For Coverage to Exist Under a Homeowners Policy You Must Be an Insured and Have an Insurable Interest
For reasons unknown to me many people believe a homeowners policy insures the property. It does not. A homeowners policy only insures specific people who qualify as insureds against certain risks of loss to the property. A person named as an insured who has no insurable interest cannot recover for a loss. A person with an insurable interest cannot recover unless named as an insured or who is an insured by the terms, conditions and definitions of a policy.
In Vaughn v. Stillwater Property & Casualty Insurance Co., Superior Court of Delaware, Not Reported in A.3d, 2017 WL 2709750 (June 23, 2017) the Superior Court of Delaware was faced with a claim from a person with an insurable interest in property who was not named as an insured nor did he fit within the definition “insured” but asked to be provided coverage because it was only fair that the insurer be prohibited from denying him indemnity.
The plaintiff, a homeowner whose residence and personal property were damaged in a fire, yet, on the date of the fire, the plaintiff was divorced from the named insured and she no longer resided in the home. The insurance company denied coverage for damage to the plaintiffs’ personal property because he was neither a named insured nor a relative of the named insured on the date of loss. This case presents two core issues:
First, what is the relevant date for determining coverage under an insurance policy: the effective date of the policy or the date of loss?
Second, if the date of loss is the determinative date, is the policy amendment retroactive to the date of loss?
On December 17, 2009, the plaintiff, John Vaughn, jointly purchased 1803 Belfield Avenue, Wilmington, Delaware (the “Property”) with non-party Samantha Brocklesby (“Ms. Brocklesby”). Both the plaintiff and Ms. Brocklesby were named on the deed and in the mortgage documents associated with the purchase of the Property. Only Ms. Brocklesby filled out an application for homeowner’s insurance and was the only named insured under the homeowner’s insurance policy issued for the Property (the “Policy”).
The Policy was annually renewed. The premium payments for the Policy were escrowed through the mortgage company and paid by Vaughn or Ms. Brocklesby as part of their mortgage.
Although Ms. Brocklesby was the only named insured on the Policy until August 29, 2014, the Policy covered certain others who resided with her. Specifically, the Policy defined “Insured” included residents of her household who were her relatives. The Policy also defined “You” and “Your” as “the ‘named insured’ shown in the Declarations and: (1) The spouse; or (2) a Party who, with the ‘named insured’, has entered into a civil union recognized under Delaware law; If a resident of the same household.” While they were married and living together Vaughn was an “insured.”
On July 22, 2013 they formally divorced on March 6, 2014. Two months later, Vaughn and Ms. Brocklesby’s agreement regarding the division of assets was entered by the Family Court as an order of that Court (the “Ancillary Order”). As part of the property division the property was awarded to Vaughn as soon as he took Brocklesby’s name off the mortgage and a new deed issued. It also provided that once Ms. Brocklesby moves from the home Vaughn shall be solely responsible for all expenses for the home.
On August 3, 2014 (the “Date of Loss”), a fire occurred on the Property, damaging both the residence and Vaughn’s personal property. On the Date of Loss, Ms. Brocklesby was not living in the Property, and she and Vaughn were divorced.
Stillwater covered the damage to the residence but refused Vaughn’s claim for damage to his personal property and his expenses for alternate living arrangements, concluding he was not an insured on the Date of Loss. Three weeks after the Date of Loss, Vaughn contacted the servicing agent for the Policy, who submitted a “policy change update” adding Vaughn as a named insured. The amended declaration page (the “Amended Declaration”) issued after the policy change, lists both Vaughn and Ms. Brocklesby as named insureds.
Vaughn then sued Stillwater alleging claims for breach of contract and bad faith.
It is undisputed that Vaughn was an “Insured” under the Policy on its effective date, December 17, 2013. On that date, Vaughn and Ms. Brocklesby legally were married and residing in the same household. Eight months later, however, on the Date of Loss, Vaughn did not meet the definition of “Insured,” because he was neither named as an insured, not Ms. Brocklesby’s spouse nor a relative residing in her household.
Vaughn, although acknowledging the insurable interest of the parties to an insurance contract is determined by the facts existing at the time of the loss, argues he had an insurable interest in the Property because he was a mortgagee, co-owner, and resident of the Property.
Precedent provides that the date of loss is the determinative date for purposes of defining the scope of coverage under an insurance policy. This rule is both logical and fair, because it relies on the circumstances existing on the date of loss, without unnecessarily including people who, due to changed circumstances, no longer meet the conditions for coverage, while including those who did not meet the conditions for coverage on the effective date but do as of the date of loss.
Although Vaughn was not a named insured, the spouse of the named insured, or otherwise an “Insured” within the definitions of the Policy, he argued, however, that he was added as a named insured shortly thereafter and that amendment was retroactive to the Date of Loss. However, the Amended Declaration, which added him as a named insured was not effective until August 29, 2014, some three weeks after the Date of Loss.
On its face, the Amended Declaration provides that the amendment added a “spouse,” that is, Vaughn, and that the change was effective August 29, 2014. Put simply, the only reasonable interpretation of this one-page document is that Vaughn was added as a named insured effective on that date. Nothing on the face of the Amended Declaration indicates it is retroactive; the effective date unambiguously indicates the amendment was prospective.
Finally, Vaughn argued it would be unfair and inequitable to interpret the Policy in a manner that excludes him from coverage because he alone paid all the mortgage payments, including the escrowed Policy premiums, and the oversight in omitting him as a named insured was unintentional and unknown to him until after the Date of Loss. Vaughn argues, in essence, that Stillwater should not be permitted to accept the Policy premiums but exclude him from coverage.
This argument failed to persuade the court.
Although there is a mechanism under Delaware law to reform a contract for error, Vaughn did not assert that claim. Even if principles of fairness were relevant to issues before the Court, Vaughn failed to show any evidence that Stillwater was aware of the error, but remained silent, or otherwise acted inequitably to exclude Vaughn from coverage.
A first party property policy of insurance is a contract of personal indemnity and does not insure property. This case, like Russell v. Williams, 58 Cal. 2d 487, 374 P.2d 827, 24 Cal. Rptr. 859 (Cal.10/04/1962) established that an insurable interest is not sufficient to recover on a policy unless the person is insured by the policy. A fire insurance policy is a personal indemnity contract.
This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, 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. He 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.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide
The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972
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