Filed Under:Agent Broker, Coverage Issues

Up in flames: Who gets paid?

9th Circuit rules on who can keep the insurance proceeds after a fire

Just because a policyholder has insurance doesn't mean he will automatically get the payout in the event of a loss. (Photo: Shutterstock)
Just because a policyholder has insurance doesn't mean he will automatically get the payout in the event of a loss. (Photo: Shutterstock)

The U.S. Court of Appeals for the Ninth Circuit has ruled that a bank was entitled to keep the insurance proceeds payable after its borrower's property had burned down, and it did not have to turn them over to him to rebuild.

The Case

After Michael Music's property burned down, Bank of America (“BoA”), which had a lien on the property, received the insurance proceeds.

Because Mr. Music was in default on his loan, BoA refused to transfer the insurance proceeds to him for purposes of rebuilding, instead opting to credit the proceeds against the outstanding balance owed on the loan.

Mr. Music sued BoA for breach of contract and breach of the implied promise of good faith and fair dealing. He contended that, under the terms of the deed of trust, insurance proceeds should be applied for purposes of restoration or repair, unless restoration or repair would be economically infeasible or BoA's security would be lessened. According to Mr. Music, BoA had violated this provision by refusing to allow the proceeds to be used by him for rebuilding.

The U.S. District Court for the Northern District of California dismissed Mr. Music's complaint, and he appealed to the Ninth Circuit.

The Ninth Circuit's Decision

The circuit court affirmed.

In its decision, the Ninth Circuit rejected Mr. Music's claim for two reasons. First, the circuit court observed, under California law, a party claiming breach of contract either must have performed on the contract or have a legally valid excuse for non-performance.

Mr. Music's failure to make payments meant that he had not performed, the circuit court said. Moreover, it observed, he had not pleaded a legally valid excuse for non-performance. Although the fire made it more difficult for Mr. Music to make his payments, “[m]ere difficulty or unusual or unexpected expense will not excuse a party for failing to comply with the terms of his contract.” The circuit court ruled that, for this reason alone, Mr. Music's breach of contract claim failed.

The circuit court said that there also was another reason his claim of breach failed: Given Mr. Music's default, BoA's security would be lessened if it had to transfer the insurance proceeds to him and it had to “defer foreclosure indefinitely” while Mr. Music rebuilt.

The case is Music v. Bank of America, N.A.,No. 16-15036 (9th Cir. Oct. 23, 2017).

Steven A. Meyerowitz, Esq., ( is the director of FC&S Legal, the editor-in-chief of the Insurance Coverage Law Report, and the founder and president of Meyerowitz Communications Inc.

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