I have reminded many to check their insurance policies because the windstorm season is approaching for the southern coastal waters and the Atlantic seaboard. Over the past two weeks, I have fielded two important insurable interest questions and noticed a wrong address of the risk, which may have raised significant problems. Accordingly, it is a good time to discuss these two potential areas of coverage disputes and review policies to make certain you do not have these issues.
The insurable interest requirement in property insurance policies has historical and practical implications. Generally, an "insurable interest" in property exists when a person or entity derives some financial benefit or other personal advantage by a property’s preservation, maintenance or existence, so that if the property were damaged or destroyed, the person or entity would suffer a financial loss.
Historically, there was a social concern that if property insurance was sold, insureds would have an incentive to destroy the insured property. The purpose of the insurable interest requirement helps partially allay this concern. An insurable interest requirement serves the following purposes:
- Prevents insurance from becoming a wager rather than a social product used for financial protection;
- Deters people with no interest in the property from allowing destruction or intentionally causing the damage;
- Indemnification of people with financial loss for the proper amount of the interest.
Generally, a person/entity with an insurable interest will be:
- Owners and those with ownership interests;
- Use or occupancy interests;
- Contractual requirement interests;
- Custody or risk of loss interests;
- Lien and security interests.
The most common question I field is whether you have to be the owner of property to have an insurable interest. The answer: NO. To have an insurable interest, one must only suffer financially if the property is damaged or destroyed.
Insurable interest problems typically arise where the people or entities with the insurable interest are not named correctly or completely in the insurance declarations.
This occurs most often during or after divorce, death, expiration of leases or contracts, complex real estate ownership and lease backs to closely held family property, long term leases, co-operatives written under a condominium form, and lien holders buying insurance for greater than their interest.
Chip’s Insurance Rule: Name the legal owners correctly, and include everybody else with a financial interest. Agents and brokers should spend more time discussing this issue with policyholders –especially where businesses operate in property without a written lease.
The address is significant as well. Wrong addresses can lead to a wrong premium being charged or a location insured in violation of underwriting requirements. In some states, these are material issues which could cause a claim to be denied. Florida is one of those states.
The typical scenario is where the address listed for the risk is not the intended insured location, but the billing address of the insured. These disputes are not uncommon and typically lead to Errors and Omission claims against agents.
Property managers with many properties should be especially careful to ensure that agents do not write the trade name of a building on the contract rather than the legal name of the owners and possibly the property manager, and also that the risk address is listed and not the property manager’s billing office or another property.
Make a note to check the declarations page of your policy. If somebody is going through a divorce or separation, the policy may need to be changed. If a death has occurred or a guardianship established, see that the policy lists the estates and trusts. In short, most of these problems are avoidable, but we see them in our offices all the time. Do yourself and your friends a favor, and make certain these two basic policy issues are taken care of now.