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The other day I found out my new insurance card was missing. While sitting at a red light, a car hit mine from behind. The responding officer pointed out that the proof of insurance card in my truck had expired.

Happily, we got an agent on the phone who confirmed my car insurance was up to date. If my car insurance had lapsed, I would have gotten ticket and paid a fine. Furthermore, if my insurance had expired, the insurer wouldn’t have helped me with the accident.

What happens when a business is supposed to have insurance, but doesn’t? It can be a big deal. For the tenant in LNM1, LLC v. TP Properties, LLC it meant losing out on a chance to purchase the property and losing out on the lease.

A gas-station landlord-tenant dispute.

LNM1, LLC involved the owner of some property its tenant which used it as a gas station.  When the owner wanted to sell the property, the tenant tried to purchase it.  The tenant would have been able to purchase the property, except that they hadn’t bought the right insurance. The terms of the lease required several policies to protect the landlord.  Because the tenant didn’t have the required insurance, not only was it  unable to purchase the property, it also lost its lease.

The tenant didn’t have all the required insurance.

The lease required the tenant to have at least three types of insurance overage. The policies were supposed to list the landlord as an “additional insured.”  When in the course of the sale of the property, the landlord learned the tenant didn’t have the right insurance, the lease was terminated.

There were several problems with the insurance the tenant did have.  The tenant had failed to list the landlord as an additional insured.  The tenant had purchased a policy that was below the amount required in the lease.  The tenant failed to buy environmental insurance at all.  As a result, the trial court determined there were material breaches justifying ending the lease.  The Alabama Supreme Court agreed.

Why is this case important?

The Supreme Court ruled that the tenant’s failure to have insurance was a material breach of the contract. This case may be the first in the state to hold that a failure to maintain insurance is a material breach. Failure to have insurance is likely to be a material breach under other contracts as well.  This could mean repossession of a car by the lender.  It could mean a construction company doesn’t get any more funds from the bank.  It could mean, as it did here, that a tenant loses their lease.

Late purchase of insurance doesn’t cure breach.

Just as important as its “material breach” holding is what the Supreme Court appears to say about buying insurance after the fact.  Without saying so explicitly, the Supreme Court appears to hold that buying insurance after the fact won’t cure a material breach of contract.  It cited to several foreign cases that held a failure to buy required insurance could not be cured by purchasing it after the fact.

Where to learn more?