Insurable Interest & Coverage

Insurance Dispute Resolved by Recognition of Insurable Interest

First party property insurance does not insure property but, rather, insures a person named as an insured against the risk of loss of property in which the person insured has an insurable interest. An insurable interest is one where the insured will be damaged as a result of a loss to the property caused by a peril insured against.

In Fontana Builders, Inc. v. Assurance Co. of America, Supreme Court of Wisconsin, — N.W.2d —- , 2016 WL 3526408 (June 29, 2016) the Supreme Court of Wisconsin dealt with the review of an unpublished decision of the court of appeals affirming judgments entered in favor of Assurance Company of America (Assurance) against its insured, Fontana Builders, Inc. (Fontana), and Fontana’s lender, AnchorBank, FSB (AnchorBank).

The case involves what the Supreme Court found to be a complicated insurance coverage dispute arising out of a 2007 fire that destroyed portions of a high-end custom home that was still under construction in Lake Geneva. The fire caused major damage not only to the home but also to the personal property of the home’s occupants, who were the presumptive purchasers of the home upon its completion but who had not yet purchased the dwelling which was still owned by the builder, Fontana.

Both the construction contractor, Fontana, and the occupants/presumptive purchasers, James and Suzy Accola (the Accolas), had separate insurance policies. After the fire, the Accolas settled with Chubb Insurance Co. (Chubb), the insurer that provided their homeowner’s policy, and received a substantial payment. Assurance then denied all coverage to Fontana for the fire, relying on the “permanent property insurance” condition in its builder’s risk policy as grounds for the denial.

Before getting to the Supreme Court there were two jury trials and two appeals, although this is the first appeal to reach the Supreme Court. The Supreme Court saw two fundamental questions: First, is the interpretation of the “permanent property insurance” condition in the builder’s risk policy a question of fact for a jury or a question of law for the court? Second, if the interpretation of the “permanent property insurance” condition is a question of law, did that condition terminate Fontana’s coverage under the builder’s risk policy?

FACTUAL BACKGROUND

Fontana designed and built “spec” homes, speculative custom houses for which Fontana obtained financing and began construction before securing a buyer for the finished structure. James Accola was the president and sole shareholder of Fontana Builders, Inc.

Nearly all of Fontana’s assets were invested in the house, which the company planned to use to generate new opportunities for itself in the high-end housing market. The home was larger and included more detailed interior work than any previous Fontana-built home. Accola testified at the second trial that he intended to use the home to “showcase” Fontana as “one of the premier builders in the Lake Geneva area.” As the home’s owner, Accola would have unfettered access to an example of Fontana’s finished work when he courted prospective buyers.

Fontana financed the project’s construction through two mortgages with AnchorBank. The first mortgage, dated November 29, 2005, secured a $1.076 million loan. A subsequent mortgage, dated April 23, 2007, secured a $200,000 loan. Accola provided a personal guarantee on Fontana’s loans and mortgages.

Fontana’s Builder’s Risk Coverage from Assurance

Under the builder’s risk policy, Assurance agreed to “pay for direct physical loss to Covered Property from any Covered Cause of Loss described in [the] Coverage Form.” Covered Property included “[p]roperty which has been installed, or is to be installed in any commercial structure and/or any single family dwelling, private garage, or other structures that will be used to service the single family dwelling.”

A separate section of the policy specified additional conditions for coverage: “We will cover risk of loss from the time when you are legally responsible for the Covered Property on or after the effective date of the policy if all other conditions are met. Coverage will end at the earliest of the following: ¶ Once your interest in the Covered Property ceases; ¶  * * * ¶ When permanent property insurance applies;… (Emphasis added.)”

The Accolas’ Homeowner’s Policy from Chubb

James Accola obtained a 30–day temporary occupancy permit dated May 30, 2007, and, shortly thereafter, the Accolas moved most of their personal property into the home. Although the Accolas began residing in the home, Fontana continued interior work preparing the home for permanent occupancy. Fontana remained the home’s owner and had not yet closed a sale or transferred title to the Accolas.

In anticipation of purchasing the home, the Accolas acquired a homeowner’s policy from Chubb Insurance Co. The policy listed “Jim Accola” and “Susy [sic] Accola” as the named insureds, and it listed “Anchor Bank” as the mortgagee. Effective for one year from June 21, 2007, the coverage summary explained: “Your policy provides coverage against physical loss if your home or its contents are damaged, destroyed, or lost.” It provided $2 million of deluxe coverage for the dwelling and $1 million of deluxe coverage for the home’s contents.

The Fire and Its Aftermath

The fire occurred late on the night of June 28, 2007. A Fontana employee working on the property during the day left rags used for wood staining in the garage, and those rags spontaneously combusted. Awakened by smoke alarms shortly after falling asleep, Accola immediately smelled smoke in the house. With thick smoke filling the home’s interior, Accola retrieved his two youngest children from an upstairs bedroom and exited the house.

After the fire, the Accolas submitted a claim to Chubb for damages to their property. They signed a Non–Waiver Agreement allowing Chubb to investigate the claim without acknowledging that the homeowner’s policy provided coverage for the Accolas. Separate from the Accolas’ claim with Chubb, Fontana made a claim with Assurance under the builder’s risk policy. Assurance began investigating Fontana’s claim after James Accola signed a Non–Waiver Agreement on Fontana’s behalf.

Following the mediation, Chubb entered into a settlement agreement with the Accolas. Chubb agreed to pay the Accolas $1 .5 million to dispose of their claim. The agreement allocated $519,000 of the settlement proceeds toward “replacement costs of the [Accolas’] personal property” and $330,000 toward their “additional living expenses,” with the remainder allocated toward “[a]ny other interest the [Accolas] may have in the premises.”

Assurance denied coverage after concluding that the policy did not cover the fire loss and Assurance concluded that the homeowner’s insurance constituted permanent property insurance that applied, thus terminating the Assurance policy.

INTERPRETING THE ASSURANCE POLICY

When determining insurance coverage the Supreme Court examines the facts to determine whether the insuring agreement provides an initial grant of coverage, and the analysis ends if the policy does not provide an initial grant.

The Assurance policy does not define “permanent property insurance.” Nor does the policy define what it means for permanent property insurance — whatever it may be — to “apply.” Assurance contends that Chubb’s payments to the Accolas demonstrate that permanent property insurance applied to the fire loss, thus terminating the Assurance policy. Fontana counters that its insurable interest as a builder was distinct from the Accolas’ interests as occupiers and potential purchasers.

Policy language is ambiguous when “susceptible to more than one reasonable construction. Where an ambiguity exists in a grant of coverage, the court must construe the policy against the drafter, and in favor of the reasonable expectations of the insured.

An insured builder might reasonably expect builder’s risk coverage to end when the builder completes construction and the owner — be it the builder or a new owner — purchases a policy to provide adequate coverage for the finished structure. On the other hand, a party might conclude that it is reasonable for builder’s risk coverage to end when any other property insurance applies to the property, regardless of the party purchasing coverage or the particular interest insured.

For guidance interpreting the phrase “when permanent property insurance applies,” we expand the analysis to consider the phrase within the context in which it appears. Considering the phrase “when permanent property insurance applies” in context suggests that the phrase speaks to the builder’s interest in the property.

The circumstance at issue in this case — “when permanent property insurance applies” — is the only condition or exclusion in the policy that does not explicitly relate to the builder’s interest in the property. Accordingly, based on its context, the Supreme Court read the phrase “when permanent property insurance applies” as addressed to the builder’s insured interest in the property.  Hence, it examined the interests covered by the Assurance and Chubb policies to determine whether the existence of the Chubb policy terminates Fontana’s coverage with Assurance.

This court has explained the broad scope of insurable interests: “A person need not have an absolute insurable right of property in the thing insured or even a special limited interest. It is sufficient if a person’s relationship to the property is such he would reasonably be expected to suffer a loss by the destruction of the property or to derive a benefit from its continued existence. Neither a legal nor an equitable interest nor any property interest as such in the subject matter is necessary.” Ben–Hur Mfg. Co. v. Firemen’s Ins. Co. of N.J., 18 Wis.2d 259, 262, 118 N.W.2d 159 (1962). An insurer under a builder’s risk policy obtained by a contractor and an insurer under a fire policy obtained by a purchaser, who occupied the dwelling prior to conveyance of the title by the contractor, could not prorate a loss, though each policy contained pro rata clauses, because each policy covered a separate insurable interest.

The Accolas’ acquisition of the Chubb policy for their interest as occupants and prospective purchasers did not trigger the Assurance policy’s termination provision because the Chubb policy did not apply to the same interest as the Assurance policy. The Chubb policy in no way covered Fontana’s interest as a builder and owner; therefore, it did not “apply” so as to supersede the builder’s risk coverage. Furthermore, the Accolas’ settlement with Chubb does not change the analysis because even if Chubb had acknowledged that the policy provided coverage — which the settlement expressly disclaimed — any payments to the Accolas would speak to their interest insured by Chubb rather than Fontana’s interest insured by Assurance.

 Leaving builders exposed to such uninsured risk of loss would thoroughly frustrate their reasonable expectations. Assurance, as the drafter of the policy, had the opportunity to set forth in clear terms the circumstances envisioned by the phrase “when permanent property insurance applies.”

CONCLUSION

Legally distinct entities had different interests in the Lake Geneva property at issue in this case. Although the Accolas occupied the property on the date of the fire, their occupancy did not alter Fontana’s insurable interest: construction on the property continued, and Fontana remained the property’s owner because sale to the Accolas had not yet closed. Reaffirming the longstanding principle that interpretation of insurance contracts generally presents a question of law for the court, it concluded that the homeowner’s policy issued by Chubb to the Accolas did not “apply” so as to terminate Fontana’s builder’s risk policy from Assurance.

ZALMA OPINION

This supposedly complex case was truly simple. The Accolas had an insurable interest in both the contents and structure as a place they were occupying and had the right to make a claim against their homeowners insurer, Chubb for all losses up to the amount of their interest. Fontana had a builders insurable interest in the structure and had a right to make claim for its losses due to the fire. The court so found. It ignored the fact that Chubb had the right to subrogate against Fontana for negligently causing the fire that resulted in a $1.5 million settlement that might be presently pending.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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