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Short takes on significant topics.

Loss Payee on a Property Policy Doesn't Have the Same Rights as a Mortgagee

In 2010, Stairway Capital Management II LP lent Eidos Partners LLC, $20 million to fund a patent enforcement program. That sum, and the amount of insurance, was later increased to $25 million. As a condition for the loan, Stairway required Eidos to obtain a contingent loss reimbursement policy, which was issued by Ironshore Specialty Insurance Company.

Ironshore's policy provided coverage to Eidos in case it couldn't recoup enough recovery from the patent litigation to repay the loan's principal by November 2013. Stairway was named as a loss payee and there was a contract between Steinway, Eidos, and Ironshore assigning the right to make claim under the policy to Steinway.

Eidos failed to make the principal payments and Stairway filed claim against Ironshore. (6) Ironshore denied coverage for the loss and Stairway sued.

This is obviously not the type of transaction that crosses our desks every day. It is more financial guarantee than insurance. It sounds like a plot idea for a sequel to the movie "The Big Short." Nevertheless the principles set out in the decision apply to our everyday work.

Stairway claimed that under the loss payee clause in the policy and the agreement between Stairway, the insured and insurer, it was entitled to receive payment from Ironshore despite any defense that Ironshore might have against Eidos. The lower court agreed, but the Appellate Division, NY Supreme Court, First Department reversed and ruled in favor of the insurer.

The court emphasized the difference between a loss payee clause and a standard mortgagee clause.

Here's an excerpt of the wording from a typical loss payee clause:

Loss Payable Clause For Covered Property in which both you (the insured) and a Loss Payee shown in the Schedule or in the Declarations have an insurable interest, we will:

1. Adjust losses with you (the insured); and

2. Pay any claim for loss or damage jointly to you and the Loss Payee, as interests may appear. (7)

That differs greatly from a standard mortgagee clause. In addition to agreeing to pay the loss jointly to the mortgagee and the insured, the NY Standard Mortgagee Clause provides that the insured's acts or neglect will not invalidate the insurance, that the mortgagee may file a claim and a proof of loss and even demand appraisal if the insured has not, and that if the insured fails to pay premiums due, the mortgagee can pay the premiums to continue coverage. The NY standard mortgagee clause is often described as creating a virtual separate policy for the mortgagee.

The court ruled that Stairway, as lender and loss payee, is not itself an insured under the policy issued by Ironshore to the Eidos Partners, LLC since the loss payee endorsement in the policy does not contain any such provision. Stairway is only entitled to payment of any loss it may be due from Ironshore. Furthermore, all the policy terms apply. (8)

If one of your clients is a lender relying on a loss payee clause for security, explain the difference between the two clauses.

A Big Embezzlement Loss and a Bigger Auto One

Hearing about big losses can get us thinking about how the coverage clients carry will respond and can get insureds thinking about the adequacy of their coverage. Two unrelated losses serve those purposes very well.

The first one is a fidelity loss. A QBE executive and his accomplice were arrested and charged with embezzling $2.6 million by forging the signature of the QBE CFO to fictitious invoices for consulting services. (9) Not a very sophisticated crime, but the size of the loss and the fact that it involves an insurance company proves that it can happen to anyone and that the money involved can be substantial. It should be a wake-up call to insureds to strengthen loss-control and look at the limits of coverage they carry. We regularly see firms with many millions of dollars exposed to loss carrying fidelity limits of less than $100,000.

The second involved an auto accident. David Zucker suffered spinal injuries when motorist Miguel Gonzalez collided with an 18-wheel oil tank truck and careened into the path of Zuckers' car on Interstate 95 in Miami. (10) The jury awarded the Zuckers $14.5 million.

And your clients think $1,000,000 liability limits are sufficient? Ask them to think again.

(1) Minasian v. IDS Prop. Cas. Ins. Co. and State Farm Fire & Cas. Co. (SDNY, decided 12/9/2015)

(2) http://nycoveragecounsel.blogspot.com /2015/12/86-day-delayed-notice-ofapproximately.html

(3) Chubb Group of Insurance Companies, Social Engineering Loss Scenarios Form 14-01 -1140 (Ed. 7/14)

(4) Travelers Casualty and Surety Company of America Form # CRI-19071 Ed. 02-15

(5) Uber, Airbnb and Insurance, Insurance Advocate January 12, 2015 pp. 12 & 13

(6) See Jeff Sistrunk Stairway's Bid For $25M Coverage Rebuffed By NY Court http://www.law360.com/articles/632451/stairway-s-bid-for-25m-coveragerebuffed-by-ny-court and Stairway Capital Mgt. II L.P. v Ironshore Specialty Ins. Co. 2015 NY Slip Op 02044 [126 AD3d 522] March 17, 2015 Appellate Division, First Department

(7) Loss Payable Provisions (CP 12 18 10 12) (c) Insurance Services Office Inc. 2011

(8) Stairway Capital Mgt. II L.P. v Ironshore Specialty Ins. Co. op cit

(9) U.S. v. Shea, 15-MAG-1996, U.S. District Court, Southern District of New York (Manhattan).

(10) "Florida Couple Awarded 14.5 Million" http://www.insurancejournal.com/news/southeast/2015/11/177389224.htm

Jerome "Jerry" Trupin, CPCU, is a partner in Trupin Insurance Services located in Briarcliff Manor, NY. He provides property/casualty insurance consulting advice to commercial, nonprofit and governmental entities. He is, in effect, an outsourced risk manager.

Jerry has been an expert witness in numerous cases involving insurance policy coverage disputes and has taught many CPCU and IIA courses. Jerry has spoken across the country on insurance topics and is the co-author of over ten insurance texts used in CPCU and IIA programs including Commercial Property Risk Management and Insurance and Commercial Liability Management and Insurance. He regularly contributes articles to CPCU Society publication, the Insurance Advocate[R], and others. He can be reached at jtrupin@aol.com. Thanks to Jerry Trupin for this article and to the CPCU Society for letting us reprint it.
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Title Annotation:EXPOSURES & COVERAGES
Author:Trupin, Jerome
Publication:Insurance Advocate
Geographic Code:1U2NY
Date:Jan 25, 2016
Words:1049
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