Contract for Deed: Two Insurable Interests, One Policy
Doris signed a 15-year contract for deed selling her four-unit apartment building to Marcus. Marcus paid $60,000 down, took possession 14 months ago, pays $2,400 monthly, and handles all repairs and tenant issues. Doris keeps legal title until the final payment; the unpaid balance is $310,000. The contract required Marcus to insure the building, but he never bought a policy. Doris's policy, written in her name only, shows $800,000 replacement cost on the building, a $2,500 deductible, and a mortgage clause favoring her bank, which is still owed $120,000 on her own loan. A kitchen fire causes $250,000 of replacement-cost damage, and two tenant units are unusable.
1. At the time of loss, who has an insurable interest and in what? Can Doris collect the full $250,000 for herself?
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Both parties have an insurable interest, but they are not the same interest.
- Marcus holds equitable title and possession; he bears the risk of loss, must repair, and loses rental income. His interest is the value of the property less what he still owes.
- Doris holds legal title plus a security interest in the $310,000 unpaid balance, and a reversion if Marcus defaults.
- The bank is protected separately by the mortgage clause, which pays it regardless of Doris's acts or neglect.
Insurable interest is tested at the time of loss, not at application. Doris's policy responds because her interest existed when the fire occurred.
However, the principle of indemnity caps her recovery at her actual loss. If she collected $250,000 and kept it while Marcus still owed $310,000 on a restored building, she would be enriched, not indemnified. Practically, the insurer pays the loss to repair the building, with Doris's interest protected as her interest appears; the carrier should not subrogate against Marcus, who is effectively a coinsured.
The real exposure: Marcus's equity and rental income are uninsured. His loss is not Doris's loss, and her policy will not make him whole.
2. Suppose Doris had already received the full purchase price and delivered the deed before the fire, but the policy was never changed. How does the analysis change?
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Doris has no insurable interest and her policy pays her nothing for the building loss.
- Insurable interest must exist when the loss occurs. Once the deed is delivered and the price fully paid, Doris holds no title, no security interest, and no economic stake. She cannot collect under a policy insuring her own interest.
- Marcus, now the record owner, is the only party with an insurable interest, and he bought no insurance. The loss falls on him.
A subtler version: if the price were fully paid but the deed not yet delivered, Doris holds bare legal title for Marcus's benefit. The insurer still measures recovery by her actual loss, which is zero or nominal; she would hold any proceeds for Marcus's benefit, but that is a matter of equity between them, not a coverage obligation of the carrier.
The lesson for exam purposes: insurable interest is not a one-time test at underwriting. A transfer of title or possession changes who is indemnified, and the policy's change-of-ownership/assignment condition requires notice to the insurer.
3. What should the agency have recommended when this policy was written or renewed?
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The agency should have identified the contract for deed as a material change in ownership and possession and documented advice:
- Require Marcus to buy his own policy as the contract demands, naming Doris as mortgagee/loss payee to the extent of the unpaid balance.
- Alternatively, write one policy with both interests scheduled (Doris as named insured, Marcus as named insured or with a contract-of-sale/loss-payable endorsement), so a single fire loss is settled once and both interests are protected.
- Notify the carrier of the installment sale; an undisclosed transfer can jeopardize the claim and creates an errors-and-omissions exposure for the agency.
- Check the limits against replacement cost and consider ordinance-or-law coverage, since the building is older.
- Confirm the bank's mortgage clause remains accurate and address rental income (business income or fair rental value) if either party depends on the rents.
An uninsured equitable owner occupying the premises is the classic gap this fact pattern is designed to test.