A Video Explaining Why Property Insurance Insures People not Property
First party property insurance is a contract of personal indemnity. The insurer promises to indemnify the first party, the insured, in the event the insured incurs a loss as a result of one of the perils insured against by the wording of the policy. Insurance does not follow title to the land. The insurer makes a promise to the first party, the insured, that if there is a loss to property in which the insured has an interest, to pay indemnity for the loss. The “elementary principle of insurance law that fire insurance” is a contract of personal indemnity, “not one from which a profit is to be realized.” [Cigna Property & Cas. Ins. Co. v. Verzi, 684 A.2d 486, 112 Md.App. 137 (Md. App. 1995)]
The insurance claims adjuster (the adjuster) must always ascertain that the owner, or a person with some other insurable interest in the property, is the person insured and that the person insured has an interest in the property. Failure to do so could result in the insurer paying the wrong person or paying a person with no right to the benefits promised by the policy. Proceeds of a policy upon the interest of an insured are not subject to the claims of others who have an interest in the property but are not named as insured or who do not qualify as insureds by definition.
A first party property policy is considered by courts asked to interpret the conditions of the policy, a contract of personal indemnity. It is a contract made with the individual protected. The insurance does not go with the property as an incident thereto to any person who may buy that property. If it goes at all, it goes as a matter of contract for the transfer of the policy. [Estate of Cartwright v. Standard Fire Ins. Co., No. M2007-02691-COA-R3-CV, 2008 WL 4367573, *2 (Tenn. Ct.App. Sept. 23, 2008) (noting that “[t]he contract of insurance is also purely a personal contract between the insured and the insurance company, and does not attach to or run with the title to the insured’s property absent an agreement for the transfer of the policy.” Fulton Bellows, LLC v. Federal Ins. Co., 662 F.Supp.2d 976 (E.D. Tenn., 2009).
It is an elementary principle of insurance law that fire insurance is a contract of personal indemnity, not one from which a profit is to be realized. The right to recover must be commensurate with the loss actually sustained. [Glens Falls Ins. Co. v. Sterling, 219 Md. 217, 222, 148 A.2d 453, 456 (Ct.App.1959); Starkman v. Sigmond, 446 A.2d 1249, 184 N.J.Super. 600 (N.J. Super., 1982)]
To have an insurable interest, the insured must derive “a direct, pecuniary loss” from the subject matter of the contract; the loss cannot be indirect or sentimental.” [A.B. Petro Mart, Inc., 892 N.W.2d at 465; see also 14 Mich. Civ. Jur. Insurance § 135] An insurable interest in an insurance policy is determined not by the label attached to the insured’s property but by whether the insured will suffer a pecuniary loss due to the destruction of the property. [Sam D Mkt. 1 v. Selective Ins. Co. of S.C. (E.D. Mich. 2021)]
© 2021 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant 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 54 years in the insurance business.
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