92 N.Y.2d 790 (1999)

An insurance carrier is not liable in conversion to a secured creditor of its policyholder for paying out insurance proceeds directly to the policyholder, even if the creditor has filed UCC-1 financing statements covering the destroyed collateral, absent actual notice to the carrier of the creditor’s security interest.

Summary

The landlords (Badillos) of a supermarket sued the supermarket’s insurer (Tower Insurance) after Tower paid fire loss proceeds directly to the tenant (the supermarket), who was the policyholder and loss payee. The Badillos claimed Tower should have paid them as security interest holders, based on UCC-1 filings. The New York Court of Appeals held that Tower was not liable to the Badillos because the UCC-1 filing did not constitute sufficient notice to the insurance company; actual notice is required to impose a duty on the insurer to protect the secured party’s interest. This decision balances the UCC’s notice filing system with the need for efficient claims processing in the insurance industry.

Facts

The Badillos, as landlords, granted a security interest to 75-27 B & F Supermarket, Inc. (B & F) in all personal property, goods, chattels, and insurance proceeds at the supermarket to secure B & F’s obligations as a tenant. The Badillos filed UCC-1 financing statements describing the secured collateral. A fire destroyed the supermarket less than a year later. B & F carried casualty insurance with Tower Insurance. The Badillos were not named in the policy. B & F submitted a proof of loss, and Tower paid approximately $70,000 to B & F.

Procedural History

The Badillos sued Tower Insurance for conversion, alleging Tower should have paid them instead of B & F. Supreme Court initially denied Tower’s motion to dismiss. The Appellate Division affirmed. Later, Supreme Court denied the Badillos’ motion for summary judgment. The Appellate Division reversed and granted summary judgment to the Badillos, holding that the UCC-1 filings gave Tower constructive notice of the Badillos’ interest. Tower appealed to the New York Court of Appeals.

Issue(s)

Whether an insurance carrier, by paying fire loss proceeds to its policyholder, is liable in conversion to the policyholder’s landlords who had filed UCC-1 financing statements covering the destroyed collateral, when the insurance carrier had no actual notice of the landlord’s security interest.

Holding

No, because the UCC-1 filing, without more, did not alter Tower’s obligation to pay the proceeds to its insured, B & F. The Court distinguished between constructive notice (through UCC filings) and actual notice, requiring the latter to impose a duty on the insurer.

Court’s Reasoning

The Court of Appeals distinguished this case from Rosario-Paolo, Inc. v C & M Pizza Rest., where the carrier was liable to a third party because it had actual notice of their interest before paying the insured. Here, the Badillos only filed UCC-1 statements. The insurance contract was solely between B & F and Tower, obligating Tower to pay B & F. The Court stated that the UCC’s notice-filing concept is to warn potential purchasers, transferees, or other creditors, not to create an obligation for insurance carriers to conduct UCC searches before paying claims. The Court acknowledged UCC 9-306(1), which expands the definition of “proceeds” to include insurance payments, but clarified that this amendment affects only the rights between the debtor and creditor, not between the creditor and the insurance carrier, absent actual notice. Imposing a duty to search UCC filings would complicate and delay claim payments. The court analogized the insurance carrier to an account debtor protected under UCC 9-318(3) when making payment without actual notice of an assignment. The court suggested that the secured party could have protected its interests by being named as a loss payee or additional insured in the policy. The Court quoted UCC 9-303 Comment 1 stating that “A perfected security interest may still be or become subordinate to other interests * * * but in general after perfection the secured party is protected against creditors and transferees of the debtor and in particular against any representative of creditors in insolvency proceedings instituted by or against the debtor”.