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Teague-Strebeck Motors Inc. v. Chrysler Insurance Co.3/8/1999
limited interest. In City of Carlsbad v. Northwestern National Insurance Co., 81 N.M. 56, 463 P.2d 32 (1970), the City, which had an insurable interest in the destroyed property, was not entitled to recover its full value. The City owned a building at the airport which had been appraised at $4000 in February 1967. Later in the year the City requested bids for the purchase and removal of the building from the airport. On December 11, 1967, the City accepted a bid for $300. Eleven days later fire destroyed the building. The successful bidder cleared the property but never paid the $300. Although the district court valued the building at $3000, our Supreme Court wrote:
"The general rule . . . is that the insured with only a limited interest cannot recover the full value of the property destroyed but is limited to the value of his actual interest therein. At the time of the fire the [City's] interest was in receiving the $300.00 in payment for the building and in having the building and all rubbish and debris cleared . . . ." Id. at 59, 463 P.2d at 35 (citations omitted). The court held that the City could recover only $300 on the policy. See id.
{47} A second rule stated by our Supreme Court is that as between a buyer and seller with interests in the same property, "the party who bears the risk of loss is entitled to any and all insurance proceeds, less an offset for the amount required to reimburse the payor of the premiums, regardless of who contracts for the coverage." Berlier v. George, 94 N.M. 134, 135-36, 607 P.2d 1152, 1153-54 (1980). In that case the Berliers reached an agreement to buy George's ranch for $445,000, payable in installments. The house on the ranch was destroyed by fire, at a time when the risk of loss had already shifted to the Berliers. In accordance with the purchase contract, the Berliers had obtained $10,000 in fire insurance on the house; George had paid additional premiums to raise the coverage to $30,000. See id. at 135, 607 P.2d at 1153. The parties agreed that the first $10,000 of the $30,000 coverage should be paid to the holder of the first mortgage on the house. George contended that the remaining $20,000 should go to him. The Berliers successfully argued that the $20,000 should be credited to the purchase price. See id. Otherwise, George would have received a windfall, since the Berliers still owed the balance due on the purchase price. If George had retained the insurance proceeds for himself, without crediting them to the purchase price, he would have benefitted financially from the fire. The prospect of such a result would pose a moral hazard.
{48} Even after application of the Berlier rule, moral hazard can arise if the total insurance coverage acquired by the buyer and seller exceeds the value of the destroyed property. A third rule limits the total recovery of all insureds to the value of the property. This rule is illustrated by the circumstances in Whitten v. Cincinnati Insurance Co., 544 N.E.2d 1169 (Ill. App. Ct. 1989). The Whittens had a contract with a bank to purchase a home for $67,500, but the house burned down before closing on the sale. See id. at 1170. The Whittens had obtained a $70,000 fire insurance policy on the house, while the bank had a $56,000 policy. See id. at 1171. The bank recovered $51,000 (the policy limit less a $5,000 deductible). Although the parties terminated the original sales contract, see id., the bank later sold the property to the Whittens for $16,500, see id. at 1173. (In effect, the bank's insurance recovery was credited to the purchase price, as in Berlier.) The appeals court held that the $51,000 received by the bank should be subtracted from the $70,000 policy limit to calculate the Whittens
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