankruptcy proceedings,
Sierra discovered that much of its equipment had been damaged, lost, or destroyed.
Sierra sought payment from LWL. When nothing came of Sierra’s claim, Sierra
made demand for payment upon Lexington, and then ultimately filed a lawsuit
against Lexington.
Sierra asserted in the litigation a
claim for insurance proceeds for the loss of and damage to Sierra’s equipment.
The district court dismissed Sierra’s claim, concluding that Lexington was out
of luck since the policy did not name Sierra as an additional insured.
Sierra appealed.
In the Circuit Court, Sierra claimed
that the insurance policy was intended to benefit the equipment lessor and
consequently, Sierra was entitled to tap the policy proceeds.
The Circuit Court reviewed the
equipment lease and determined that LWL was not required to obtain insurance
with a loss payable clause to Sierra. And, since the Lexington policy did not
contain such a clause, Sierra would not be entitled to access the policy
proceeds.
1. I’ll
wager the commercial leases you use obligate both the LL and T to maintain
insurance coverages. Further, those same provisions state that the other party
must be named as an “additional insured,” with a “loss payable” clause or
similar verbiage.
2. Further,
I’ll bet that even your commercial purchase and sale agreements obligate the
buyer to provide insurance during the due diligence period, to insure the
seller against liabilities and damages created by the buyer’s on-site
inspection of the property.
3. Are
you checking to be sure that not only are the insurance coverages properly
stated in the policies or certificates, but that your interests are properly
secured by naming your entity as “loss payee” and “additional insured”? Because
based on this case, the failure to do so may prove catastrophic if you need
insurance proceeds to cover a substantial loss, but they are not available to
you due to administrative or management oversight.
Stuart A. Lautin, Esq.*
* Board Certified,
Commercial (1989) and Residential (1988) Real Estate Law,
Texas
Board of Legal Specialization
Licensed
in the States of Texas and New York
