Author(s): Karen Libertiny Ludden

In this Commfax, the use of Article 9 Security Interests are examined in the context of settlements involving insurance proceeds.

DO INSURERS EVER NEED TO CONCERN THEMSELVES WITH THE UCC?]

Financing statements: those pesky critters, are showing up in settlements involving insurance proceeds. What does the Uniform Commercial Code have to do with insurance settlements? Didn’t the Court of Appeals recently conclude that insurance contracts are not “goods” and therefore not covered by the UCC?

In Klapp, the Michigan Court of Appeals confirmed what insurers have assumed for years: that an insurance contract is not a “good,” and, therefore not covered by Article 2 of the UCC, which governs the sale of goods. Klapp v United Ins Group Agency, 259 Mich App 467, 470 (2004), on remand. But there are nine Articles in the UCC and the last one is making inroads into the world of insurance. Here’s why.

Lately, insurers doing business in Michigan have been taking advantage of Article 9 of the UCC. For example, in settlements of catastrophic claims arising under the Michigan No-Fault Act, the statute only mandates that insurers pay reasonable charges for reasonably necessary products, services and accommodations for an injured person’s care, recovery, or rehabilitation. MCL 500.3107(1)(a). It says nothing about purchasing and handing over ownership of $90,000 worth of durable medical equipment for home use, particularly when the insured might only need the equipment for a finite period of time. So, insurers are including clauses in their settlements retaining their ownership of the equipment, with use by the insured for the medically-necessary time period. The investment can save money at both ends; by reducing the amount of costly hospitalization, and by maintaining ownership in expensive equipment and custom vehicles that will be valuable for years.

In the context of a commercial policy which is ambiguous as to how to compensate for destroyed or damaged large equipment (which is often subject to a financing security interest), a settlement might be reached whereby the insurer purchases the replacement equipment for use by the insured during a finite period of time but retains ownership. This facilitates a prompt settlement that satisfies the insured and can be worth the extra trouble of holding such assets.

Enter Article 9.
In general, Article 9 of the UCC casts a pretty wide net. It generally applies to any interest, regardless of its form, in personal property and fixtures, created by contract. MCL 440.9109(1)(a). This means that any settlement agreement where the insurer seeks to retain a security, i.e. ownership interest, in some item such as equipment is potentially governed by Article 9.

This in turn leads us to those pesky financing statements. A financing statement is a document that is filed with the Michigan Secretary of State to perfect a secured interest in some item. In short, this means that it stakes the insurer’s financial claim to a particular item and ensures its proper priority should the insured go bankrupt, or otherwise try to sell the equipment. You have to have a secured interest before you can perfect that interest, and you have to perfect that interest to make it secure. In other words, you must already have a signed settlement agreement or other document demonstrating your security interest in the item before you can go about filing a financing statement – unless the equipment is in your possession – and you must, in most circumstances, file the financing statement to protect and secure that interest.

Assuming that you have a valid, signed security agreement of some nature, the next question becomes, when and how does one go about filing a financing statement. The UCC, as adopted in Michigan, provides that all security interests (and agricultural liens, for that matter) must be secured via the filing of a financing statement unless they fall under one of approximately 10 exceptions. As with all things UCC, each exception references exceptions to the exceptions, which renders a complete summary here impossible. But generally, most situations where perfection through filing a financing statement is not mandatory is because perfection is automatic upon receipt of a signed security agreement.

For example, a purchase-money security interest (“PMSI”) does not generally require the filing of a financing statement because perfection is automatic when the security interest attaches. MCL 440.9310(2)(b) and MCL440.9309. APMSIgenerallyreferencesasecurity interest created when party A loans party B money to purchase item X and then has an interest in item X; the collateral. Once again, the devil is in the details as to whether a particular interest must be perfected through a filing, and each situation is unique.

Often, filing a financing statement “just to be careful” can be a good idea, if the investment is large enough. It can be a comparably small expense to protect a large asset. But be careful, time is of the essence in filing financing statements. The clock usually starts ticking when the insured takes possession of the equipment, and the time frames can be short. Also, filing a financing statement for equipment that is going to be around for a long time will probably mean that the security interest must be renewed every so often. It is not a great undertaking to do so, but failure to renew can be a costly mistake. Analyzing a specific situation, and knowing your rights and obligations, will help protect any long-term financial investments in settlements.

To discuss this article in further detail, contact Karen Ludden, an attorney in GARAN LUCOW MILLER, P.C.’s Troy office at: 1111 W. Long Lake Road, Ste. 300, Troy, MI 48098-6333; 248-641-7600; kludden@garanlucow.com.