Insurable Interest: Coverage Even When an Insured Does Not Own the Property

The Leased Commercial Complex Applying Georgia Law

In the first case study, a fire originated in an apartment. It 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 ….”[1] Thus, “insurable interest” exists if an insured has “any actual, lawful, and substantial economic interest” in the claimed, damaged property.[2]

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.”[3] 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.[4]

Therefore, as long as the insured-lessee can demonstrate an “actual, lawful, and substantial economic interest” in the claimed, damaged property, which the insured-lessee likely could via the leasehold, then under Georgia law, the lessee has an insurable interest and is entitled to coverage, subject to the policy’s remaining applicable provisions.

The Leased Commercial Unit Applying North Carolina Law

In the second case study, 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 states 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 defines “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 affords $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 treats improvements and betterments as “personal property,” as it lists 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.”[5] Here, the insured could likely successfully argue that the damaged improvements and betterments, such as interior walls and floors are property that the insured would derive a benefit from its preservation, or are property which he would incur a pecuniary loss from its destruction.

Insurable Interests Under Florida Law

Fla. Stat. §627.405, states that an insurance contract is not enforceable unless the purchaser of the insurance contract has an insurable interest in the things insured at the time of loss.[6] An “insurable interest” is defined as 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.[7] The measure of an insurable interest in property is the extent to which the insured might be damnified by loss, injury, or impairment thereof.[8] Thus, under Florida law, a person or entity may have a valid insurance contract insuring property without ownership of the property as long as the person or entity has an insurable interest (as defined by the Statute) at the time of the loss.[9]

How much insurable interest a person may have at the time of a loss was tested in Travelers Idem. Co. v. Duffy’s Litter Tavern, Inc.[10] In Travelers, the insured was a lessee of a building and purchased an insurance policy from the insurer that included $145,000 of coverage for a fire loss on the real estate and $20,000 in coverage for personal property within the building.[11] The property was totally destroyed by a fire and the insurer denied the lessee’s claim for the loss.[12] A non-jury trial was conducted and the trial court ruled in favor of the lessee and awarded $165,000 in total coverage.[13]

On appeal, the insurer argued that the lessee was not entitled to the full amount of coverage because the lessee did not have legal or equitable title in the property.[14] The lessee argued that it was entitled to the full amount of coverage because the lease contained an option to purchase the property.[15] The Fifth Circuit Court of Appeal found that it was well-settled law that in order for an insurance contract to be valid, the policyholder must have an insurable interest in the property at the time of the loss.[16] The court acknowledged that the lease contained an option to purchase the property, but the option was not exercised at the time of the loss, and therefore, the lessee did not have an equitable or legal title to the property at the time of the loss.[17] While the lessee did have an insurable interest of the property because the lessee had a substantial economic interest in the property, the trial court’s award of $165,000 was improper because said amount represented the insurable interest of the owner of the property.[18]

The appellate court remanded the case for the trial court to determine the amount of the insurable interest of the lessee at the time of the loss.[19] In doing so, the trial court could consider the value of the use of the building during the unexpired term of the lease, the value of the leasehold improvements, and the value of the contents and/or personal property destroyed in the fire.[20]

Florida law is settled that a person may have an insurable interest in real property without being the owner or the lessee of the property if the person has a substantial economic interest in the property.[21] In Aetna Ins. Co. v. King, Mrs. King and her husband owned real estate with a building on it that they operated as a grocery store.[22] Mrs. King and her husband’s health began to decline and they were unable to devote the necessary time to their grocery business, so the couple conveyed the real property in fee simple to their daughters.[23] The proceeds from the store were placed in a special bank account to care for the Kings.[24]

Over two years later, Mrs. King obtained insurance from Aetna Insurance Company, insuring against any loss from the destruction of the building and its contents by fire.[25] A few months later, the sisters and their husbands entered into a “memorandum of understanding” that all proceeds from the property would be used to support Mrs. King (Mr. King had since died).[26] The store was then leased to a third party and the rent money collected from the operation of the store was used for the care of Mrs. King.[27] The store building and all of its contents were then destroyed by a fire.[28] Mrs. King made an insurance claim with Aetna, and her claim was denied.[29] Aetna reasoned that at the time of the fire, Mrs. King did not have an insurable interest in the store or its contents.[30] The trial court awarded Mrs. King $13,083.93 for damages to the building and contents destroyed by fire, and Aetna appealed the verdict.[31] On appeal, the court was asked to decide whether Mrs. King had an insurable interest in the destroyed building and its contents at the time of loss.[32]

Specifically, Aetna argued that since Mrs. King had neither legal nor equitable title to the store at the time of the loss, she did not have an insurable interest and therefore the policy was ineffective.[33] The court stated that an insurable interest in property is not determined by legal or equitable ownership of property, but whether a party has a substantial economic interest in the property.[34] The appellate court found that Mrs. King did have an insurable interest in the property stating as follows:

The testimony at trial which the jury resolved was that at the time of the fire Mrs. King suffered poor health. Having been repeatedly hospitalized for a nervous condition she was unable to work and her livelihood was the destroyed property. To say she had no “insurable interest” is to deny the very fact from which she drew her financial livelihood.[35]

As noted in Aetna, the insured was receiving the entire proceeds of the rent from the grocery store. But what if the insured’s revenue interests were less than the entire amount of revenue the business was collecting? In Banta Properties, Inc. v. Arch Specialty Ins. Co., Banta Properties was the management company of three apartment complexes that were severely damaged by Hurricane Wilma.[36] In exchange for managing the properties, Banta Properties received 4 percent of the revenue collected by the apartment complexes.[37] Banta Properties obtained insurance for the three apartment complexes and eventually made a claim with its insurer for physical damage to the properties.[38]

While a jury found Banta Properties had a $5 million insurable interest, the court held that Banta Properties’ insurable interest was limited to 4 percent of the potential loss of revenue.[39] The court found that the loss of revenue due to Hurricane Wilma was $39,000 in business interruption and Banta Properties’ insurable interest was $1,600 — its 4 percent share of $39,000.[40]

In sum, under Florida law, an insurable interest may also arise based on the economic interests the individual or entity has in the property; however, the amount of benefits the insured may receive will be limited to the amount of financial interest the insured has in the property at the time of loss.

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 in Georgia and Florida, 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.

Nicholas Goanos is a senior associate at Butler Weihmuller Katz Craig LLP, Charlotte, North Carolina. Jeffrey Gionet is an associate at the firm’s office in Tampa, Florida.

[1] See Ga. Code. Ann. §33-24-4(a),(c).

[2] See Ga. Code. Ann. §33-24-4(a),(c).

[3] Conex Freight Systems, Inc. v. Georgia Ins. Insolvency Pool, 254 Ga. App. 92, 561 S.E.2d 221 (2002).

[4] Farmers’ Mut. Fire Ins. Co. of Ga. v. Harris, 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.).

[5] 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)).

[6] Fla. Stat. §627.405(1).

[7] Fla. Stat. §627.405(2).

[8] Fla. Stat. §627.405(3).

[9] See Fla. Stat. §627.405(1)-(3).

[10] Travelers Idem. Co. v. Duffy’s Litter Tavern, Inc., 478 So. 2d 1095, 1095 (Fla. 5th DCA 1985).

[11] Travelers Idem. Co., 478 So. 2d at 1095.

[12] Travelers Idem. Co., 478 So. 2d at 1095-1096.

[13]Travelers Idem. Co., 478 So. 2d at 1096.

[14] See Travelers Idem. Co., 478 So. 2d at 1096.

[15] Travelers Idem. Co., 478 So. 2d at 1096.

[16] Travelers Idem. Co., 478 So. 2d at 1096.

[17] Travelers Idem. Co., 478 So. 2d at 1096.

[18] Travelers Idem. Co., 478 So. 2d at 1096.

[19] Travelers Idem. Co., 478 So. 2d at 1096.

[20] Travelers Idem. Co., 478 So. 2d at 1096.

[21] Aetna Ins. Co. v. King, 265 So. 2d 716 (Fla. 1st DCA 1972).

[22] Aetna Ins. Co., 265 So. 2d at 717.

[23] Aetna Ins. Co., 265 So. 2d at 717.

[24] Aetna Ins. Co., 265 So. 2d at 717-718.

[25] Aetna Ins. Co., 265 So. 2d at 718.

[26] Aetna Ins. Co., 265 So. 2d at 718.

[27] Aetna Ins. Co., 265 So. 2d at 718.

[28] Aetna Ins. Co., 265 So. 2d at 718.

[29] Aetna Ins. Co., 265 So. 2d at 718.

[30] Aetna Ins. Co., 265 So. 2d at 718.

[31] Aetna Ins. Co., 265 So. 2d at 717.

[32] Aetna Ins. Co., 265 So. 2d at 717.

[33] Aetna Ins. Co., 265 So. 2d at 718.

[34] Aetna Ins. Co., 265 So. 2d at 718.

[35] Aetna Ins. Co., 265 So. 2d at 719.

[36] Banta Properties, Inc. v. Arch Specialty Ins. Co., 553 Fed. Appx 908, 909 (11th Cir. 2014).

[37] Banta Properties, Inc., 553 Fed. Appx at 909.

[38] Banta Properties, Inc., 553 Fed. Appx at 909.

[39] Banta Properties, Inc., 553 Fed. Appx at 910-911.

[40] Banta Properties, Inc., 553 Fed. Appx at 913.

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