Can An Insured With An Invalid Lease Have A Financial Interest In A Property?

Property insurance policies require that an insured have a financial interest in the insured property. Courts have defined a “financial interest” as either: “(1) a monetary right, title, or legal share in the property; (2) a monetary advantage, profit, and responsibility, i.e. a monetary stake or claim in the property; or (3) a monetary share of the ownership or control in the property.”¹ A financial interest might include a leasehold interest pursuant to a written lease if the lease contains an obligation to procure insurance or repair the property.

In a recent case,² a husband and wife purchased a commercial building, a parking lot, and concrete barrier wall in 1996. In 2007, they transferred the property to a revocable trust created by them. In 2015, a lease for the property was purportedly entered into between a corporation (which was also controlled by them) and the husband and wife, as “landlord” and “owner” of the property.

The lease required the tenant to procure property insurance coverage for the full replacement value. The tenant thereafter obtained a commercial property insurance policy for the property. After someone drove a car through the concrete barrier wall and partially into the building on the property, the insured-tenant filed a claim. The insurer ultimately denied the claim on the ground that the insured did not have a financial interest in the property because the insured did not have a legal or equitable interest nor a valid lease with the trust that owned the property. After litigation ensued, the insurer maintained that it had no obligation to pay property damage proceeds to the insured-tenant because it had no financial interest in the property.

The Court of Appeals of Indiana ultimately held that the insured-tenant did not have a valid lease with the owner of the property and, thus, lacked a financial interest in the property as required by the insurance policy. Because the insured-tenant did not have a financial interest in the property, the court found that the insurer had a legitimate reason for denying the insured-tenant’s claim.
____________________________________
¹ JAM Inc. v. Nautilus Ins. Co., 128 S.W.3d 879 (Mo. Ct. App. 2004).
² Nuell, Inc. v. Marsillett, 164 N.E.3d 768 (Ind. Ct. App. 2021).