“A” decides to purchase an asset. They buy it on finance and “B” (the financier) holds an interest in the asset. Transfer of ownership from B to A only happens after completion of the final payment.
What happens if the asset is damaged in the period when B owns it, but A is leasing it?
The typical situation described above sees the asset covered by insurance. It is often the case that one party is named, but sometimes the interest of the other party is noted on the policy.
So what happens next?
The insurance company checks to see if the incident was caused by a third party. If there is a right of recovery they will instruct solicitors to exercising their right of subrogation.
The issue is that the insurer can only pursue the claim based upon stepping into their policyholder’s shoes. This means that any agreement between A and B relating to finance has to remain in play. It cannot be side stepped. Therefore if a third party is pursued, they should look at whether either A or B has standing to bring the claim.
What’s the problem?
For a more detailed explanation, look at Complex Loss Structure/Theory, but in short there is a serious risk that only pure economic loss may apply. This, in light of the Spartan Steel decision, means the right of recovery maybe lost to insurers. Party A might only have an insurable interest,and B will not have suffered loss in most situations as the finance agreement normally means they receive insurance monies or full payment in the event of destruction of the asset.
Why is this a problem?
Nobody owns anything!! There is so much financing in the market, few people are owning assets they use. Even Fernando Torres was bought for Liverpool by the Royal Bank of Scotland! These issues with claims are only going to be on the rise. Keep an eye out on this.
Over and out.