Insurable Interest

Insurable interest exists when a person derives benefit from the existence of, or ability to use, an item whether or not they own it. Insurable interest is a basic equirement for the issuance of an insurance policy

 

Insurable interest is a term thrown around a lot in insurance claims. As property damage restoration contractors, we do not necessarily need to be fully versed in all insurance languages, but we should know the basics.

I used to think that having insurable interest means you are the owner of the property, but I was wrong. You can, in fact, have an insurable interest in a property you do not own. So let’s start with a basic definition and then try to break it down to what it might mean to us as restoration contractors.

Insurable interest is “a right or relationship in regard to the subject matter of the insured contract such that the insured can suffer a financial loss from damage, loss or destruction to it” (Bickelhaupt and Magee) (NAIC glossary of insurance terms).

In more basic terms, insurable interest exists when a person derives benefit from the existence of, or ability to use, an item whether or not they own it. Insurable interest is a basic requirement for the issuance of an insurance policy. Entities not subject to financial loss from the loss of use of a property do not have insurable interest and cannot purchase insurance for that property.

In terms of a property like a home, if you own it you obviously have insurable interest on it and can insure the property. But, interestingly enough, if you rent the property, you may still have an insurable interest in it. It’s not quite the same as if you own it, but the best example of this is if you have renters insurance, you can be covered for “loss of use” of the property, but you cannot buy insurance to replace or repair the property since you do not own it. There are some exceptions to this listed below.

Why is insurable interest important to us as restoration contractors? It is because we must know who owns the property and has insurance coverage for the items we are handling. And we must know who is responsible for which elements of the property in a multilayer scenario.

A few simple examples are as follows: You get called in by a property manager in a rental building to clean up after a fire. The property manager can hire you to restore the structure, but he cannot hire you to clean, handle or even move the tenant’s personal property. Now take the same scenario in a condominium and the same loss and damage may have multiple different levels of insurance. The property manager on behalf of the condo association may only be able to hire you to clean up public areas. The individual units may also have separate policies. In a sublet scenario, for example, you may have one insurance policy for the base building, a second insurance company covering the interior structure and any alterations, and then a third insurance company covering the personal property of the tenant.

Next to an owner-occupied dwelling, the rental scenario is possibly the simplest. More complex properties such as co-ops and condominiums can be much more confusing. Let’s break them down and understand what they are:

Cooperatives (aka “co-ops”) – The residents of a co-op own shares of a corporation that is operated by a board of directors (“Board”) comprised of elected shareholders. Each shareholder of the corporation has the right to live in and alter their apartment within the limits of the co-op bylaws. In most co-ops, the resident owns and is insured for their personal property and contents, finishes (paint/poly), and any improvements or renovations made to the unit (aka “improvements and betterments” (“I&B”) or “additions and alterations (“A&A”)). The co-op generally owns and has the insurable interest in all common areas and original structure within each unit, including original walls, floors, windows, fixtures, kitchen, bathrooms, etc. Therefore, it is very important to determine in a co-op if the property elements are original or if a renovation was performed, even if it was performed by a previous owner. Even if the space was completely unaltered from when the building was built, there is a line where the building’s insurance stops and the unit owners take over. The building will not cover finishes such as paint, carpet, or even the finish on the floor. Imagine the simplest water damage loss where just the floor needs to be refinished and you have one carrier paying to sand it and another to apply the finish.

Condominiums (aka “condos”) – The residents of a condo own their actual unit (i.e., not shares), including all structural surfaces, fixtures, finishes, etc. That means the unit owner has an insurable interest in everything within the apartment but not the basic building structure and elements behind the walls, floors, and ceilings.

Are there exceptions to this? Unfortunately, yes. It depends on the proprietary lease (bylaws). We have seen at least one condo where the building had the insurable interest on the walls, floors, moldings, etc., within each apartment. In most cases, the only things within the apartment that fall under the building’s insurable interest are the front door and the windows. Note that condos have become an increasingly common ownership structure in the last 20 years.

I warned you there were exceptions to these rules. The first is for the transportable property. You can buy bailee coverage to transport or store someone else’s property, and this makes sense because even though you do not own it, you derive financial benefit from transporting it.

Triple Net Lease (or Absolute Net Leases) – These are rental scenarios mostly in long-term commercial real estate deals where a tenant is responsible for all maintenance, repairs, and insurance for the property. In these scenarios, the tenant does have insurable interest on the property even though they do not own it and can purchase insurance not just for the loss of use but for property damage as well.

Another entity that has an insurable interest, even though they never pay a penny in premiums, is the banks that hold the mortgage on the property. In many cases, they end up controlling the money on an insurance-covered repair and make you jump through hoops to collect. Technically, as the mortgage holder, they do have insurable interest on the property since they are a part-owner of the property.

The last thing that may be worth discussing is the assignment of benefits with regard to insurable interest. Assignment of benefits allows a third party, such as a restoration company, a roofer, or a plumber, to “stand in the shoes” of the insured and seek direct payment from the insurance company. This relates to the “direction to pay” language that many of us have in our contracts and emergency authorization forms. While this does not really pertain to insurable interest directly, as you are assigning benefits from a claim but not transferring insurable interest or ownership rights to the property, it is relevant because if you get the wrong entity to sign your assignment of benefits form, then you will not be successful in collecting payment for your services from the carrier that is responsible for it.

What are the takeaways for us restoration contractors who just want to prepare one bill for our services, have one customer to satisfy, and deal with one insurance adjuster to negotiate our charges? Sorry to say this, but welcome to the real world. It is vitally important to know who is hiring us to perform work and what they are responsible for. Aside from not getting paid for our services, which would be bad enough, there are other concerns you need to consider, such as trespassing or being liable for damages you may not have caused. And, of course, the most important reason why you need to understand the concept of insurable interest is to know who is going to be responsible for paying your bill at the end of the day.

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