Business Law Newsletter
| Publication year | 1980 |
| Pages | 1884 |
| Citation | Vol. 9 No. 9 Pg. 1884 |
1980, September, Pg. 1884. Business Law Newsletter
1884
A secured party who has a valid, perfected security interest in collateral under Article 9 of the Uniform Commercial Code may find that the security does not include insurance proceeds if the collateral is damaged or destroyed. Recent statutory changes to the Code still permit other persons who claim an interest in the collateral, perhaps including otherwise subordinate secured parties, to obtain the insurance funds free from the claim of a prior perfected secured party.
Prior to 1978, § 4-9-104(g) specifically excluded a "transfer of an interest in or claim in or under any policy of insurance" from Article 9 of the Code in Colorado.(fn1) Cases which were decided in other jurisdictions, interpreting the same statute, held that this exclusion prevented a secured party with a valid security interest in collateral under Article 9 from claiming a security interest in the proceeds of an insurance policy when the collateral was destroyed or damaged.(fn2)
Even cases that did not rely upon this specific exclusion of insurance policies from Article 9 concluded that destruction of or damage to collateral was neither a sale, exchange nor disposition of the collateral that would be included within the definition of "proceeds,"(fn3) so the secured party could not claim an interest in them.(fn4) Moreover, an insurance contract between the debtor and an insurer for a policy of insurance to protect collateral was considered to be a personal contract negotiated solely to protect the debtor from the loss of his goods.(fn5)
It is doubtful that the drafters of the Code intended to exclude funds paid by an insurer for lost or damaged collateral by the exclusion in § 4-9-104(g). More likely, the original intention was to prevent the creation of a security interest in an insurance policy by making the policy itself the collateral.(fn6) Consequently, many courts reasoned that, under certain circumstances, a secured party could claim an interest in the insurance funds payable when collateral was destroyed as "proceeds" within the meaning of the Code.
The secured party must have obtained an agreement that "proceeds" of the collateral were subject to the security interest.(fn7) Further, the security agreement must have required the debtor to insure the secured property for the benefit of the secured party.(fn8) Finally, the existence of a rider attached to the insurance policy which made the loss payable to the secured party "as its interest may appear" permitted the application of the insurance funds for the benefit of the secured party.(fn9) In...
To continue reading
Request your trial