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Teague-Strebeck Motors Inc. v. Chrysler Insurance Co.3/8/1999
is $31,748.12 more than the actual value of the insured property. Such overcompensation poses a moral hazard.
{54} It is worth noting how this moral hazard would have been avoided if the Purchase Agreement had been approved by the bankruptcy court. In that event, the bank could have collected at most $50,000 on its insurance, because its financial interest in the property would have been limited to what it would receive out of the $50,000 purchase price. See City of Carlsbad, 81 N.M. at 59, 463 P.2d at 35. Also, the insurance proceeds received by the bank would have been credited to the purchase price because Mills-Strebeck bore the risk of loss to the property. See Berlier, 94 N.M. at 135-36, 607 P.2d at 1153-54. Finally, that credit would have been subtracted from the value of the property to set the maximum recovery allowable on Mills-Strebeck's own policy. See Whitten, 534 N.E.2d at 1175. (For present purposes, we ignore the special considerations that would arise if Mills-Strebeck were entitled to replacement costs under its policy. See Keeton & Widiss, supra, ยง 3.9(g).)
{55} What is the appropriate means of avoiding the moral hazard here? There is no ground to reduce the payment to the bank. Until the bankruptcy court approved the Purchase Agreement (which would reduce the amount that the bank could recover on its lien to a portion of the $50,000 sale price), the bank's loss would equal the value of its lien on the destroyed property. Cf. City of Carlsbad. Hence, the bank should receive the entire $81,748.12. The absence of an enforceable contract of sale also precludes any requirement that the bank apply the insurance proceeds to the $50,000 purchase price for the benefit of Mills-Strebeck. Cf. Berlier. Perhaps the insurance payments to the bank and to Mills-Strebeck could both be reduced proportionately so that the total came to $300,000. But that would be unfair to the bank, which had a valid lien, as compared to Mills-Strebeck's mere expectancy. In our view, the equitable result is to permit the bank to retain the insurance proceeds of $81,748.12 and to adjust Mills-Strebeck's insurable interest accordingly. The fairness of this result may become more apparent if one considers what would have happened if Tucumcari Chevrolet-Geo, as well as Mills-Strebeck, had been fully insured with respect to the property at the time of the fire, when Tucumcari Chevrolet-Geo still bore the risk of loss. Tucumcari Chevrolet-Geo would have received $300,000 in insurance proceeds and would have had no obligation to pay any of that sum to Mills-Strebeck. In that event, Mills-Strebeck would not be entitled to collect any insurance proceeds on the property. As between the prospective seller and the prospective buyer, the proceeds should certainly go to the seller, who bore the risk of loss until the Management Agreement was approved by the bankruptcy court. Just as Mills-Strebeck's interest in recovering on its insurance policy should yield to the interests of the owner who bore the risk of loss, it should yield to the lienholder bank that bore a similar risk. The reduction in insurance proceeds necessary to avoid moral hazard should be borne by Mills-Strebeck. In short, the $31,748.12 excess of the bank's insurance recovery over the $50,000 purchase price must be subtracted from Mills-Strebeck's recovery from Chrysler, to prevent total insurance recovery from exceeding $300,000.
{56} There is, however, one further complication. Mills-Strebeck contends that the insurance recovery by the bank has already been taken into account in stipulations entered into between the parties. That may be so. But the record on that point is not clear to us. We therefore remand for a determination of the
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