The last several months I’ve spent the majority of my time on the New Jersey Shore. Among the reconstruction, empty lots, and damaged homes I also see a growing number of “for sale” signs lining the sidewalks. In fact, this was a topic of conversation Tuesday night over dinner with a new client.

The increase in property sales following a natural disaster is a common phenomenon, whether it’s a massive hurricane or your typical Midwest hailstorm. I can only guess the reasons behind the “for sale” signs. I presume the drastic increase in property sales stems from an inability to afford repairs, an inability to afford the mortgage, an unwillingness to continue to fight with the insurer, a broken heart that can’t bear looking at the devastation that used to be the place of family memories, or maybe it’s just a business deal. Whatever the rationale behind the sale, the important question in our line of work is “how does selling the property impact the insurance claim?”

Last month the Seventh Circuit Court of Appeal issued an opinion that gives hope to the policyholder seller. The Court found that selling the property in its unrepaired state does not foreclose the seller from recovering the “replacement cost” down the road.

In Edgewood Manor Apartment Homes v. RSUI Indemnity Company,1 the insured owned an apartment complex and recovered the “actual cash value” for the Hurricane Katrina damage from the insurance company and then sold the property in its unrepaired state with an assignment of the insurance claim to the buyer. The Court ultimately found that the assignment was invalid, but the insured seller retained rights to the insurance claim and had a valid claim for “replacement cost” once the repairs were performed by the buyer.

The first hurdle for the policyholder seller is establishing an “insurable interest” in the property. The Court pointed out no state requires an insured to continue to maintain an “insurable interest” while the claim is being litigated. Whether an “insurable interest” exists is determined either at the time of policy formation or at the time of loss.

The second hurdle is recovering the “replacement cost” proceeds. In Edgewood Manor, the insurer argued that it didn’t have to pay “replacement cost” because the insured sold the property in its unrepaired state. However, the court pointed out that nowhere in the policy does it require the insured to repair the property itself. Thus, the insured could sell the property and if the buyer performs the repairs within a reasonable time, as required by the policy, the seller can recover the “replacement cost” proceeds.

After a major catastrophe property values plummet and sales are often made at pennies on the dollar. The opportunity to recover the “replacement cost” after the sale can make all the difference for policyholder sellers.

1 Edgewood Manor Apartment Homes, LLC v. RSUI Indem. Co., No. 12-1480, 2013 WL 5764664 (7th Cir. Oct. 25, 2013).

  • James W. Greer, CPCU

    Interesting concept and totally fair. Carrier should not fight this. If an insured sells the property “unrepaired”, he or she will take a big loss on the sale. There is no requirement that “the policyholder” repair the property…only that it be repaired. Once repaired, for the policyholder to get the additional RCV funds only serves to make up at least a portion of the loss on sale of the “unrepaired” property. Insurable interest is a given. It’s the right thing to do.

  • Good one Ashley.
    I believe, a homeowner that sells his un-repaired property and uses the proceeds of the sale and the ACV portion of his settlement to purchase a new property, he may be able to recover the depreciation withheld as well. For he did indeed “replace” the damaged property. Especially relevant on an investment property – happens all the time.
    Chip, what are your thoughts on this?

  • Ashley – During the last 22 years – We have worked with three homeowners through the process you described. The new homeowners were forwarded the insurance proceeds, from the previous homeowners.

    The justification for the financial exchange was that the property was sold/purchased at a discount because of circumstantial and hail/wind/rain “wear and tear”.

    None of the sellers were aware of the degree of [covered] damage, and made their loss claims upon discovery of it.

    2 of the previous owners had made a claim – and 1 had not. The 2 that made a claim had been told by their insurance adjusters that they had no damage – and the owners believed them – but Nature said otherwise.

    The damage was 3.5, and 4.5 years old, and had to have been obvious in it’s original state – to the adjusters. Even if the adjusters were brand new to damage inspections, the impact condition of the roofing systems was clearly obvious years earlier, by how clear it was years later.

    Anyway – all insurers honored their stated/implied promises even though policy language appeared to indicate that the “statue of limitations” for making a claim had expired.

    As a layperson – It seems to me that contractual law – centered around “statue of limitation” principles – can be unfairly rigged against the general public, and adjusters can use “the claim is closed”, or some other believable canned response, to deceptively discourage legitimate indemnification issues – after being honestly discovered – from being honestly honored.

    All three claimants explained the damage had never been discovered by the adjusters, or themselves – and they were entitled to compensation no matter how may years went by because they had never been paid for what had always been owed.

    Side point – As honorable as true insurance/indemnity principles are – I don’t believe insurers should be able to (intentionally) use unqualified personnel, or fake and misleading business tactics, to actually steal money from people – and then pretend that they are not.

    Proper damage investigation – by truly qualified/forensic certified “adjusters” – will help many properties change hands without insurers keeping money they have no legal, ethical, or moral right to.

    Could be – Higher grade adjusters damage inspections would not allow certain low quality insurers to reap profits that they are not entitled to. Innumerable properties change hands, or not, waiting for someone to actually discover what insurers owed all along – even if the financial recovery discover is many years past technical “SoL” proclamations.

  • RAS

    Here’s a related question. If the homeowner of a 2nd home, with FEMA flood insurance, chooses to replace flood damaged property with property of lesser quality and/or having less than “like use”, and at a cost lower than the carrier’s estimate of ACV (or even just lower than RCV), is the homeowner still due the entire ACV as reimbursement for his loss, or only the ACV of the low quality item? E.G. Homeowner chooses to replace a $1200 refrigerator with a $700 refrigerator, with less bells and whistles (smaller, no ice-maker, etc) or a Corian countertop with a Formica countertop.

    How about if, in the interest of being able to help cover uninsured losses from a flood (fence destruction, travel costs, paving blocks etc.) the owner chooses not to replace a subfloor included in a reimbursed POL, and instead chooses to risk future costs of repair (and non-coverage of the subfloor in the next flood), is the homeowner still due the ACV of the subfloor replacement in the POL from the carrier?

    Finally, closer to the case above, if a homeowner suffers a substantial loss, say an ACV of $125,000 vs. a total ACV of $200,000 for the structure, and decides to demolish it and sell the lot, is the homeowner due the $125,000 from the carrier? The blog above suggests that the carrier is only liable for payment if the homeowner uses it to repair the property.

    Any cases on these that anyone knows of?

    Thanks for any input on this.