Risk Management

When named insured listing isn't updated

Changes in title to property can nullify coverage

By Donald S. Malecki, CPCU

Two insurance 101 subjects that can end up being disastrous to people who do not normally know they exist are that (1) a contract of insurance is personal, and (2) if persons or organizations are going to recover for their covered losses, they must have an insurable interest in what is being insured.

Briefly, what is meant by a contract being personal is that for purposes of qualifying for the purchase of insurance, it is the person or organization seeking insurance who must pass the test of eligibility. In other words, underwriters traditionally inquire into a person's background, credit rating, and loss history before they look into the acceptability of insurance on the property sought to be covered.

Insurers, after all, have a right to determine who it is that is interested in purchasing insurance as well as a right to accept or reject them. In some cases, the subject of insurance—a dwelling for example—may meet the insurer's underwriting criteria of construction, location, occupancy and protection, but still be declined based on the owner's "shady" background.

What insurable interest is and when it must exist also is crucial to the subject insurance. For purposes of simplification, say a person has put some of his or her money into real property as improvements. If that investment is lost when the property is damaged or destroyed, the person has a financial interest in those improvements that could be insurable against damage or destruction.

Another way to define insurable interest is this: If a person or organization can stand to lose financially if property is damaged or destroyed, that person or organization has an insurable interest in that property.

For purposes of property insurance, the insurable interest of a person or organization must exist at the time of loss. In other words, it is not something underwriters consider at the time insurance is purchased. It is the claims people who are interested after a loss occurs. In fact, there are times when people purchase insurance only to find out at the time of loss that they do not have an insurable interest.

The fact that producers know when insurable interest must exist is helpful only if they become aware of situations where there might be a problem if it is not addressed. Unfortunately, with property insurance, many insureds do not contact their producers for consultation about changes in named insureds or insurable interest.

A contract must be personal

A recent case that comes to mind about the requirement that an insurance contract be personal involved a father and son who lived together in a house owned by the father. In this case of Douglas C. Ramsey v. Allstate Insurance Co., No.1:09-CV-207 (U.S. Dist. Ct. So. Dist OH 2011), the father purchased insurance on the house and paid premiums to the insurer through a bank which held the mortgage. Since the son lived with his father, he was considered an insured under the policy.

When the father passed away, the son did not notify the insurer of his father's death, but continued making insurance premium and mortgage payments to the bank. The insurer, therefore, did not issue a new policy to the son.

As fate would have it, the house was damaged by fire six years after the father's passing. The insurer took possession of the house, put the undamaged personal possessions in storage, and paid the son $500 to cover expenses. In the course of investigating this loss, the insurer learned for the first time of the father's death and, therefore, denied the son's claim for damage on the grounds that he was not an insured under the terms of the policy.

The lower court ruled for the insurer, stating that the son ceased being an insured under his father's dwelling property policy at the end of the premium period following his father' death. The court also found that the insurer never did have actual notice of the father's death.

The appeals court upheld the trial court's decision, holding that there was no express contract between the son and the insurer. (The requirement that the insurance contract is personal was missing.) Something pointed out by the high court was that the trial court failed to consider whether the insurer had constructive notice of the father's death. This court, in other words, thought that the insurer might have had constructive notice of the father's death, since the estate went through probate and title to the house was transferred to the son. This point, however, was apparently not pursued.

Whether it was worth trying this case hinges on what a person can afford. In most cases, the outcome of cases cannot be predicted. There are plenty of court cases but, in the final analysis, much will depend on the facts. In fact, the court of appeals thought that an implied-in-fact contract for insurance between the son and the insurer might have been possible based on the insurer's actions of accepting premiums, and paying storage expenses.

Whether the insurer would have issued a new policy to the son is something that cannot be answered. The fact that the son was an insured under his father's policy is one thing, but qualifying to be a named insured is another. As mentioned, while the subject of insurance is important, the personal characteristics of the potential insured is what will determine acceptability of insurance.

No insurable interest, no coverage

In some instances, the question of whether someone is even insurable is not considered when insurable interest is lacking. There is no way an insurer is going to pay for damage or destruction to property if the person or organization claiming coverage does not have a financial interest in the property.

This was the issue in the case of Discover Property & Casualty Ins. Co. v The Mitchell Co., No. 10-00663-KD-M (U.S. Dist. Ct. AL So. Div. 2011). The Mitchell Company (named insured) was the owner and manager of several apartment complexes that were covered by a property policy for limits of $5 million per occurrence at various "covered premises" owned, rented or occupied by the named insured.

The property policy did not specifically identify any of the covered premises; rather, the policy declarations incorporated by reference a schedule on file with the insurer. In chart form, the schedule listed a warehouse and nearly 50 different apartment complexes, shopping centers and office buildings. Some of these were owned by the named insured, others were owned and managed by it and still others managed but not owned by it.

The Statement of Values for buildings, business personal property and rents reflected a value of $169,314,634, subject to a premium of $711,121 based on a .42 rate per $100 of valuation, plus taxes, fees and surcharges.

One of the apartment complexes on the Statement of Values that was managed but not owned by the named insured was damaged when unknown persons stole copper piping and fixtures from the vacant units. As a result, the named insured made a claim for this loss under its property policy.

The insurer, however, denied coverage because the copper piping and fixtures allegedly stolen constituted other real property that the named insured did not own. It maintained that the policy included as "covered property" only buildings, structures and other real property that the named insured owned, which meant that if the named insured did not own such property, this defined term also served as an exclusion precluding the coverage sought.

The named insured acknowledged that it did not own the stolen property. It conceded that it did not own the copper piping and fixtures and fully disclosed its lack of any ownership interest to its broker and insurer.

The named insured maintained that coverage applied nonetheless because the apartment complex was included in the Statement of Values, and the "covered property" definition (exclusion) was so broad as to render the policy illusory.

The court ultimately ruled against the named insured. In doing so, it stated that with respect to real property—but not personal property—ownership by the named insured was a condition of coverage and since the named insured lacked ownership of that apartment complex, coverage did not apply.

Analysis

This is a case where the insurer acknowledged that the named insured met its underwriting requirements as an insured for property insurance but still declined to provide coverage because of the lack of an insurable interest.

It is difficult to understand why a company would go to such an expense to argue this issue, given that it has no financial interest in the stolen copper but still wanted to collect for the loss and damage.

The fact that the named insured's broker was said to have known about the named insured's lack of ownership in copper does not appear to be a problem since the broker could not have known that this named insured would have gone to such great lengths to obtain payment for a loss it did not sustain.

An auto problem

For certain, there are no shortages of problems involving insurable interest and insurance. One that involves auto insurance is the case of Country Preferred Insurance Co. v. Asia Grant, No. 09-1069-CV-W-ODS (U.S. Dist. Ct. W.D. Mo. 2010).

This case involved a car accident where one of the autos was driven by a woman whose daughter previously owned and had the car insured. During the period when the policy was in force, the daughter transferred the car's ownership to her mother. The accident took place after this transfer. When the insurer learned of this transfer, and of the accident, it attempted to rescind the policy.

The insurer maintained that it was not obligated to defend or indemnify for damages because the named insured (daughter) did not have an insurable interest in the auto. According to law of the state where this event took place, "Anyone has an insurable interest in property who derives a benefit from its existence or would suffer loss from its destruction."

The court agreed with the insurer, holding that since the named insured (daughter) did not have an insurable interest in the car at the time of the accident, the insurer was not obligated to indemnify or defend her mother. Technically, the insurer could also have denied coverage because it did not contract with the mother.

Conclusion

The kinds of cases discussed here are not isolated. They are quite common. Unfortunately, it is impossible for producers to find out about these kinds of events where insureds take it upon themselves to transfer ownership of property without giving a second thought about how the insurance will be affected.

It is only when producers are consulted before such actions that they can usually take steps to arrange the proper coverage. Even so, producers have to be ever cognizant about cursory questions posed by insureds and attempt to delve more deeply into them to make sure that what insureds plan to do does not jeopardize their insurance program.