Lack of Insurable Interest Dooms Law Firm’s Coverage Claim

A federal district court in Alabama has ruled that a law firm did not have an insurable interest in a commercial building that was destroyed by fire and it therefore granted summary judgment in favor of the insurer that had issued commercial liability and property insurance policies for the building.  

The Case

Guster Law Firm, LLC, through its principal and sole member, Eric Guster, an attorney and a licensed real estate agent, applied for commercial liability and property insurance policies for a commercial building. About one month after the policies were issued, a fired destroyed the insured property and Guster Law submitted a claim for $446,835, plus $30,000 for demolition.

The insured property, however, was owned by Guster Properties, LLC. The insurer filed an action against Guster Law and asserted that it was entitled to summary judgment because Guster Law had no insurable interest in the property at the time of the loss. Guster Law countered that it had an insurable interest, or, alternatively, that the court should reform the insurance contracts to substitute Guster Law for Guster Properties.

The Court’s Decision

The court first ruled that reformation was inappropriate, explaining that Eric Guster had testified that he had applied for the policies on behalf of “Guster Law Firm, LLC,” even though Guster Properties owned the property and was a separate legal entity from Guster Law. To reform the contracts under these facts, the court said, would require that it ignore the actual applications and evidence that the insurer believed that Guster Law owned the property because Mr. Guster had listed it as the named insured.

According to the court, Guster Law had committed a unilateral mistake when it named Guster Law as the insured and Guster Law had provided “no acceptable evidence” that the insurer had knowledge of this alleged mistake. The court observed that Mr. Guster was an attorney and a sophisticated businessman who had entered into an arm’s length agreement with the insurer for the policies on behalf of Guster Law, and ruled that he could not “now claim that he intended to obtain the policies for Guster Properties and that the court should overlook his unilateral mistake and reform the contract.”

The court also decided that Guster Law did not have an insurable interest in the property even though Eric Guster owned both companies, holding that sharing a common owner with Guster Properties did not mean that Guster Law had an insurable interest in property owned by Guster Properties. It reasoned that Guster Law was not occupying the insured property, had not taken a loan out related to the property, and had not invested any money in the improvements made to the property. That the two entities shared a common principal did not eliminate the fact that they were two separate legal entities, the court found. Moreover, it added, although Eric Guster, doing business as Guster Law, was arguably acting as an undisclosed gratuitous agent for Guster Properties, because he failed to disclose the true ownership of the property, Guster Law had no insurable interest in the property.

Accordingly, the court found that Guster Law had failed to provide evidence sufficient to prove that it had an insurable interest. It granted the insurer’s motion for summary judgment.

The case is Nationwide Mutual Fire Ins. Co. v. Guster Law Firm, LLC, No. 2:11-cv-1183-AKK (N.D. Ala. March 28, 2013).