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A Better Partnership
September 23, 2016

COA holds that insured party does not need legal interest in insured property to be indemnified

In A.B. Petro Mart, Inc. v. Prime One Insurance, No. 327481, the Michigan Court of Appeals held that under the insurable-interest doctrine, an insured party is not required to have a legal interest in or financial responsibility for any damages to the insured property in order to be indemnified under an aleatory indemnity contract.

This case arises out of an insurance claim filed by A. B. Petro Mart, Inc. with Prime One Insurance for indemnification of the costs associated with purchasing a gas pump after an automobile ran into and destroyed one of the gas station pumps located at a Detroit Petro Mart gas station.  Prime One declined coverage, asserting that although the insurance policy was in Petro Mart’s name, it did not have an insurable interest in the gas pumps as required under Michigan law because the gas station’s owner, Aref Bazzi—not Petro Mart—owned the covered gas pumps.

Petro Mart and Bazzi (“Plaintiffs”) subsequently sued Prime One for breach of contract and moved for summary disposition, asserting, among other things, that Prime One referred to Bazzi as the “insured” in its own files and therefore should have been precluded from arguing there was no coverage due to a lack of an insurable interest.  The Plaintiffs also contended that Bazzi was entitled to the claim proceeds under the contract because he was a third-party beneficiary.  The trial court denied Plaintiffs’ motion and granted summary disposition in favor of Prime One, finding that, with no legal ownership interest in the pumps and no obligation to repair the pumps, Petro Mart suffered no pecuniary loss and therefore did not have the necessary insurable interest to receive indemnification under the contract.  The trial court also determined that Bazzi was not a third-party beneficiary because nothing in the parties’ insurance policy demonstrated that Prime One directly promised to give something to or do anything for Bazzi.

On appeal, the Michigan Court of Appeals agreed with the trial court on the issue of whether Bazzi was a third-party beneficiary, reasoning that under Michigan precedent, a person is a third-party beneficiary of a contract only when a promisor under the contract has made a promise to or for the benefit of that person.  With no reference to Bazzi in the contract, the court held he was not a third-party beneficiary as a matter of law. 

On the issue of whether Petro Mart had an insurable interest in the gas pumps under the contract, the Court of Appeals reversed the trial court, holding that an insured party is not required to have a legal interest in or financial responsibility for any damages to the insured property in order to be indemnified under an insurance policy.  Relying on Michigan precedent, the appellate court held that an “insurable interest” is not synonymous with “ownership,” and that the salient question to ask when determining whether such an interest exists is whether the insured would suffer a direct, pecuniary loss from the property’s destruction.  Here, the appellate court answered the question in the affirmative, reasoning that one of the aspects of Petro Mart’s business was selling gasoline at the insured location.  Petro Mart would gain some advantages by the continuing existence of the gas pumps and conversely suffer loss by the destruction of them.  Therefore, the Court of Appeals reversed the trial court’s finding on this issue and remanded the action. 

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