VIRTUAL UNIVERSITY
I BET THE NAMED INSURED DOESN’T OWN THE BUILDING! HAVE YOU ASKED? “Who owns the building?” Asking this rather basic, four-word question can save your insured, you, and your errors and omissions carrier a major heartache and undue costs following a building damage claim. Never assume a small, closely-held corporation is as simple as it appears on the surface. Exposure and legal realities often exist, the importance of which are not fully understood by the “business owner.” Consider the following example, George Bailey owns Widgets, Inc., a manufacturer of widgets (who would have guessed?). The manufacturing operation is conducted in a building that, according to Mr. Bailey, is “owned by the insured.” However, Mr. Bailey owns the building individually. Understand, Mr. Bailey is not attempting to mislead the insurance carrier or misrepresent the facts. In his mind, there is no distinction between the operations of Widgets, Inc. and the ownership of the building. To Mr. Bailey, it’s all the same because he owns both. Such belief is more common than many agents realize. But within the realities of insurance and law, two separate “persons” are involved in this all-too-common situation. Potential insurance coverage gaps arise from the existence and participation of two separate “persons.” Each natural person and legal person must be accounted for and managed separately within the insurance policy. (Natural persons are flesh and blood individuals. Legal persons are created by the filing of specific legal documents such as articles of incorporation or articles of organization.) Natural persons and legal persons have the same rights; the right to sue, to be sued, to own property, etc. Therefore, each “person” presents his/her/its individual risk exposure that must be analyzed and specifically insured. 28 28
JULY JULY2020 2020
wisconsin wisconsin INDEPENDENT AGENT INDEPENDENT AGENT
Unless each person’s exposure is properly addressed, the property policy may not respond to a property claim for one of two reasons: 1. Lack of insurable interest; or 2. Lack of insurance protection. Property insurance policies do NOT respond to a claim if insurable interest does not exist at the time of the loss. Likewise, if the party with insurable interest is not an insured, the policy does NOT pay. Insurable interest, in a property insurance context, exists when a “person” suffers direct financial loss as a result of damage to or destruction of the specified property. If the “person” with insurable interest is not covered by a property policy, the loss must be paid out of that “person’s” resources. Insurable interest in real and personal property is created in one of three ways: 1. Ownership; 2. Legal liability: Responsible for someone else’s property – like a dry cleaner is responsible for its customer’s clothes; or 3. Contract: A lease agreement making another party responsible for insuring the property. Returning to the initial scenario: George Bailey owns the building individually, but Widgets, Inc. is the policy’s only named insured. If the building is damaged or destroyed by any covered cause of loss, the property policy covering the building owes – nothing. The legal person listed on the policy as the named insured, Widgets, Inc., did not have insurable interest; and the natural person with insurable interest, George Bailey, is not covered in the policy as an insured. Beyond the individual (natural person) ownership of a building, one of several possible ownership scenarios could exist that must be considered, anticipated and/or
