Rosario-Paolo, Inc. v. C & M Pizza Restaurant, Inc., 82 N.Y.2d 120 (1993)
An insurer who pays a claim to the insured after receiving notice of a third party’s equitable lien on the insurance proceeds does so at its peril and may be liable to the lienholder.
Summary
Rosario-Paolo, Inc. (plaintiff) sold a pizza restaurant to C & M Pizza Restaurant, Inc. (C&M), taking a security interest in the property. The security agreement required C&M to maintain fire insurance naming Rosario-Paolo as a beneficiary. C&M obtained a policy from Investors Insurance Company of America, Inc. (Investors) but failed to name Rosario-Paolo as a beneficiary. After a fire, Rosario-Paolo notified Investors of its security interest and claim to the insurance proceeds. Investors paid C&M directly. The New York Court of Appeals held that Investors, having received notice of Rosario-Paolo’s equitable lien, was liable to Rosario-Paolo for the proceeds up to the amount of its secured interest.
Facts
Rosario-Paolo sold a pizza restaurant to C & M on March 6, 1987. As part of the purchase price, C & M executed promissory notes for $63,000. A security agreement required C & M to insure the premises against fire and name Rosario-Paolo as a beneficiary. The agreement stipulated that in case of fire, insurance proceeds would be held in trust by Rosario-Paolo’s attorney to repair or replace damaged items. C & M filed a UCC-1 financing statement on April 9, 1987. C & M obtained an insurance policy from Investors on April 21, 1987, but failed to list Rosario-Paolo as a loss beneficiary. A fire occurred on January 19, 1988. Rosario-Paolo notified Investors by certified letter dated April 13, 1988, of its claim to any fire loss proceeds based on its security agreement. Investors issued a check for $49,598.52 to C & M on May 18, 1988, which C & M deposited into an individual account and refused to pay Rosario-Paolo.
Procedural History
Rosario-Paolo sued C & M and Investors. The Supreme Court granted summary judgment against C & M on default, denied summary judgment against Investors, and granted Investors’ cross-motion dismissing Rosario-Paolo’s claim against it. The Appellate Division affirmed. One Justice dissented, arguing that Investors should be liable because it had notice of Rosario-Paolo’s claim. The New York Court of Appeals reversed the Appellate Division’s order, granting Rosario-Paolo’s motion for summary judgment against Investors.
Issue(s)
Whether an insurer is liable to a third party who has an equitable lien on insurance proceeds when the insurer pays the insured despite having received notice of the third party’s claim.
Holding
Yes, because once an insurer has notice of a third party’s equitable claim to insurance proceeds, it pays the insured at its peril and assumes the risk of resisting the equity claimed by the third party.
Court’s Reasoning
The Court of Appeals reasoned that C & M’s covenant in the security agreement to insure the premises for Rosario-Paolo’s benefit created an equitable lien in favor of Rosario-Paolo on any insurance proceeds, up to the amount of its secured interest. Even though Investors had no duty to investigate the legitimacy of Rosario-Paolo’s claim, once it received notice of the claim, it was obligated to preserve the proceeds for the rightful owner. By paying C & M directly despite the notice, Investors assumed the risk of having to pay Rosario-Paolo. The court cited Cromwell v Brooklyn Fire Ins. Co., stating that Investors “assumed the hazard of resisting the equity claimed by the plaintiff.” The court distinguished McGraw-Edison Credit Corp. v Allstate Ins. Co., because in that case, the creditor lacked any legal or equitable claim to the policy proceeds. Here, the security agreement created a direct relationship and obligation. The court suggested that Investors could have protected itself by initiating an interpleader action to determine the rightful owner of the proceeds. The Court emphasized that C&M’s failure to name Rosario-Paolo as a loss beneficiary did not extinguish Rosario-Paolo’s equitable lien. The dissent in the Appellate Division was persuasive: Investors’ only obligation was to preserve the proceeds when confronted with conflicting claims.