In California, we see a lot of claims where investors or wealthy buyers purchase homes held in trusts, corporations or other business entities such as the LLC (limited liability company). Often, investors or buyers do this to protect their assets. However, the irony is that it is exactly in these scenarios that homeowners find they may run into issues if they are not clear with their insurance brokers or agents and do not purchase their insurance policy properly.
The most common scenario is when a homeowner either purchases a home in the name of a business entity, holds the home under the entity’s name, and then lives in the home and purchases insurance under their personal name. Under California Insurance Code Section 282, the homeowner may find that if a direct physical loss to their property occurs, they do not have a proper insurance policy to cover the loss. Insurance Code Section 282, dictates that an insurable interest is defined as “an existing interest, an inchoate interest founded on an existing interest, or “an expectancy, coupled with an existing interest in that out of which the expectancy arises.”
When dealing with insurance policies, it almost seems like a no brainer when we talk about a homeowner needing an insurable interest before they can have an interest in an insurance policy proceeds. However, in reality insurance is a complicated business and it is pertinent that an insured has a proper policy obtained under the proper party name to have a proper insurable interest. How can a homeowner make sure they have an insurable interest and proper insurance policy?
- Talk to your broker when obtaining insurance; disclose how title is held to the property;
- check in often if there are changes in property status regarding ownership and remodeling, rebuilding;
- Make sure you have the proper entity of the true insured’s name listed on your policy.
In California, an insurance policy is void unless the insured has an insurable interest in the property at the time of the loss. (See California Insurance Code Sections 280 and 287). Specifically, if a loss occurs and the named insured is not the titled owner of the property then there is no active policy for the property. To constitute an insurable interest, the insured must have a direct pecuniary interest in the preservation of the property and be exposed to pecuniary loss as an immediate an proximate result of its destruction.1
We all want to protect our assets, and usually our homes are our most cherished asset, but if title to a homeowner’s property is held in trust, under a different name, or through a business entity, the purchase of insurance may be more complicated than a straight homeowner policy. If the proper information is not conveyed to a broker or agent, you may find that your purchased policy is worth nothing more than a few pieces of paper after a loss. Without giving full disclosure on how a property title is held, an insured may not know that purchase a renters policy to cover personal property may be needed while the business entity holds another policy for the real property.