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Insurance carriers are not responsible if a bank improperly cashes a check made out to two insureds and gives the proceeds to only one of them, a federal appeals court decided this week.

The U.S. 11^th Circuit Court of Appeals on Wednesday reversed a lower federal court’s ruling and held that Markel American Insurance Co. had upheld its obligation when it issued joint checks for $573,404 made payable to two insured truck-leasing firms in Florida.

“Markel American agreed to provide coverage and payment for negotiated claims. It did not, however, agree to assume responsibility for the bank’s lack of diligence in paying a draft,” 11^th Circuit Judge Barbara Lagoa wrote in the three-judge panel’s Oct. 30 opinion.

The insured leasing company that missed out on the payment should sue the bank, not the insurance company, the judges noted.

It all began several years ago. From 2016 to 2018, VFS Leasing Co., affiliated with Volvo Financial Services, leased trucks to Time Definite Leasing, a Florida company that is now in bankruptcy protection. TDL was required under the contract to insure the trucks and to name VFS as an additional insured or as a loss payee, the court explained.

TDL did that, obtaining coverage through Markel American, along with certificates of insurance listing VFS as a certificate holder. After some of the trucks sustained damage, Markel paid the claims and wrote checks that were correctly made payable to both TDL and VFS. The check was apparently sent to TDL, and the bank, JPMorgan Chase, cashed the check.

TDL, which entered bankruptcy in 2019, never forwarded a share of the insurance proceeds to VFS, the court explained.

VFS then filed suit against Markel, arguing that the insurer had breached the insurance contract and had not actually paid the claim, since one of the insureds never saw the money.

The district court agreed. Markel appealed and the appellate judges said the case turned on the Uniform Commercial Code, adopted by most states and codified by Florida in several statutes. One section of the law states plainly: “If a draft is accepted by a bank, the drawer is discharged, regardless of when or by whom acceptance was obtained.”

But another section notes that if an instrument “is payable to two or more persons not alternatively, it is payable to all of them and may be negotiated, discharged, or enforced only by all of them.”

Case law on the question is thin. The U.S. 7^th Circuit and Illinois state courts have found that the UCC discharges a payer’s duty when the check is accepted by a bank. But in a Texas case involving a State Farm insurance company, the Texas Supreme Court in 2014 reached the opposite conclusion.

Ultimately, the 11^th Circuit said the 7^th Circuit’s Illinois decision was most on-point.

Under Florida’s commercial code statute, “the bank’s acceptance of the draft discharged Markel American’s performance obligation on the claim,” the appeals court wrote. “In effect, VFS seeks to impose upon an insurer a duty of performance that exceeds the insurer’s obligations under the insurance contract.”

The decision should give insurers, at least in Florida, some measure of comfort, knowing that they likely will not have to face similar suits in the future. It follows a similar ruling by Florida’s Fourth District Court of Appeals, a state-level appellate court, in 2022. That year, the majority of the DCA’s panel found that United Property & Casualty Insurance Co. had fulfilled its obligation in an assignment-of-benefits claim when it made a check out to both the insured and a restoration contractor.

Related: SageSure, Markel Collab to Expand Capacity in Coastal States

Topics Carriers