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Insurer's Insurance Comes Before Creditor's Insurance in Case of Insurer Insolvency
Description Rhode Island high court held that the fund that insures insurance companies in case of their insolvency stood first in line to pay losses suffered by a homeowner whose property was damaged and whose insurance company was insolvent. The insurance held by the homeowner's mortgage company to cover uninsured losses does not have primary liability.
Topic Insurance
Key Words Exhaustion; Guaranty
C A S E   S U M M A R Y
Facts Lombardi owned a two-family house that was damaged by fire. Her insurance policy covered $75,000 for property loss plus $5,000 for debris removal. She owed $68,540 on the mortgage on the house. The bank that issued the mortgage was the loss payee. The fire caused damage in excess of the policy limits. Her insurer was insolvent. The Insurer's Insolvency Fund (Fund) was sued by Lombardi to cover the loss. The bank had a Lloyd's of London policy that covered losses in instances such as this. The Fund was ordered to pay Lombardi the full value of the policy. The Fund appealed, contending that Lloyd's was liable up to the value of the mortgage.
Decision Affirmed. "We refuse to require an insured who has made timely premium payments, and who suffers a loss under the policy, to first exhaust the insurance of his or her creditor." The Fund exists to step in as if the insurance company was solvent; it may not attempt to cast the burden on another party. The fact that the bank will get most of the insurance money does not mean that Lombardi does not have a substantial interest in the matter and is not a real party to the suit. She bought the policy and paid for it. Her interests were not forfeited because her name did not appear as "loss payee" on the contract.
Citation Lombardi v. Rhode Island Insurers' Insolvency Fund, 751 A.2d 1275 (Sup, Ct., R.I., 2000)

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