The Sale, the Fire, and the Coinsurance Trap
A commercial property owner in Baltimore contracted to sell a four-unit apartment building for $1.1 million, with closing scheduled in 30 days. The buyer's deposit is nonrefundable, and the sale contract is silent on risk of loss. The seller's commercial property policy shows a building limit of $900,000, an 80% coinsurance clause, replacement cost, and a $5,000 deductible. Ten days before closing, a kitchen fire causes $300,000 in damage. The building's actual replacement cost is $1.2 million; the seller had purchased the $900,000 limit three years earlier and never updated it. The insurer acknowledges coverage but says the coinsurance clause reduces payment and that the buyer, as contract purchaser, may be the proper payee. The seller retains a public adjuster. The buyer still wants to close but demands a $250,000 price reduction.
1. Who has an insurable interest in the building at the time of the fire, and how should the adjuster address the insurer's suggestion that the buyer may be the proper payee?
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The seller has an insurable interest because it owns the building and bears the risk of loss until closing; the sale contract is silent, and Maryland's default risk-of-loss rule generally leaves the risk with the seller until title passes. The buyer has an equitable interest as contract purchaser, but that does not entitle it to a double recovery. Insurance is a contract of indemnity: total payment cannot exceed the actual loss. The named insured is the seller, so the seller presents the claim. If the buyer has suffered a separate loss or has a contractual right to the proceeds, the insurer may need to protect both interests, often by naming the buyer as a loss payee or by paying according to the sale contract. The adjuster should document the sale contract, closing date, and any assignment of insurance rights; obtain a signed release from the buyer if the buyer is paid; and not let the insurer use the buyer's interest to delay or reduce the seller's covered claim.
2. Calculate the coinsurance recovery and explain each step. Then explain why the $250,000 price reduction does not control the insurance payment.
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Required insurance = 80% x $1,200,000 = $960,000. Carried insurance = $900,000. Coinsurance ratio = $900,000 / $960,000 = 0.9375. Coinsurance-adjusted loss = 0.9375 x $300,000 = $281,250. Subtract the $5,000 deductible = $276,250. Because the policy limit is $900,000, the payment is not capped below that. The insurer may apply the deductible before the coinsurance factor depending on the policy wording; under that method the result is 0.9375 x $295,000 = $276,562.50. The adjuster should read the coinsurance and deductible provisions together, show the calculation line by line, and not accept a flat reduced payment without the formula. The $250,000 price reduction is a negotiation between buyer and seller; it does not set the insurance loss. The measure is the cost to repair or replace the covered damage, subject to the policy.
3. If the insurer pays the seller and the buyer later demands the same proceeds, what principles prevent double recovery and what should the adjuster document?
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Indemnity limits recovery to the actual loss, and subrogation prevents the insured from recovering twice for the same damage. If the buyer has its own insurable interest, it may pursue its own claim, but the insurer is entitled to credit for payments already made to the seller for the same loss. The adjuster should document the closing status, the sale contract's risk-of-loss terms, any assignment of the claim, the mortgagee or loss-payee clause, and the buyer's written release if the buyer receives any payment. If the seller assigns the claim after closing, the adjuster should confirm the assignment is in writing and that the insurer acknowledges it. The adjuster should also separate building damage from the seller's personal property and business income, so the buyer cannot claim items it never owned.