Who Owns the Loss? Insurable Interest, Indemnity, and Subrogation After a Sale

No coverage is owed under Dwayne's policy.

• Property insurance is a contract of indemnity: it restores the insured's economic interest in property, and the insured must have an insurable interest at the time of loss (not merely when the policy was written).
• Title passed to Priya when the deed was delivered and accepted on May 1. Recording is a public-notice formality - it does not create or destroy ownership or insurable interest. On May 12 Dwayne owned nothing and occupied nothing.
• An HO-3 insures the named insured's interest in the residence premises - defined as the dwelling where the insured resides. After closing, Dwayne neither resided there nor owned it.
• A paid premium does not create coverage. Premium is consideration for the policy period, not proof of interest, and the duty to pay a loss is triggered only by a covered loss to an insured interest.
• What Dwayne is entitled to is a refund of unearned premium from May 1 (pro rata or short rate depending on who cancels under the policy's cancellation condition).
• Practical warning to the agent: leaving a homeowners policy in force after the insured moves out creates an occupancy/residence-premises problem and, if the home were later rented, business-pursuits and rental exclusions.

Subrogation is derivative - the insurer inherits only the rights Priya still had.

1. Timing: the insurer may subrogate only after it has paid. Recovery is limited to the amount paid; any excess belongs to the insured.
2. Scope: the insurer steps into Priya's shoes against the party legally liable. It takes the claim exactly as it exists, including defenses.
3. Impairment: every property policy imposes a post-loss duty not to impair the insurer's subrogation rights. Signing a release of the responsible tortfeasor - even for $500, even before payment - destroys or drastically narrows the right the insurer would otherwise have acquired.
4. Result: the electrician's carrier will raise the release as an absolute defense. Rico... i.e., the insurer's practical recovery is close to zero, and the policy lets the insurer reduce or deny the claim to the extent it was prejudiced. Priya's $500 bargain can therefore cost her a substantial part of an $85,000 claim.
5. Contrast: subrogation would not be asserted against a member of the insured's own household, and would not run against Dwayne, who has no liability here. It would also fail against the neighbor-type defendant if that party was not legally at fault.

The result does not change; the reasoning simply shifts one step.

• Negligence of the named insured is not a coverage issue - an HO-3 is not written on a 'no-fault' basis; the insured's own negligence is covered (only intentional acts, fraud, and the enumerated exclusions are not). So Dwayne's carelessness is irrelevant to whether the fire is a covered peril.
• The bar is the absence of insurable interest, not fault. Since Dwayne owned nothing on May 12, his policy responds to nothing, regardless of who was careless.
• If Dwayne had rented the home back from Priya, he could acquire an insurable interest as a tenant - but not in the dwelling itself. A tenant's interest is personal property and use/occupancy; it would be insured under renters-type coverage, and the HO-3's residence-premises definition still would not be met.
• Priya, as owner, would look to her own policy, and the fire (if caused by a tenant's negligence) would produce a subrogation claim against Dwayne as a tenant - but not against him as an insured of her policy.