Expert Commentary

Foreclosure Destroys Insurable Interest

Every first-party property policy of insurance requires that the person insured have an insurable interest in the property, the risk of loss of which was sought to be insured. The policy limits coverage to the extent of the insurable interest. If there is no insurable interest, there is no damage to the person insured. The policy only promises to indemnify the insured for its loss up to, but no more than, the insurable interest of the person insured.


Claims Practices
October 2013

Tyson Rhine and wife, Sandra Rhine, owned a house in a semi-rural part of Harrison County, Texas. They obtained fire and hazard insurance on the property from Priority One Insurance Company. After the house was destroyed by fire, Priority One denied coverage, claiming that the policy had been terminated before a claim matured and that, at the time of the loss, the Rhines had already lost any insurable interest in the property due to foreclosure. The parties filed competing motions for summary judgment, and the trial court granted Priority One's motion and denied the motion filed by the Rhines. The Rhines appealed. In Rhine v. Priority One Ins. Co., 2013 Tex. App. LEXIS 10399 (Tex. App. 6th Dist. Aug. 20, 2013), the Texas Court of Appeal resolved the dispute based on whether the Rhineses had an insurable interest at the time of the fire that was the subject of the suit.

Factual Background

The Rhineses were the owners of a house located in Harrison County, Texas, and had obtained fire and casualty insurance from Priority One for the property, receiving a homeowners insurance policy that included coverage up to $200,000 for the dwelling itself and up to $120,000 for personal property contents. The policy specified that the "'Insured location' means ... the residence premises" and that "'Residence premises' means the residence premises shown on the declarations page. This includes the one or two family dwelling ... where an insured resides or intends to reside within 60 days after the effective date of this policy."
 
The Rhineses' real estate (together with any permanently attached personal property) was secured by a mechanic's lien contract with power of sale originally granted to secure Neatherlin Homes, Inc., in the payment of a promissory note given for the construction of the improvements. The obligation was prescribed to be paid in monthly installments. Priority One, prior to any fire, sent a warning to the Rhineses that it was notified that the property appeared to be vacant and that coverage would be suspended if vacant more than 60 days. The Rhineses made no response to this notice.

During the time that repairs of the damages occasioned by a fire were being performed, the home was once again severely damaged/destroyed in a second fire. An important event intervened between the first fire and the second. A trustee's sale foreclosing the Rhineses' ownership in the property was conducted on the property in favor of Walter Mortgage Company LLC, which was then the holder of the note and lien.

The Motions for Summary Judgment

In his affidavit in support of a motion for summary judgment, Tyson Rhines claimed that, even though the October fire had occurred, and, despite the fact that the holder of the lien had foreclosed some 2 weeks before the second fire occurred, the Rhineses claimed that they still maintained the insured property as their primary residence. Priority One, after having first issued several insurance checks to the Rhineses, stopped payment on them. On January 16, 2012, Priority One informed the Rhineses that the "policy was canceled effective November 4, 2011," the claim was denied due to that cancellation, and "no coverage was in effect on the date of loss of 11/15/2011."

The Rhineses sued Priority One. Priority One's answer to the suit raised several defenses, including cancellation of the policy and that Plaintiffs did not have an insurable interest in the property, did not own the property in question, did not cooperate in the handling of their claim, and failed to provide proper notice of suit as required by the Texas Insurance Code and the Texas Business and Commerce Code.

Priority One asserted that the Rhineses had no insurance policy in effect at the time of the fire because they had no insurable interest in the residence at the time of the loss due to the November 1, 2011, foreclosure. Thus, the motion claimed that the Rhineses could not establish a breach of contract claim.

The Rhineses claim on appeal was that the trial court's decision was erroneous because, at the time of the second fire, the Rhineses were still using the property as their primary residence, and "[n]owhere in the policy is ownership of the premises mentioned as a prerequisite or requirement for coverage to take effect." They further argued that, because they could still owe money to the mortgage holder even though a foreclosure had taken place, if a deficiency existed between the amount owed and the amount realized at the trustee's sale, they sustained pecuniary loss from the home's destruction. Employing this rationale, they stated that they retained an insurable interest in the property even after the foreclosure had been completed.

Priority One's Motion for Summary Judgment

To prove unfair settlement practices under the Texas Insurance Code, the Rhineses were required to show that Priority One "knew or should have known that it was reasonably clear that the claim was covered." The coverage was denied due to the alleged vacancy, but when there is evidence on either side, as there was here, the issue is a fact question. However, the issue of whether it was reasonable for Priority One to conclude that the Rhineses lacked an insurable interest in the property was held to be a fact question for the jury because reasonableness is determined using an objective standard of whether a reasonable insurer would have delayed or denied payment on a claim.

Insurable Interest

In its motion, Priority One sought to establish the lack of an insurable interest due to the foreclosure proceedings. The homeowners insurance policy contained a condition titled "Insurable Interest and Limit of Liability" clarifying that "[e]ven if more than one person has an insurable interest in the property covered, we will not be liable in any one loss ... to the insured for more than the amount of the insured's interest at the time of loss."

There was no dispute that the Rhineses' interest in the property was lost through foreclosure prior to the loss occasioned by the November fire. Therefore, the Rhineses' status had been reduced to only that of tenants at sufferance as a result of the foreclosure sale. A claimant has the burden to prove an insurable interest, which is a question of law. An insurable interest exists when the insured derives pecuniary benefit or advantage by the preservation and continued existence of the property or would sustain pecuniary loss from its destruction. Ownership or title in the home was not necessarily mandatory in order for the Rhineses to have an insurable interest in the home.

The appellate court found that the Rhineses had no insurable interest in the dwelling at the time the second fire took place and that Priority One's summary judgment on this point was proper. Because the Rhineses were tenants at sufferance, the policy prevented their recovery for personal property damage.

Conclusion

Insurable interest in property is an interest where a person can be damaged by the loss of the property in question. Anyone can buy insurance on any property because the insurer will take the word of the applicant. However, without an insurable interest in the property, there can be no recovery of indemnity because, without an insurable interest, the insured has lost nothing for which he or she needs to be indemnified.

In this case, even after the foreclosure, the Rhineses stayed in the property until it—fortuitously—caught fire. However, since they lost nothing from the second fire, there was no loss to an insurable interest, and the court refused to allow them to profit from an insurance policy that provided no coverage to them.


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