There are a myriad of situations that bring about what we like to call ‘law school exam questions’.

Think of a scenario where an insured client enters into a contract to sell his property, but prior to closing the deal, the property gets destroyed by fire. Having proper understanding will ensure a seamless selling process for your home or business property while bringing you more dollars and the “right” party.

The Dilemma In This Case:

• What happens next?
• Can the property change hands?
• Can the insurer stop the transfer?
• Who will collect the proceeds from the insurance company — the buyer whose property is destroyed or the seller whose property was burned? Could it be both?
• Is the decision based on the purchase agreement? What if the insurance cover has an anti-assignment clause? Who will have the insurable interest?

Well, this conundrum struck the team at Insurance Claims Group really hard, and also gave them a chance to wear their “legal-eagle” caps. Backed with their expertise in insurance claims matters, they herein provide possible solutions to the above equations?

But first things first…

It is worth noting that selling residential and commercial properties has become a day to day occurrence. Notably, the transfer of title happens regardless of whether it is a home or a business premise.

This is also applicable in case of transfer of insurance obligation. The seller usually insures the property up to the day when the transaction is closed. Upon closing, the new owner (buyer) is expected to insure the property afresh.

For now, let’s assume one of these events has taken place.

So what next?

First, assuming you have suffered loss from an insured event before deciding to dispose the property while the claim is pending; or second, in the process of selling the property, an insurance claim arises.

A key principle in insurance states that a loss should never hold up the transfer or sell of property. As a matter of fact, the insurer is forbidden from holding up the sale or transfer of a property on the basis of a pending claim.

Please beware of insurance companies that delay or deny the payout of insurance claims when properties with existing claims are put under sale. This is just one way of insurers evading the obligation of paying maximum compensation of what is due to the insured the soonest possible.

Pre-contractual Duty of Disclosure of Property Defects

Even though most buyers arrange for property inspection before putting it up for sale, it’s your legal obligation to disclose any defects including structural issues, faulty appliances and fixtures, dampness, or insect infestation.

In essence, it would be prudent for you to fix these issues before putting your property up for sale. This will enable you to get several repair quotations, enabling you to get value while keeping costs at minimal.

 More often than not, the main deal breaker for many buyers has to do with structural problems, pest infestation, storm damage or deteriorating parts of a building such as flooring, roofing etc.

What happens if you fail to disclose something?

According to an article published on realestate.com.au, the best policy when it comes to disclosures is honesty.

And not just for the sake of ethical reasons, in fact, failing to disclose can land you in jail or attract tens of thousands in fines and penalties, depending on the state or territory where the property is located.

This means that you could end up losing your buyer. And the fines and penalties are not worth the risk and hence it’s better to disclose everything from the onset.

The Purpose Of The Claim:

Based on the language used in the purchase agreement, several scenarios are possible. For instance, the seller could pass part or the entire claim to the purchaser. Every insurer has its own “anti-assignment” clause within the insurance policy. What this clause means is that the insurance policy cannot be assigned until the insurer consents; however, a post-loss claim can be assigned, despite this clause.

Factors Arising in these scenarios

First and foremost, let’s assume the insurance claim is not assigned in the purchase agreement. In such a case, only the seller can lodge a claim for damages or loss under the insurance policy that existed at the time of loss or damage, since the buyer will not have the right to file a claim as s/he didn’t and doesn’t have any insurable interest.

Ideally, in the absence of an assignment, a seller may reduce its purchase price by the sum total of the claim to be filed so as to place the buyer in the position it would have been if no loss had occurred.

Assuming that the seller actually assigned the claim to the buyer, then the buyer would have the right, as per the assignment, to receive the claims proceeds and do the repairs. In this case, the sales price would remain as it was in the sale agreement.

In both cases, the insurance company cannot escape compensating the insured, which is one of the main reasons for taking an insurance cover.

The Replacement Cost Claim:

Assuming the scenario changes to the fact that the insured seller had already received the actual cash value under the insurance cover (differs per state, but here we’ll use the common definition of “replacement cost minus depreciation”) and later transferred or sold the property to a willing buyer.

The question that beckons here is,

Is the buyer or seller entitled to lodge a claim for the depreciation withheld (for repair or replacement costs of the property) from their insurer? The answer is a loud “YES! ”when the property in question is already replaced or repaired.

So, who is entitled to make this insurance claim? Here, it all depends again with the language used in the purchase agreement. If the claim is already assigned, then the buyer can replace or repair the property, and follow with a claim for the depreciation withheld under the original policy of the seller.

But then….

What if there was no claim assigned? Can an insured party who has already transferred ownership of a property file a claim for withheld depreciation on a property they no longer own?

Let’s take a look at a case with one of our western neighbours:

The Seventh Circuit Court of Appeals in Edgewood Manor Apartment Hoes, LLC v. RSUI Indemnity Co., 733 F.3d 761 (7th Cir. 2013) addressed this question. In this case, the court ruled that an insured, whose property was destroyed by a storm, had the right to sell the unrepaired property and still claim for replacement cost proceeds.

In summary, the insurer paid the insured the actual cash value of losses caused by Hurricane Katrina and had to negotiate coverage of the replacement cost. While the negotiations were on, the insured sold the property in question. After the sale, the buyer made repairs to the property and thereafter the seller and buyer sued the insurance company for replacement costs. Both the circuit and trial courts determined that, in the absence of the assignment of claim, the buyer had no right to sue.

The question that arose was, “is a seller eligible to recover the replacement cost or withheld depreciation proceeds?

The insurance company argued that it was not obligated to pay because the seller sold the property while it was in an unrepaired state, hence didn’t incur any costs repairing the property and that after the sale; the property’s insurable interest was lost. The trial court ruled in favour of the insurance company, dismissing the claim.

The seller made an appeal arguing that he had the right to recover since the insurance policy and transfer of property did not require him to repair the property, just that repairs be made.

The Seventh Circuit agreed, and ruled that the Mississippi law only allows for insurable interest in the property during contract formation, i.e. at the point of issuing the policy and that the insured was not required to maintain the interest during the negotiation or settlement of claims or litigations.

What if the seller didn’t make the property repairs?

The Seventh Circuit determined that the insurance cover didn’t require the insured to make repairs on his own, only that repairs be made.

The court ruled that replacement cost insurance is:

1. Supposed to exceed the indemnity policy
2. Designed to place the insured in a better position than before the loss occurred through compensation of the insured for depreciation
3. That the insurance company made a “repair it yourself” provision, otherwise the policy language should have been drafted more clearly.

In Edgewood Manor, the court determined that the insured/seller had an insurable interest in the property at hand the moment it procured the insurance policy and at the time of damage or loss, fulfilling any legal requirement for standing.

Additionally, the options available for the seller are as follows:

1. Settle for a reduced selling price depending on the damage and receive the RCV, or
2. Settle for a full selling price (with the assumption that the property was not damaged) and make a claim assignment to the buyer.

Building Code Upgrades

There are some areas where failure to give an assignment of claim leads to discontinued payment to a non-repairing seller. This relates to code upgrades. Ideally, code upgrades are to be paid by the insurance company—the amount incurred and when it is incurred.

If there’s no assignment of claim and the new owner of the property applies for building code upgrades, the buyer will not gain standing to file claims with the insurer (even though there hasn’t been any assignment) and the seller might also not be able to recover from the insurance company (since they did not really incur the cost for code upgrading).

In the event that the buyer might be forced to repair and also make code upgrades, the property transaction should be able to assign claim to the buyer so as to recover the cost of code upgrades. However, there’s no need for sales price adjustment.

In summary, do not allow the carrier to inform you that you’ve been caught up in the “catch-22” when a claim has been made during the sale of a property. Claim recovery by the buyer or seller based on the agreement is considered viable.

Again, the sales price need not change so that both parties of a real estate transaction remain in the same position they should be in the absence of an insured event that causes damage or loss.

Working with a claims handling company like Insurance Claims Group is a sure way to seamlessly make a claim even when such issues as those highlighted above arise.

Contact Insurance Claims Group for help to maximise your commercial or residential property damage insurance claim.