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Law Column

April 2009 Law Column

WHO HOLDS THE INSURED INTEREST IN A LEASE CONTRACT RECEIVABLE ?

André Ramier, lawyer

The Superior Court was asked to answer this question in the matter of Érostable inc. (Trustee) J.E. 2009-246.

In this case a lease contract receivable had been signed between Érostable inc. and John Deere Credit for certain equipment, including an excavator. The lease between the two parties included an obligation for the lessee to take out an insurance policy in favour of and in the name of the lessor.

Although Érostable did take out an insurance policy, John Deere was not named in the policy as the insured party.
In September 2007, the excavator was stolen and two months later, before the insurance benefit was paid, Érostable declared bankruptcy.

John Deere sought recourse from the trustee, claiming the amount of the insurance benefit, but the claim was refused. The trustee in bankruptcy argued that the amount was part of the trust estate in bankruptcy and that John Deere had no guaranteed right to the amount because John Deere had not been named as the beneficiary of an insurance policy.

The insurance company acknowledged that the indemnity was payable and asked the court to decide to whom the amount should be paid.

The Superior court issued a judgment in favour of John Deere.

The judge first noted that a trustee does not acquire more rights than the bankrupt person or company. The excavator was never part of the estate in bankruptcy. The judge ruled that the powers of the trustee were limited to managing issues related to the creditors and the assets of the estate in bankruptcy, and did not include resolving an issue regarding a right between and creditor and a third party. Therefore it was not the role of the trustee to decide to whom the insurance indemnity should be paid.
Therefore who held the insured interest in the excavator?

The judge concluded that the finance lessor was the only party directly and adversely affected by the theft of the excavator and therefore should receive the insurance compensation. The only concern of Érostable was to provide for a third party in the insurance contract, which they did by agreeing in their lease to obtain an insurance policy in the name of John Deere. The insurance compensation was therefore to be paid to John Deere.

Finance lessors should ensure an insurance clause is included in the leases they approve.