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.