Sixth Circuit Holds Bank’s Loss Payee Coverage Derivative
The United States Court of Appeals for the Sixth Circuit in Westfield Ins. Co. v. Talmer Bancorp, 545 Fed. Appx. 402 (6th Cir. Oct. 30, 2013) held that a secured party's insurance coverage rights under a loss payee provision are derivative of its borrower, and thus were extinguished when the borrower admitted fraud. The secured lender, Talmer Bancorp, Inc. (successor to People's State Bank), made a loan to Milan 2000 Furnishings, Ltd. that was secured by real estate and business inventory. In March 2008, Milan stated that burglars had vandalized the real property and stolen the business's inventory. Milan made a claim with its insurance carrier, Westfield Insurance Company, and submitted a fraudulent proof of loss when it failed to divulge that the inventory was subject to a security interest in favor of Talmer. Westfield paid the proceeds of the inventory loss to Milan. Talmer requested that the check be reissued to include Talmer as a joint payee. Westfield refused to reissue the check and filed a declaratory judgment action. The district court ruled in favor of Westfield, and Talmer appealed. On appeal, the Sixth Circuit held that Milan voided its coverage under the policy's terms when it falsified the proof of loss. The court also held that Talmer's rights were derivative and that Talmer had no independent right of recovery. Because of Milan's breach of the terms of its insurance policy, Talmer was foreclosed from receiving any of the insurance proceeds.