Property Insurance

Property insurance does not insure property. It insures people who have an interest in real or personal property and who face the risk of losing that property to unknown or contingent perils. Most property insurance policies insure against all direct risks of physical loss not excluded or the risk of loss by perils named in the policy like fire, lightning, windstorms, or hail. The risk of loss is spread among the customers of the insurer so that the cost of insurance is affordable. It is called “first party” insurance against risks faced by property in which the insured (the first party to the contract of insurance) has an interest and by the loss of which the insured would be damaged. The insurer, considering ancient ways to describe parties to contracts, is considered the second party to the contract.

Only an insured of a policy who also has an insurable interest – an interest where the insured will be damaged in some way as a result of a loss due to a peril insured against – before he or she can collect. Failure to be an insured named on the policy or by definition – regardless of the extent of the insurable interest – deprives the person of a right to the benefits of the policy. Failure to maintain an insurable interest – even if named as an insured by the policy – deprives the person of the right to the benefits of the policy.

To obtain that indemnity the insured must also fulfill the promises he, she or it made to prove its loss and cooperate with the insurer’s investigation. That’s really all that an insurance policy is: promises made by the insured and the insurer. As long as both keep their promises there will be no problems and no need for anyone to attempt fraud. A fraudulent insurance claim is one made by a person who fails to keep the promises made when the policy was acquired.

CONTRACT OF PERSONAL INDEMNITY

First party property insurance is a contract of personal indemnity. The insurer promises to indemnify the first party, the insured, in the event the insured incurs a loss as a result of one of the perils insured against by the wording of the policy. Insurance does not follow title to the land. The insurer makes a promise to the first party, the insured, that if there is a loss to property in which the insured has an interest, to pay indemnity for the loss.

The “elementary principle of insurance law that fire insurance” is a contract of personal indemnity, “not one from which a profit is to be realized.” [Cigna Property & Cas. Ins. Co. v. Verzi, 684 A.2d 486, 112 Md.App. 137 (Md. App. 1995)]

A first party property policy is considered by courts asked to interpret the conditions of the policy, a contract of personal indemnity. It is a contract made with the individual protected. The insurance does not go with the property as an incident thereto to any person who may buy that property. If it goes at all, it goes as a matter of contract for the transfer of the policy. [Estate of Cartwright v. Standard Fire Ins. Co., No. M2007-02691-COA-R3-CV, 2008 WL 4367573, *2 (Tenn. Ct.App. Sept. 23, 2008) (noting that “[t]he contract of insurance is also purely a personal contract between the insured and the insurance company, and does not attach to or run with the title to the insured’s property absent an agreement for the transfer of the policy.” Fulton Bellows, LLC v. Federal Ins. Co., 662 F.Supp.2d 976 (E.D. Tenn., 2009).

For example, in practice consider a fictional Mrs. Jones who is allowed to live rent free in a home owned by her children. Mrs. Jones purchases, in her name alone, a policy of homeowners insurance, insuring her against the risks of loss to the structure and its contents. If a fire destroys the house, Mrs. Jones can recover because her interest in the house is an “insurable interest.” This means she has an interest in the property that will allow her to recover for the loss of property if it is lost, damaged or destroyed. Mrs. Jones’s children, the owners of the home, also have an insurable interest in the home, but are not insured under Mrs. Jones’s policy and may not recover any proceeds from her policy.

In California, as in most states:

[i]n common parlance, we speak of a house as being insured, but, strictly speaking, it is not the house but the interest of the owner therein that is insured, and, whether that interest is founded upon a legal title, an equitable title, a lien, or such other lawful interest therein as will produce a direct and certain pecuniary loss to the insured by its destruction, he has an insurable interest therein.” [Davis v. Phoenix Ins. Co., 111 Cal. 409 (Cal. 1896).]

Only a person who is both an insured and who has an insurable interest may obtain indemnity from a policy of first party property insurance. In Russell v. Williams, 58 Cal. 2d 487, 374 P.2d 827, 24 Cal. Rptr. 859 (Cal. 1962), the California Supreme Court stated the rule:

It is a principle of long standing that a policy of fire insurance does not insure the property covered thereby, but is a personal contract indemnifying the insured against loss resulting from the destruction of or damage to his interest in that property.

The property is not insured against destruction. The insured is guaranteed against loss, to the extent of his insurable interest, not exceeding the amount stated in the policy’s declarations page as the limit of liability promised by the insurer. As the betterments and improvements installed in the building passed to the owner at the expiration of a lease, in part consideration for the rent, the tenant could not sell them, or remove, or recover their value. The insured, therefore, had a limited insurable interest: the right to use them until the expiration of the lease while the owner would have a 100% insurable interest in the property. [Lighting Fixture Supply Co., Inc., v. Fidelity Union Fire Ins. Co., 55 F.2d 110 (5th Cir. 1932); Grange Mutual Casualty Company, v. Central Trust Company, N.A, 774 S.W.2d 838 (6th Cir. 1989)]

A fire insurance policy is always a contract of personal indemnity made with the individual protected, and does not go with the property as an incident thereto to any person who may buy that property. If it goes at all, it goes as a matter of contract for the transfer of the policy.

INSURABLE INTEREST

It may be said, generally, that any one has an insurable interest in property who derives a benefit from its existence or would suffer loss from its destruction. An insurable interest in property is any right, benefit or advantage arising out of or dependent thereon, or any liability in respect thereof, or any relation to or concern therein of such a nature that it might be so affected by the contemplated peril as to directly damnify the insured.

The test for whether an insured has an insurable interest in property is whether the insured has such a right, title or interest therein, or relation thereto, that he will be benefited by its preservation and continued existence or suffer a direct pecuniary loss from its destruction or injury by the peril insured against. [Hyman v. Sun Ins. Co., 70 N.J.Super. 96, 100 (App. Div. 1961)) (internal quotations omitted); Margin Holdings, Ltd., LLC v. Franklin Mut. Ins. Co. (N.J. Super. App. Div. 2022)]

The term “interest,” as used in the phrase “insurable interest,” is not limited to property or ownership in the subject matter of the insurance. An insurable interest in property may arise from some liability which an insured incurs with relation thereto. Such liability may arise by force of statute or by contract, or may be fixed by law from the obligations which insured assumes.

In Georgia, an insurable interest means any actual, lawful, and substantial economic interest in the safety or preservation of the subject of the insurance free from loss, destruction, or pecuniary damage or impairment. [O.C.G.A. § 33-24-4(a); Zurich Am. Ins. Co. v. Steve Ayers Constr. Co. (N.D. Ga. 2022)]

Insurable interest is a keystone of the concept of insurance. The requirement for an insurable interest safeguards the insurer against the risk that arises if one who will receive the monetary benefit from loss of the insured property has no interest in the property not being destroyed. [Woods v. Independent Fire Insurance Co., 749 F.2d 1493, 1496 (11th Cir. 1985)] It is well settled across the United States that having title or an ownership interest is not the sole basis for having an insurable interest in property. [Brown v. Ohio Cas. Insurance Co., 239 Ga.App. 251, 253(2), 519 S.E.2d 726 (1999)] Rather, the test of insurable interest in property is whether the insured has such a right, title, or interest therein, or relation thereto, that he will be benefitted by its preservation and continued existence, or suffer a direct pecuniary loss from its destruction or injury by the peril insured against. [Ga. Farm Bureau Mut. Ins. Co. v. Franks, 320 Ga.App. 131, 739 S.E.2d 427 (Ga. App. 2013)]

To have an insurable interest, the insured must derive “a direct, pecuniary loss” from the subject matter of the contract; the loss cannot be indirect or sentimental.” [A.B. Petro Mart, Inc., 892 N.W.2d at 465; see also 14 Mich. Civ. Jur. Insurance § 135] An insurable interest in an insurance policy is determined not by the label attached to the insured’s property but by whether the insured will suffer a pecuniary loss due to the destruction of the property. [Sam D Mkt. 1 v. Selective Ins. Co. of S.C. (E.D. Mich. 2021)]

California, by statute defines “insurable interest” as follows:

Every 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. [California Insurance Code Section 281]

“Damnify” means “[t]o cause loss or damage to; to injure.” Damnify, Black’s Law Dictionary (11th ed. 2019). Accordingly, an insurable interest exists where the insured has such a relationship with the property that it would incur a loss if the property were harmed by the risk against which it is insured. [Colo. Hosp. Serv., Inc. v. Auto-Owners Ins. Co., No. 14-cv-01858-WJM-NYW, 2015 WL 6098639, at *2 (D. Colo. Oct. 16, 2015) (citing Bird v. Cent. Mfrs. Mut. Ins. Co., 120 P.2d 753, 755 (Or. 1942); Wildwood Townhome Homeowners Assn. v. Travelers Prop. Cas. Co. of Am. (D. Colo. 2022)]

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

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