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Teague-Strebeck Motors Inc. v. Chrysler Insurance Co.3/8/1999
' recovery from their insurer. See id. at 1175. The Whittens could therefore collect only $19,000. See id. at 1176. The court wrote:
"Public policy considerations preclude an award to plaintiff of the amount of the policy. We cannot encourage future fraud on insurance companies. Such a decision might well provide an incentive for an unscrupulous home buyer to insure the property to be purchased, burn it, pay a reduced price for it, and then recover fully under the insurance policy. Further, allowing the full policy amount in this case would unjustly enrich the plaintiffs, another result public policy will not allow." Id. (We should add that we are not certain that we agree fully with Whitten. It is not clear to us why the bank's insurance recovery of $51,000 was subtracted from the $70,000 policy limit rather than from the value of the property-which may have been greater or less than $70,000. The concerns expressed in the quoted paragraph would not arise so long as the total recovery by the bank and the Whittens is less than or equal to the property's value.)
{49} We now turn to the special case before us on this appeal. There was no enforceable contract of sale at the time of the fire because the bankruptcy court had not approved the transaction. The parties have not provided, nor have we found, precedents that address specifically the potential problem of overcompensation in this context. Nevertheless, the objective of avoiding moral hazard provides sufficient guidance to determine the applicable law.
{50} First, we consider the effect of the $50,000 purchase price. If the contracts between Mills-Strebeck and Tucumcari Chevrolet-Geo had been enforceable, the purchase price would be irrelevant to the determination of the extent of Mills-Strebeck's insurable interest. Because the Management Agreement provided that Mills-Strebeck bore the risk of loss, Mills-Strebeck would owe the $50,000 to the bankruptcy estate and would be entitled to recover $300,000, the full value of the destroyed dealership property. See Berlier, 94 N.M. at 135-36, 607 P.2d at 1153-54. Here, however, at the time of the fire, Mills-Strebeck apparently had no legal obligation to pay the $50,000 to anyone. Therefore, recovery of the $300,000 would place Mills-Strebeck in a better financial position than if the purchase had been consummated. It would obtain the $300,000 value of the property without bearing any obligation to pay the $50,000 purchase price. The moral hazard is apparent. In the absence of any obligation by Mills-Strebeck to pay the $50,000, its recovery under the property insurance-its insurable interest in the dealership property-must be reduced by $50,000.
{51} Second, Chrysler argues that we must also take into account a bank lien of $89,579.75 on the dealership property at the time of the fire. To protect its lien, the bank acquired insurance on the dealership property. After the fire the insurer paid the bank $81,748.12.
{52} The lien in itself does not affect Mills-Strebeck's insurable interest. The Purchase Agreement provided that Mills-Strebeck would acquire the dealership property "free and clear of all liens and encumbrances." The existence of liens on the property prior to consummation of the sale would therefore be irrelevant to Mills- Strebeck's financial interest in the property.
{53} But the insurance payment to the bank presents problems. To the extent that the insurance recovery by the bank exceeded the $50,000 purchase price, the insureds-Mills-Strebeck and the bank-taken together could be better off after the fire than before. If Mills-Strebeck were to recover $250,000, the total recovery by the two insureds would be $331,748.12, which
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