The US District Court for the Northern District of Illinois has decided that despite denying a claim and later offering to pay it, the insurers offer satisfied its obligations under the policy. The case is Berkshire Hathaway Homestate Ins. Co. v. Chi. Metro. Hosp., No. 17 C 9370, 2020 U.S. Dist. LEXIS 81 (N.D. Ill. Jan. 2, 2020).
Chicago Metropolitan (Chicago Metro) owned a building in Chicago that once held the Sacred Heart Hospital, known as the Property herein. In 2014 the mortgagees Robert and Kathleen Dieleman (the Dielemans) lent Chicago Metro $500,000, secured by a mortgage on the Property and three other parcels of land. Berkshire Hathaway Homestate Insurance Company (Berkshire) issued a $7,500,000 commercial property insurance policy to Chicago Metro covering the Property between September 2016 to September 2017. The policy listed the Dielemans as loss payees, and provided that under certain circumstances the Dielemans could be entitled to coverage even if Chicago Metro was not.
In June 2017 a fire occurred at the Property, and two days later Chicago Metro submitted a claim to Berkshire under the Policy. Later, the Dielemans sent Berkshire a letter asserting a first-priority lien on any proceeds that came from Chicago Metro's claim, on the mistaken belief that they had not been identified as payees of the policy. Berkshire denied Chicago Metro's claim asserting that Chicago Metro was ineligible for coverage for failing to maintain an automatic fire alarm. The Dielemans letter was not mentioned.
After denying coverage, Berkshire filed an action for declaratory judgment and the Dielemans counterclaimed for breach of contract and bad faith. Berkshire's attorney informally asked the Dielemans' attorney to provide documentation about the loan and mortgage. The response showed that two of the other parcels subject to the mortgage had been sold and the proceeds had not been credited to the loan balance, so Berkshire asked for more information. The Dielemans told Berkshire that they had filed a foreclosure complaint against Chicago Metropolitan.
Further discovery showed that Chicago Metropolitan had substantially paid down the loan with the Dielemans, and owed $504,357 at the time of the fire, and at the time the Dielemans mailed their letter, but at the time of discovery only owed $401,094. Berkshire offered to pay the Dielemans the then-current balance of $401,094 in exchange for the note. The Dielemans rejected the offer contending that Berkshire should pay the $504, 357 that was due at the time of the fire. Each party filed for summary judgment.
The policy language is as follows.
"b. For Covered Property in which both [you,i.e. Chicago Metropolitan] and a Loss Payee have an insurable interest:
3. If we deny your claim because of your acts or because you have failed to comply with the terms of the Coverage Part, the Loss Payee will still have the right to receive loss payment if the Loss Payee:
(a) Pays any premium due under this Coverage Part at our request if you have failed to do so;
(b) Submits a signed, sworn proof of loss within 60 days after receiving notice from us of your failure to do so; and
(c) Has notified us of any change in ownership, occupancy or substantial change in risk known to the Loss Payee.
All of the terms of this Coverage Part will then apply directly to the Loss Payee.
(4) If we pay the Loss Payee for any loss or damage and deny payment to you because of your acts or because you have failed to comply with the terms of this Coverage Part:
(a) The Loss Payee's rights will be transferred to us to the extent of the amount we pay; and
(b) The Loss Payee's rights to recover the full amount of the Loss Payee's claim will not be impaired.
At our option, we may pay to the Loss Payee the whole principal on the debt plus any accrued interest. In this event, you will pay your remaining debt to us."
Under the endorsement language, if Berkshire pays the Dielemans and not Chicago Metropolitan, Berkshire effectively buys the debt from the Dielemans and succeeds to their rights against Chicago Metropolitan. So, if Berkshire pays off the Dielemans in full, the Policy provides that Chicago Metropolitan will pay its remaining debt to Berkshire. The endorsement also caps the Dielemans' potential recovery at "no more than the applicable Limit of Insurance on the Covered Property."
The dispute centers on whether the Policy requires Berkshire to pay the $500,000 owed at the time of the loss or the $400,000 owed at the time of the suit. The Dielemans argue that the Policy requires Berkshire initially to value the claim at the time of the loss, with which the court agreed. The court also agreed with Berkshire that other policy provisions permit Berkshire to reduce the claim if Chicago Metro's indebtedness to the Dielemans is later reduced. The Dielemans argue that Berkshire will The Dielemans argue that Berkshire should not be entitled to take their rights under the Note and Mortgage because Berkshire breached the policy.
The court sided with Berkshire, and allowed its motion for summary judgment.
Editors Note: Although the Dielemans were owed $500,000 at the time of the loss, the court determined that Berkshire only owed them the $400,000 owed at the time of discovery. Had Berkshire assumed the Note and Mortgage at the time of the loss, it would have been responsible for the whole $500,000 worth of losses, but it would have presumably received that $100,000 of principal that Chicago Metro had since paid to the Dielemans, so Berkshire's payment to the Dielemans of $400,000 satisfied its obligation.
The purpose of insurance is to make the insured whole again after a loss, not provide the insured with more than they started out with.