The standard commercial lease for an entire building will require the tenant to either buy building insurance or reimburse the landlord’s premium payments if the landlord buys the insurance. If the tenant opts to purchase the building insurance, this often results in a lower overall premium to the tenant since the building coverage is underwritten with the tenant’s other insurance needs, such as business interruption insurance, workers compensation, liability insurance, and business personal property coverage. This begs a legal question—can a tenant can have an insurable interest in property it leases, i.e., the landlord’s building?
The standard for an insurable interest is well-established under California law. Insurance Code Section 281 states, “[e]very interest in property, or any relation thereto, or liability in respect thereof, of such a nature that a contemplated peril might directly damnify the insured, is an insurable interest.” Furthermore, Insurance Code Section 282 broadly defines an interest in property as an: (1) “existing interest”, (2) “inchoate interest founded on an existing interest”; or, (3) “expectancy, coupled with an existing interest in that out of which the expectancy arises.”1
California courts have held that any financial interest is enough to create an insurable interest.
[A]n insurable interest exists when ‘the insured has a direct pecuniary interest in the preservation of the property and … will suffer a pecuniary loss as an immediate and proximate result of this destruction ….’2
The insured’s interest in the property must exist when the insurance takes effect and when the loss occurs.
Insurance treatises and California law have broadly interpreted the definition of an interest in property that establishes an insurable interest. Any status of possession, provided that the insured has a cognizable economic interest in the property, will support a finding of insurable interest.3 If the insured would sustain a loss by the destruction of the insured property, it is immaterial whether he or she has any title in, lien upon, or possession of, the property itself.4 A court, “when determining if a party has an insurable interest, is required to examine the realities, economic or otherwise, of a situation rather than merely looking at technical concepts of title.”5
Under California law, an insured need not own the property in order to have an insurable interest in the property. In one case, the court found that an almond processor had an insurable interest in a stock of almonds delivered to its facility by a cereal supplier for roasting and dicing because the processor was directly liable under both agency principles and its agreement with cereal supplier for loss of almonds during processing.6 In another, the court held that a holder of mechanic’s lien had an insurable interest in building.7 In another case, the court held that a condominium owners association had an insurable interest in the common property held collectively by its individual members.8 In another, the court held that the interest of a lien holder is an insurable one.9 In yet another, the court held that an insured had an insurable interest in a restaurant he or she was purchasing, even though the sale had not closed and title had not been recorded in the insured’s name.10
Courts have even held that a tenant has an insurable interest in a leasehold premise, or even when there is an intent to lease the premises coupled with actions consistent with that intent.11 In California Food Service Corp. v. Great American Insurance Company, for example, a letter of intent to sublease a building and actions consistent with that of a tenant created an insurable interest. In that case, the plaintiff, California Food Service Corporation (“CFS“) signed a letter of intent to buy the assets of Sandy’s, a fast food establishment, and assume Sandy’s leasehold rights. CFS also agreed to assume the obligations under Sandy’s lease, including the purchase of fire insurance for the benefit of the landlord. CFS moved into the building, began operations and was issued a fire insurance policy covering the building. After the policy was issued but before the sale of assets was finalized the fire damaged the building. The court found that since CFS had a binding contract with Sandy’s to assume Sandy’s obligations under the lease, which included the purchase of fire insurance for the benefit of the building’s owner, CFS, also had an insurable interest in the destroyed premises.12
As another example, the law holds that a parent corporation has an insurable interest in property owned by its wholly owned subsidiary. Even a majority shareholder of a parent corporation may be found to have an insurable interest in the property owned by the subsidiary. In this case, the Southern District of California was asked to apply California law in determining whether the majority investor in a parent corporation had the same insurable interest in property as the parent corporation’s wholly owned subsidiary.13 In that case, McAdam was the managing member of McAdam’s Fish, LLC. He also was the largest investor in McAdam’s Fish, LLC and owned a 22% share of the company. McAdam’s Fish, LLC wholly owned Charca Fish III, LLC and Charca Fish IV, LLC, which respectively owned the ships Jessica M and Shirley B. The ships were insured under an insurance policy issued to McAdam. The ships were damaged, and McAdam made a claim for the ships’ damage. State National Insurance Company claimed that McAdam did not have an insurable interest in the ships because he was not the owner. McAdam claimed he had an insurable interest because he was the largest investor in the parent company of the wholly owned subsidiary companies that owned the ships. He also claimed that his fulltime job and primary source of income was operating McAdam’s Fish, LLC. The court agreed with McAdam and, applying California law that any pecuniary interest creates an insurable interest, found that McAdam had an insurable interest in the ships.
Accordingly, a tenant can, in fact, have an insurable interest in the leased property. If this issue comes up in one of your claims, be sure to push back. Make sure to identify all the reasons why the insured had an interest in the property and present that to the insurer.
1 Cal. Ins. Code § 282.
2 California Food Service Corp. v. Great American Ins. Co. (1982) 130 Cal.App.3d 892, 897.
3 3 Couch on Ins. § 41:13.
4 3 Couch on Ins. § 41:11.
5 Royal Ins. Co. v. Sisters of Presentation (9th Cir. 1970) 430 F.2d 759, 761.
6 Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. (2000) 78 Cal.App.4th 847, 875-76.
7 Hayward Lumber & Inv. Co. v. Lyders (1934) 139 Cal.App. 517.
8 Countrywide Home Loans, Inc. v. Tutung (1998) 66 Cal.App.4th 727, 732.
9 Home Savings of America, F.S.B. v. Continental Ins. Co. (2001) 87 Cal.App.4th 835, 854.
10 Tri-State Mut. Grain Dealers Fire Ins. Co. v. Morris (9th Cir. 1959) 268 F.2d 956.
11 California Food Service Corp. v. Great American Ins. Co. (1982) 130 Cal.App.3d 892, 897-898; Sam Wong v. Stuyvesant Ins. Co. (1929) 100 Cal.App. 109, 112.
12 Cal. Food Service at 895.
13 McAdam v. State Nat. Ins. Co. (S.D. Cal. 2014) 28 F.Supp.3d 1110.