Phillips Nizer LLP Articles

No Records, No Coverage: A Lesson for Insurers and Their Secured Lenders

A recent summary judgment decision affirmed summarily by the Second Circuit holds important lessons for holders of property insurance policies as well as their secured lenders. 6247 Atlas Corporation and the Merchants Bank of New York v. The Marine Ins. Co., Ltd. et al., 923 F. Supp. 523 (S.D.N.Y.), aff'd, 104 F.3d 352 (2d Cir. 1996), involved a burglary loss by a jewelry manufacturer. The secured lender, Merchants Bank, was a "loss payee" under the jeweler's property policies.

The Court held that there could be no recovery under the insurance policies because the insured's books and records did not satisfy the "sales and transactions" clause in the policy. That clause required the insured to keep detailed records for inspection by the insurer in case of a claim.

In finding the records wanting, the Court held that clause

"mandates that 'the records in and of themselves should be sufficient to disclose to the insurer the extent of its liability independently of any need to resort to evidence outside the records to explain the records other than might be necessary to disclose the bookkeeping methods employed' [citations omitted]."

The secured lender argued to no avail that its borrower's books and records were detailed enough to establish a loss in excess of the amount of coverage, even though they were not sufficiently detailed to calculate the exact amount of the loss and that, in any event, it was not the custom and practice of the jewelry industry to keep detailed records. The Court disposed of this argument by pointing out that several important transactions had not been recorded at all, that certain other transactions were falsified and certain invoices were missing.

The teaching of this case for insureds and for secured lenders who rely on property insurance as additional security for their loans is to require the borrower to maintain records which comply with its relevant insurance policy provisions and to conduct periodic audits of those records to insure that they are being maintained in a manner so as to permit exact calculation of a loss in the event a claim needs to be made.