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January 12, 2018 | Publication| Coverage Even When An Insured Does Not Own the Property?

T. Nicholas Goanos

This article is originally a publication of Southern Loss Association, Newsletter January 2017. Legal opinions may vary when based on subtle factual differences. All rights reserved.

Insurable interest is a legal concept which requires an insured to have a financial or other interest in the claimed, damaged property before being entitled to coverage. Although this concept is easy to grasp, it can be troublesome in application, such as when an insured does not own the claimed property. Below are two case studies-one from Georgia and one from North Carolina-which show how an insurable interest may arise and how these States treat this concept. Also below are several suggestions a party may utilize when assessing the presence (or absence) of an insurable interest.

Case Study no. 1: The Leased Commercial Complex (Georgia Law)

On a particular date, a fire originated in an apartment, which damaged not only the apartment unit, but also, the entire complex. The insured, at the time of the fire, had leased the complex from the owner and had, in effect, a property coverage insurance policy, which employed customary ISO forms. Under these Forms, there was no dispute that direct, physical damage to property occurred from a covered cause of loss. There was, though, a question as to whether the insured had an insurable interest in the claimed property, given that both the unit and the complex were not his and that his policy's Loss Payment provision limited coverage to the insured's "financial interest" in the claimed property. 

Conveniently for the insured, Georgia law has addressed this issue. Under the Georgia Code, 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" and the "measure of an insurable interest ... is the extent to which the insured might be damnified by loss, injury, or impairment ...." See Ga. Code. Ann. §33-24-4(a),(c). Thus, "insurable interest" exists if an insured has "any actual, lawful, and substantial economic interest" in the claimed, damaged property. Id. (Emphasis added.)

Further, the Georgia Court of Appeals has issued multiple rulings in accordance with this Statute. For example, in Conex Freight Systems, Inc. v. Georgia Ins. Insolvency Pool, the Court held that a leasehold can constitute an insurable interest, as long as the party claiming that interest "will be benefitted by [the property's] preservation and continued existence, or [would] suffer a direct pecuniary loss from its destruction". Id., 254 Ga. App. 92, 561 S.E.2d 221 (2002). Similarly, in Farmers' Mut. Fire Ins. Co. of Ga. v. Harris, the Court held that because the "[l]essee of property had 'insurable interest' therein", and the fire insurer, with knowledge of the leasehold interest, still insured the property's full value, the "lessee was entitled to recover [the] value of barn" and its contents. Id., 50 Ga.App. 75, 177 S.E. 65 (1934); accord Commercial Union Assur. Co., Ltd., of London, v. Jass, 1929, 36 F.2d 9, certiorari denied 50 S.Ct. 410, 281 U.S. 758, 74 L.Ed. 1168 (holding that insured's occupation of a building under a lease, subject to termination on 60 days' notice, constituted an insurable interest in the building.).

Therefore, in this Case Study, as long as the insured-lessee demonstrated an "actual, lawful, and substantial economic interest" in the claimed, damaged property, which he likely could via his leasehold, then under Georgia law, he has an insurable interest and is entitled to coverage, subject to his policy's remaining applicable provisions.

Case Study no. 2: The Leased Commercial Unit (North Carolina law)

Here, a tenant leased an office space within a commercial building when, a water heater in that space failed and caused substantial water damage. The tenant submitted an insurance claim to his carrier for not only the damaged business personal property, but also, for the damaged improvements and betterments. The question arose, however, whether such damaged property was covered under the policy.

The tenant's policy stated that, subject to the policy's statement of insured values ("SIV"), the policy covers the "[r]eal property ... in which the insured has an insurable interest"; "[p]ersonal property owned by the Insured, including the Insured's interest as a tenant in Improvements and Betterments", and "[p]ersonal property of others in the Insured's custody to the extent of the Insured's interest in and the Insured's Liability." The policy also defined "Improvements and Betterments" as "fixtures, alterations, installations, or additions comprising a part of the building occupied by the insured and made or acquired at the expense of the insured" and "Insured Liability" as that "liability imposed by law upon the Insured ... or ... assumed by the Insured by specific agreement prior to loss ...." Although the SIV afforded $120,983 in coverage for business personal property at the loss location, of which $95,883 was allocated for contents and $25,100 was allocated for equipment, no amounts were allocated in the SIV for building or improvements and betterments. Nonetheless, it is possible a court applying North Carolina law could conclude, for at least two reasons, that the tenant's policy covers the damage to the improvements and betterments.

First, the tenant's policy treated improvements and betterments as "personal property", as it listed these types of property within the sub-section of covered personal property. Second, North Carolina Appellate Courts have held that an insurable interest exists "if the peril against which insurance is made would bring upon the named insured, by immediate and direct effect, some pecuniary loss", or "if the named insured would derive some pecuniary benefit from the preservation of the insured property."  Jerome v. Great Amer. Ins. Co., 52 N.C. App. 573, 578, 279 S.E.2d 42, 45 (N.C. App. 1981) (citing to Rea v. Hardware Mutual Casualty Co., 15 N.C.App. 620, 190 S.E.2d 708, cert. denied, 282 N.C. 153, 191 S.E.2d 759 (1972) and King v. National Union Fire Insurance Co., 258 N.C. 432, 128 S.E.2d 849 (1963)). Here, the insured could likely argue successfully that the damaged improvements and betterments, such as interior walling, flooring, etc. are property which the Insured would derive a benefit from its preservation, or are property which he would incur a pecuniary loss from its destruction.

Assessing the Presence of an Insurable Interest

Assessing the presence (or absence) of an insurable interest is rarely straight-forward. In most situations, it is fact intensive and involves multiple parties submitting multiple claims; the analysis of multiple documents; and the evaluation of issues such as mortgagees, other insurance, and equitable subrogation. Thus, it is helpful to undertake the following actions to ensure a complete assessment occurs:

1. Identify any and all applicable statutes. As noted in the Georgia Case Study above, a particular statute may apply, which may address the issue at hand. 

2. Identify all applicable documents. The issue of insurable interest often arises when either leased property or commonly-owned property (such as a condominium) is involved. Obtaining a copy of any leases, applicable by-laws and declaration, and all potentially applicable insurance policies may provide sufficient information to discern each insured's and claimant's insurable interest. 

3. Determine who is submitting the claim and whether any others may have an interest in the claim. This is often the most difficult step in the adjustment, but also, the most critical. Timely communication and examination of all applicable documents should ensure a full assessment.

T. Nicholas Goanos

A Senior Associate at Butler Weihmuller Katz Craig LLP in Charlotte, NC. Nicholas practices in our Arson & Fraud, Casualty Defense Litigation, Extra-Contractual, First-Party Coverage, and Third-Party Coverage departments.

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