Recently, one of our insureds signed a contract to purchase a home. We issued an insurance binder, because we felt that our insured had an insurable interest in that property. Prior to closing on the loan—but while the sellers were still living in the home—our insured hired an inspector to survey the home for any possible problems with the wiring, water, roof, etc.
A day or so after the inspection, the seller noticed water in the carpet around the bar. The water originated from the sink behind the bar. The water damage was about $900.
The seller did not feel the damage was his responsibility and refused to report it to his insurance company. Also, the inspector refused responsibility because he was not notified immediately and therefore was unable to inspect the damage prior to cleanup. Thus, the claim fell back on our insured.
We reported the loss to the insurer on the binder. That company is denying the loss on the grounds that our insured had no insurable interest in the property until after closing.
We are very confused about this issue of insurable interest and wonder when a homeowners policy should be put into effect. All real estate agents tell their buyers that once a contract is signed, there is an insurable interest and a binder should be issued.
Kentucky Subscriber
Even though your insured had not yet closed on his new home, he still had an insurable interest in it, assuming he was still bound by the contract. A case on point is Whitten v. Cincinnati Ins. Co., 544 N.E.2d 1169 (1989). The buyers purchased a homeowners policy upon contracting to purchase their new home. The closing on the home was delayed several months because of the seller's inability to obtain a clear title to the property. In the meantime, the house was destroyed by fire.
The insurer denied payment claiming that the insureds suffered no pecuniary loss and, thus, had no insurable interest. The court observed that the insureds would now have to build a new home. It also noted that since the late 1800's the concept of vested pecuniary interest has included “property the destruction of which could be said with a reasonable degree of probability to have a bearing on the insured's prospective pecuniary condition.”
If the seller would report the loss to his insurer, that policy would be primary. However, as the seller is unwilling to do that, your insured's carrier should cover the loss. It would then Interest Feature of Property Policies be up to that company to pursue subrogation.
For a further discussion of insurable interest, see Interest Feature of Property Policies.
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