Ownership Not Required to Have an Insurable Interest

Every Interest in Property Where a Peril May Cause Damage to the Insured is an Insurable Interest

Insurance is a contract of personal indemnity. It does not insure property. Rather it insures the person insured against the risk of loss of described property. Therefore if a person is not named as an insured, that person may not recover regardless of his interest in the property. On the other hand, a person who has no ownership interest in property but would be damaged by its loss has an insurable interest.

In A.B. Petro Mart, Inc. v. Ali T. Beydoun Ins. Agency, Inc., Court of Appeals of Michigan, — N.W.2d —-, 2016 WL 4922684 (Sept. 15, 2016), the Michigan Court of Appeals was asked to determine who was entitled to recover under a policy and what is an insurable interest.

FACTS

A.B. Petro Mart, Inc. (Petro Mart) and Aref Bazzi (Bazzi) appeal the trial court’s order that granted summary disposition in favor of defendant Prime One Insurance (Prime One).

Plaintiffs filed this suit to recover insurance benefits related to the destruction of a gas pump at a gas station Petro Mart operated. There is no question that Petro Mart did not own the gas pumps—Bazzi did. Petro Mart instead operated the pumps in the course of selling gasoline at the gas station. There also is no dispute that Petro Mart insured the gas pumps with Prime One. The trial court granted summary disposition in favor of Prime One with respect to Petro Mart’s claim because it determined that Petro Mart did not possess an insurable interest in the gas pumps.

Pursuant to Michigan law, an insurance contract to protect an insured from loss of property is an indemnity contract for fortuitous events. In order to be entitled to indemnity under such an insurance contract, the insured must have an insurable interest in the property. In Michigan, as in most states, legal interest is not synonymous with insurable interest because an insured’s pecuniary interest in the insured property is sufficient to constitute an insurable interest.

This dispute arises from an incident where an automobile ran into and caused the destruction of one of the gas pumps located at the gas station in Detroit. The crash started a fire and destroyed the pump. Bazzi was the sole shareholder and owner of Petro Mart, and Petro Mart is the entity that operated the gas station. However, the gas pumps themselves were owned by Bazzi. Petro Mart insured the gas pumps by purchasing an insurance policy with Prime One, which provided, among other things, $30,000 in coverage for gas pumps. After the accident Prime One eventually declined coverage because it asserted that Petro Mart did not have an insurable interest in the gas pumps, as Bazzi—not Petro Mart—owned the pumps.

The trial court noted that there was no dispute that Bazzi owned the pumps and that Petro Mart merely operated them without any leasehold agreement.

ANALYSIS

Under the clear language of the policy, the only named insured is Petro Mart. While Bazzi signed the insurance application, he is not named anywhere in the policy itself. Indeed, the policy provides that “A B Petro Mart, Inc.” is the sole named insured. Thus, without being a party to the insurance contract, Bazzi cannot maintain a breach of contract claim against Prime One. It is clear that the contract itself did not provide any basis to conclude that Prime One undertook any promise directly to or for Bazzi. Because Bazzi is neither a party to the contract nor a third-party beneficiary, he cannot maintain his action for breach of contract against Prime One. Accordingly, the trial court correctly granted summary disposition in favor of Prime One against Bazzi.

Under Michigan law an insured must have an ‘insurable interest’ to support the existence of a valid insurance policy. The reason for this requirement is based on public policy concerns. Specifically, it arises out of the venerable public policy against “wager policies” that are insurance policies in which the insured has no interest, and they are held to be void because such policies present insureds with unacceptable temptation to commit wrongful acts to obtain payment. Michigan’s common law instructs that an “insurable interest” is not synonymous with “ownership.” Instead, an insurable interest can arise from any kind of benefit from the thing so insured or any kind of loss that would be suffered by its damage or destruction. Insurable interest may be defined as any lawful and substantial economic interest in the safety or preservation of the subject of the insurance free from loss, destruction, or pecuniary damage. An insurable interest may be derived by possession, enjoyment, or profits of the property, security or lien resting upon it, or it may be other certain benefits growing out of or dependent upon it.

In dismissing Petro Mart’s claim, the trial court principally relied upon the fact that Petro Mart did not have either an ownership or leasehold interest in the gas pumps. While it is true that Petro Mart had neither of these interests and was not responsible for the repair of the pumps, these facts, standing alone, do not preclude a finding of an insurable interest. One of the aspects of Petro Mart’s business was selling gasoline at the insured location. The court found it incontrovertible that Petro Mart had more than an incidental, pecuniary interest in the gas pumps. Petro Mart necessarily received income and profits from the use of the gas pumps, including the one that was destroyed in the accident.

To determine insurable interest, the insurer must determine whether the insured would suffer a direct, pecuniary loss from the property’s destruction. If the answer is “yes” then there is an insurable interest.

Without question Petro Mart would gain some advantage by the continuing existence of the gas pumps and, conversely, suffer some loss or disadvantage by the destruction of the pumps. Importantly, Petro Mart generated income from the sale of gasoline through the use of the pumps. The loss of one of those gas pumps results in a direct and actual pecuniary loss. The fact that Petro Mart was not financially responsible for repairing any damage to the pumps is not controlling—it still had a pecuniary interest due to the commercial business it operated. We note that while any lost business profits appear to not be recoverable under the insurance policy, this fact is immaterial in determining whether Petro Mart had an insurable interest in the gas pumps themselves. Because Petro Mart had a clear, substantial, and direct pecuniary interest in the pumps, the court concluded that it had an insurable interest in the damaged gas pump. Because Petro Mart’s ability to operate its gas station is financially affected by the functioning or non-functioning of the insured gas pumps, it had an insurable interest and the decision of the trial court, with regard to Petro Mart, was therefore reversed.

ZALMA OPINION

A professional insurer should know that ownership is not required to create an insurable interest. Since Petro Mart was damaged by the loss of the pump the determination of coverage should have been easy. Instead, the claim was denied incorrectly and the case had to go through summary judgment motions and an appeal to resolve an obvious issue. Of course, the problem could have been avoided by naming Bazzi as an insured on the policy. The insured, the broker who acquired the policy, and the insurer’s ignorance caused this lawsuit and none are without fault.