Story Case

The German American Bank of Rosalie, Nebraska, had loaned a large sum of money to Aaron Walker, a farmer, and its chances of receiving payment depended upon whether or not Mr. Walker would successfully harvest his corn crop. Mr. Frear, president of the bank, insured the crop in the Merchants' Insurance Company, and when the crop was destroyed by fire, he seeks to recover from the insurance company on his policy. Will he succeed?

Ruling Court Case. Creed Vs. Sun Fire Office Of London, Volume 101 Alabama Reports, Page 323

One of the plaintiffs, Mattie Flynn, was creditor of T. W. Creed. T. W. Creed died, leaving real estate upon which there was a building. He left insufficient personal property to pay all his debts. Katie Creed, as widow of T. W. Creed, and Mattie Flynn jointly procured fire insurance upon the property from the defendant company herein. The property was destroyed by fire and this action was brought. The company contended that Mattie Flynn had no insurable interest in the property.

Mr. Justice Coleman said: "Has a creditor an insurable interest in a building, the property of the estate of his deceased debtor, which may be subjected to his debt, the personal property being insufficient to pay the debts of the estate? After much deliberation, our conclusion is that he has an interest which may be insured. We concede and affirm that a simple contract, giving a mere personal claim against the debtor, without a lien on specific property, is not an insurable interest in the property of the debtor. Such contracts are void as being against public policy. We do not think the principle applies after the death of a debtor, as to property liable for the debt, and which, if destroyed, will result in the loss of the debt. The real estate as well as personal property of a deceased debtor is liable for his debts, but the real estate cannot be subjected to the payment of his debts until after the personal has been exhausted. After the death of the debtor, the debt is no longer enforceable against the person. The proceedings to reach the property of the estate of the deceased debtor are against the property."

This gives to the creditor a right in the nature of a lien, and for that reason the creditor has an insurable interest. Judgment was given for Creed.

Ruling Law. Story Case Answer

A mere creditor has no insurable interest in the property of his debtor. If the creditor has reduced his claim to a judgment, and acquired a lien upon the property of the debtor, he then has such an interest in the property that he may insure it. And, if the debtor is bankrupt, so that the creditor may proceed directly against the property of the debtor, the creditor may then insure the property. Furthermore, when the debtor has died, and there is not sufficient personal property to satisfy the debts, the creditors may insure the property of his deceased debtor, for that is the sole security for his debt, and he may proceed directly against it for satisfaction.

Notice that Mr. Frear, in the Story Case, could not have proceeded against the crop of Aaron Walker directly, for the reason that he had not made arrangements for such action. He was a mere unsecured creditor whose right against the debtor is purely personal; he had no right against Mr. Walker's property in the absence of a lien or mortgage. Hence, the bank can recover nothing from the insurance company.