When named insured listing isn't updated
Changes in title to property can nullify coverage
By Donald S. Malecki, CPCU
Two insurance 101 subjects that can end up being disastrous to
people who do not normally know they exist are that (1) a contract of insurance
is personal, and (2) if persons or organizations are going to recover for their
covered losses, they must have an insurable interest in what is being insured.
Briefly, what is meant by a contract being personal is that for
purposes of qualifying for the purchase of insurance, it is the person or
organization seeking insurance who must pass the test of eligibility. In other
words, underwriters traditionally inquire into a person's background, credit
rating, and loss history before they look into the acceptability of insurance
on the property sought to be covered.
Insurers, after all, have a right to determine who it is that is
interested in purchasing insurance as well as a right to accept or reject them.
In some cases, the subject of insurance—a dwelling for example—may
meet the insurer's underwriting criteria of construction, location, occupancy
and protection, but still be declined based on the owner's "shady" background.
What insurable interest is and when it must exist also is crucial
to the subject insurance. For purposes of simplification, say a person has put
some of his or her money into real property as improvements. If that investment
is lost when the property is damaged or destroyed, the person has a financial
interest in those improvements that could be insurable against damage or
Another way to define insurable interest is this: If a person or
organization can stand to lose financially if property is damaged or destroyed,
that person or organization has an insurable interest in that property.
For purposes of property insurance, the insurable interest of a
person or organization must exist at the time of loss. In other words, it is
not something underwriters consider at the time insurance is purchased. It is
the claims people who are interested after a loss occurs. In fact, there are
times when people purchase insurance only to find out at the time of loss that
they do not have an insurable interest.
The fact that producers know when insurable interest must exist
is helpful only if they become aware of situations where there might be a
problem if it is not addressed. Unfortunately, with property insurance, many
insureds do not contact their producers for consultation about changes in named
insureds or insurable interest.
A contract must be personal
A recent case that comes to mind about the requirement that an
insurance contract be personal involved a father and son who lived together in
a house owned by the father. In this case of Douglas C.
Ramsey v. Allstate Insurance Co., No.1:09-CV-207 (U.S. Dist. Ct. So. Dist OH
2011), the father purchased insurance on the house and paid premiums to
the insurer through a bank which held the mortgage. Since the son lived with
his father, he was considered an insured under the policy.
When the father passed away, the son did not notify the insurer
of his father's death, but
continued making insurance premium and mortgage payments to the bank. The
insurer, therefore, did not issue a new policy to the son.
As fate would have it, the house was damaged by fire six years
after the father's passing. The insurer took possession of the house, put the
undamaged personal possessions in storage, and paid the son $500 to cover
expenses. In the course of investigating this loss, the insurer learned for the
first time of the father's death and, therefore, denied the son's claim for
damage on the grounds that he was not an insured under the terms of the policy.
The lower court ruled
for the insurer, stating that the son ceased being an insured under his
father's dwelling property policy at the end of the premium period following
his father' death. The court also found that the insurer never did have actual
notice of the father's death.
The appeals court upheld the trial court's decision, holding that
there was no express contract between the son and the insurer. (The requirement
that the insurance contract is personal was missing.) Something pointed out by
the high court was that the trial court failed to consider whether the insurer
had constructive notice of the father's death. This court, in other words,
thought that the insurer might have had constructive notice of the father's
death, since the estate went through probate and title to the house was
transferred to the son. This point, however, was apparently not pursued.
Whether it was worth trying this case hinges on what a person can
afford. In most cases, the outcome of cases cannot be predicted. There are plenty of court cases but, in
the final analysis, much will depend on the facts. In fact, the court of
appeals thought that an implied-in-fact contract for insurance between the son
and the insurer might have been possible based on the insurer's actions of
accepting premiums, and paying storage expenses.
Whether the insurer would have issued a new policy to the son is
something that cannot be answered. The fact that the son was an insured under
his father's policy is one thing, but qualifying to be a named insured is
another. As mentioned, while the subject of insurance is important, the
personal characteristics of the potential insured is what will determine
acceptability of insurance.
No insurable interest, no coverage
In some instances, the question of whether someone is even
insurable is not considered when insurable interest is lacking. There is no way
an insurer is going to pay for damage or destruction to property if the person
or organization claiming coverage does not have a financial interest in the
This was the issue in the case of Discover
Property & Casualty Ins. Co. v The Mitchell Co., No. 10-00663-KD-M (U.S.
Dist. Ct. AL So. Div. 2011). The Mitchell Company (named insured) was
the owner and manager of several apartment complexes that were covered by a
property policy for limits of $5 million per occurrence at various "covered
premises" owned, rented or occupied by the named insured.
The property policy did not specifically identify any of the
covered premises; rather, the policy declarations incorporated by reference a
schedule on file with the insurer. In chart form, the schedule listed a
warehouse and nearly 50 different apartment complexes, shopping centers and
office buildings. Some of these were owned by the named insured, others were
owned and managed by it and still others managed but not owned by it.
The Statement of Values for buildings, business personal property
and rents reflected a value of $169,314,634, subject to a premium of $711,121
based on a .42 rate per $100 of valuation, plus taxes, fees and surcharges.
One of the apartment complexes on the Statement of Values that
was managed but not owned by the named insured was damaged when unknown persons
stole copper piping and fixtures from the vacant units. As a result, the named
insured made a claim for this loss under its property policy.
The insurer, however, denied coverage because the copper piping
and fixtures allegedly stolen constituted other real property that the named
insured did not own. It maintained that the policy included as "covered
property" only buildings, structures and other real property that the named
insured owned, which meant that if the named insured did not own such property,
this defined term also served as an exclusion precluding the coverage sought.
The named insured acknowledged that it did not own the stolen property.
It conceded that it did not own the copper piping and fixtures and fully
disclosed its lack of any ownership interest to its broker and insurer.
The named insured maintained that coverage applied nonetheless
because the apartment complex was included in the Statement of Values, and the
"covered property" definition (exclusion) was so broad as to render the policy
The court ultimately ruled against the named insured. In doing so, it stated that with respect
to real property—but not personal property—ownership by the named
insured was a condition of coverage and since the named insured lacked
ownership of that apartment complex, coverage did not apply.
This is a case where the insurer acknowledged that the named
insured met its underwriting requirements as an insured for property insurance
but still declined to provide coverage because of the lack of an insurable
It is difficult to understand why a company would go to such an
expense to argue this issue, given that it has no financial interest in the
stolen copper but still wanted to collect for the loss and damage.
The fact that the named insured's broker was said to have known about the named insured's
lack of ownership in copper does not appear to be a problem since the broker
could not have known that this named insured would have gone to such great
lengths to obtain payment for a loss it did not sustain.
An auto problem
For certain, there are no shortages of problems involving
insurable interest and insurance. One that involves auto insurance is the case
of Country Preferred Insurance Co. v. Asia Grant, No.
09-1069-CV-W-ODS (U.S. Dist. Ct. W.D. Mo. 2010).
This case involved a car accident where one of the autos was
driven by a woman whose daughter previously owned and had the car insured.
During the period when the policy was in force, the daughter transferred the
car's ownership to her mother. The accident took place after this transfer.
When the insurer learned of this transfer, and of the accident, it attempted to
rescind the policy.
The insurer maintained that it was not obligated to defend or
indemnify for damages because the named insured (daughter) did not have an
insurable interest in the auto. According to law of the state where this event
took place, "Anyone has an insurable interest in property who derives a benefit
from its existence or would suffer loss from its destruction."
The court agreed with the insurer, holding that since the named
insured (daughter) did not have an insurable interest in the car at the time of
the accident, the insurer was not obligated to indemnify or defend her mother.
Technically, the insurer could also have denied coverage because it did not
contract with the mother.
The kinds of cases discussed here are not isolated. They are
quite common. Unfortunately, it is impossible for producers to find out about
these kinds of events where insureds take it upon themselves to transfer
ownership of property without giving a second thought about how the insurance
will be affected.
It is only when producers are consulted before such actions that
they can usually take steps to arrange the proper coverage. Even so, producers
have to be ever cognizant about cursory questions posed by insureds and attempt
to delve more deeply into them to make sure that what insureds plan to do does
not jeopardize their insurance program.