United States: First Circuit Opinion Examines Whether Proceeds Of Business Interruption Insurance Are Covered By UCC Article 9

Last Updated: September 7 2015
Article by John Lawlor

In In re Montreal, Maine & Atlantic Railway, Ltd.,1 the United States Court of Appeals for the First Circuit upheld a lower court decision that a lender did not have a perfected security interest under Article 9 of the Uniform Commercial Code in proceeds of a policy of business interruption insurance.


In 2009, Wheeling & Lake Erie Railway Company ("Wheeling") extended a line of credit to Montreal, Maine & Atlantic Railway Ltd. (the "Debtor"), the Debtor's Canadian subsidiary and certain of their affiliates.  To secure their obligations, the borrowers granted Wheeling a security interest in certain collateral, including accounts, payment intangibles and inventory.  Wheeling perfected its security interest by filing a financing statement under the UCC.

In April 2013, Travelers issued a commercial property insurance policy insuring certain of the borrowers; this policy included coverage for loss of business income following certain insured events.

The Debtor filed bankruptcy shortly after one of its trains, which carried a number of tank cars containing crude oil, derailed in Quebec; the resulting explosions destroyed part of a town and caused substantial loss of life.  The Debtor made a claim under the Travelers insurance policy for casualty losses and for loss of business income.  Travelers, the bankruptcy trustee and the Canadian subsidiary eventually reached a settlement whereby Travelers agreed to pay $3.8 million to the Debtor and the Canadian subsidiary.  Wheeling objected to the settlement.

The bankruptcy court ruled that Wheeling did not have a security interest in the settlement payment.  Wheeling appealed to the Bankruptcy Appellate Panel of the First Circuit, which affirmed.  In February 2015, we issued a client alert on the BAP decision (see http://www.icemiller.com/ice-on-fire-insights/publications/security-interests-in-business-interruption-insura/).


This case examined whether it was possible for the lender to obtain a perfected security interest in the business interruption insurance policy or the settlement payment by virtue of its UCC filing.  The lender apparently took no other steps to perfect its security interest.

Section 9-109(d)(8) of the UCC excludes from the scope of Article 9 of the UCC "a transfer of an interest in or an assignment of a claim under a policy of insurance . . . but sections 9-315 and 9-322 apply with respect to proceeds and priorities in proceeds."  The definition of "proceeds" in Article 9 includes "insurance payable by reason of the loss or nonconformity of, defects or infringement of rights in, or damage to, the collateral" (UCC §9-102(64)(E)).  To the extent that a creditor wishes to takes a security interest in a policy of insurance that is outside the scope of Article 9, it must comply with non-UCC law in order to do so.  Wheeling did not comply with applicable non-UCC law to take a security interest in the insurance policy.

Where a secured party has a perfected security interest in a debtor's after-acquired accounts and payment intangibles, a good argument exists that, because a policy of business interruption insurance insures the debtor for the loss of revenue that would constitute collateral had no business interruption occurred, the secured party should be perfected in the payments made under such policy as proceeds of its original collateral.2  Business interruption insurance is intended to replace the lost income, in the same way that proceeds of casualty insurance covering a piece of damaged equipment -- which is clearly within the proceeds exception to UCC Article 9's insurance exclusion -- is intended to replace the equipment.  Few court cases have examined whether business interruption insurance can be the subject of a security interest in UCC Article 9 as proceeds of other collateral.

For some reason, the lender in Wheeling did not argue that the business interruption insurance claim was proceeds of its collateral consisting of accounts and payment intangibles.  The lender made several attempts to convince the court that it had an Article 9 security interest in the insurance policy as original collateral despite the insurance exclusion in Section 9-104(d)(8).  The First Circuit found all these arguments unpersuasive.

In a footnote, the First Circuit noted the proceeds exception to Article 9's general insurance exclusion, and stated that "the exception requires that a creditor have a valid security interest in some other collateral as to which an insurance payment is 'proceeds.'"  The First Circuit found the lender's argument that the policy was original collateral did not make the proceeds exception applicable: "Because Wheeling's asserted interest in [the Debtor's] contingent right to payment under the Policy is invalid, it does not have a security interest in any collateral as to which the settlement payment can be considered proceeds."3

Final Observations

It is curious that the lender in this case did not argue that the business interruption insurance payments were proceeds of its other collateral.  There is caselaw precedent for this argument, and the argument has also received substantial support from a number of legal commentators over the years.4  By arguing that the insurance policy itself was its original collateral, rather than arguing that the business interruption insurance payments were proceeds of its original collateral consisting of the lost income stream, the lender ran smack into Article 9's insurance exclusion.

The BAP opinion had included some dicta which criticized MNC Commercial Corp. v. Rouse, a 1992 U.S. district court case which is the leading case in support of the view that payments under a business interruption insurance policy can be proceeds of accounts and general intangibles that would have been included in the lost income stream covered by the policy.  The First Circuit did not repeat this criticism or discuss MNC Commercial at all.

From a creditor's perspective, it is somewhat heartening that the First Circuit did not repeat the BAP's criticism of MNC Commercial.  However, MNC Commercial is the only case we are aware of that has come out in favor of treating business interruption insurance payments as proceeds of original collateral consisting of a lost income stream.  While there is a good argument to support this result, given the few cases that have considered the issue, it may be prudent for lenders to seek to perfect liens in business interruption insurance policies under non-UCC law.


1 2015 WL 4934212 (1st Cir. Aug. 19, 2015).

2 See MNC Commercial Corp. v. Rouse, 1992 WL 674733 (W.D. Mo. 1992), in which the court held that a secured party that had a perfected security interest in the debtor's accounts, general intangibles, contract rights, documents, instruments, chattel paper and inventory also had a perfected security interest in proceeds of the debtor's business interruption insurance policy following a suspension of the debtor's operations caused by a fire.

3 Wheeling at n. 3.

4 See, e.g., Clark & Clark, The Law of Secured Transactions under the Uniform Commercial Code, ¶1.08[8][F].

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions