The Insurable Interest Vortex
There is a roadside attraction in Oregon called the Oregon Vortex, where purported paranormal forces cause a number of optical illusions and oddities. It is definitely on my bucket list of Pacific Northwest attractions I want to visit. I have, however, made several visits to what I call the “Insurable Interest” vortex. While I doubt paranormal forces are at work with this vortex, it is worth a word of warning.
Many of you have heard me preach about first-party insurance claims. One of the benefits of a first-party insurance claim is that insureds can often seek coverage under their historic insurance policies. This is a benefit because the language of older policies might be more favorable and older policies might have a reduced impact on future premiums. But, what happens when the property was sold somewhere along the historic timeline? This is where the insurable interest vortex may occur.
In order to trigger property insurance, you must have an “insurable interest” in the property. Generally, some form of ownership is required. Although there are some exceptions, an insured must have an interest in the property when the policy is purchased and when the loss occurs. I have encountered situations where a property is purchased, property damage is discovered after the sale, and we attempt to trigger historic insurance policies. The past insurer refused to pay the buyer because it was not an insured on the prior policy. The past insurer also refused to pay the seller, because it no longer had an “insurable interest” in the property. Hence, the vortex.
Most insurance policies prohibit any assignment of the rights and duties of the policy. As a result, a seller cannot simply assign the policy to the buyer. Many courts, however, do allow an assignment of the proceeds of an insurance claim. Both buyers and sellers should be cognizant of the insurable interest vortex and add necessary language in their agreement to ensure the property has seamless coverage.
Entrance to the Oregon Vortex is $12.75. If an insured gets trapped in the insurable interest vortex, the price of admission may well be a significant uncovered loss.