Usually when a person buys a home or business, it is assumed that the purchaser or owner has an insurable interest in the property. However, when it comes to property insurance, the insured doesn’t always have to be the owner of the property. In fact, there are many other persons or entities that may have an insurable interest on a specific property at one time.
When there are multiple owners, or mortgager and mortgagee, life tenant, or lessor and lessee, each party may purchase insurance on the property to protect their interests in the event of a loss. But without a specific agreement regarding interests on a specific insurance policy, each party can only recover under its own policy.1
In the event of a loss and multiple insurance policies held by different parties, each insured may only recover up to the value of its interest in the property, even if the amount of the insurance exceeds the insured’s interest. For example, if a mortgagee (lender) and a property owner both take out a policy on the full value of a property, in the event of a loss, the mortgagee is entitled to recover only the value of its interest.2
I am often asked if a mortgagee (lender) has an interest under the property owner’s insurance policy when a loss occurs. The simple answer is, although a mortgagee has an insurable interest, the mortgagee has no right to the benefits of the property owner’s policy payout unless the mortgagee is actually named as another insured, a co-insured, or "loss payee," which gives contractual rights to the mortgagee.3 Also, a lender has rights to an owner’s insurance policy if there is a separate contract in the purchase or lending agreement.
Many policyholders don’t read their policies, and many more do not pay attention to the specific details of their lending or purchasing agreements. When purchasing insurance, know who your insurance policy covers and whether your lender has rights under your insurance policy. Knowing such information will give you a better idea of how much insurance is needed and should be discussed with your broker or agent when the policy is purchased or renewed. When insurance proceeds from a loss are payable to your lender, there may be difficulties in rebuilding or figuring out how much money will be released right away to help you recover.
1 See Alexander v. Security -First National Bank of Los Angeles (1936) 7 Cal. 2d 718 and Burns v. California Fair Plan (2007) 152 Cal. App. 4th 646.
2 See Burns supra.
3 See Foothill Village Homeowner’s Association v. Bishop (1999) 68 Cal. App. 4th 1364.