Sadly, sometimes tragedy strikes, as it did for the Montreal Maine & Atlantic Railway Ltd. in July, 2013, when one of its trains carrying crude oil derailed and exploded, resulting in 47 deaths, significant property and environmental damage, and the bankruptcy of the Railway. The Railway had a business interruption insurance policy, a settlement was reached with the insurer and the question of who was entitled to the multi-million-dollar settlement arose in the bankruptcy. In re Montreal Maine & Atlantic Ltd., 2014 Bankr. LEXIS 1628. 59 Bankr. Ct. Dec. 101 (Bankr. D. Me. 2014). 

One of the Railway’s creditors (“SP”) held a security interest in all of Railway’s accounts, inventory and payment intangibles, and SP argued that it should be entitled to the business interruption insurance proceeds. SP did not get an assignment of the insurance policy or its proceeds, but argued that its security interest in accounts and payment intangibles picked up the settlement proceeds.

The Court disagreed, noting that Article 9 by its terms does not apply to “a transfer of an interest in or an assignment of a claim under a policy of insurance” subject to limited exceptions for health-care-insurance receivables and proceeds. The Court found that SP had not obtained an assignment of the insurance or its proceeds, and that SP had not perfected a common law lien, apparently available in Maine at least, by taking possession of the policy.

SP argued that the Court should distinguish between a claim under a policy of insurance (which it argued was the process the insured must take to get paid), and the right to payment that arose when the casualty occurred. There are of course other instances where a security interest attaches to proceeds of an asset not subject to a security interest (e.g. when a secured party has a security interest in accounts but not inventory, or in payment intangibles but not all general intangibles). But the Court held, properly in the author's view, that Article 9’s insurance exclusion controlled.

SP and the Court may have missed an important argument, however.  Article 9’s exclusion for insurance has two exceptions; one for health-care-insurance receivables and one for proceeds. To the extent insurance rights are proceeds of other Article 9 collateral, a secured party with a security interest in such other collateral would have an Article 9 security interest in the insurance rights under Sections 9-315 and 9-322. The definition of proceeds in Section 9-102(a)(64)(E) includes “to the extent of the value of collateral and to the extent payable to the debtor or the secured party, insurance payable by reason of the loss or nonconformity of, defect or infringement of rights in, or damage to, the collateral.” SP might have been able to show that the value of its accounts, inventory and payment intangible collateral was adversely affected by the tragic accident. Doesn't business interruption insurance compensate for the loss of a steady stream of profits, which are part of the lender's accounts and payment intangibles collateral? 

It is not clear if the “insurance policy is proceeds” argument was raised in the case. It was not addressed in the decision and perhaps it should have been.