The Boat Sam No Longer Owned
Sam buys a used 32-foot cabin cruiser for $40,000 and insures it with a $40,000 policy limit on an actual cash value basis with a $1,000 deductible. Three years later the boat's market value is $22,000, and a marina estimate puts repair of a damaged hull and engine at $16,000. Sam accepts a buyer's offer and sells the boat in May, but never tells the insurer and never assigns the policy. The buyer, who carries no insurance of his own, keeps the boat at the same slip and takes it out on weekends. In July the boat burns at the dock. Investigators trace the fire to a faulty bilge heater the buyer installed in June. Sam files a claim for $40,000.
1. How much, if anything, does the insurer owe Sam for the July fire?
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Nothing for the loss. Insurance is a contract of indemnity, and indemnity requires insurable interest at the time of loss, not merely at the time of purchase. When Sam sold the boat in May, his economic interest in the hull ended; by July he had nothing to indemnify.
A property policy also does not follow the property. Coverage transfers to a buyer only by assignment with the insurer's written consent, which Sam never sought. The buyer is therefore an uninsured stranger to the policy.
A $40,000 'policy limit' is not an agreed value. It is a ceiling on what an ACV settlement could reach; it does not promise $40,000 on any loss. Sam's demand treats a limit as a valuation, which is exactly the error the indemnity principle is designed to prevent.
What Sam is owed is a return of unearned premium for the unexpired term, plus a candid explanation that his claim is denied for lack of insurable interest.
2. Assume instead the fire happened in April, before the sale. Compute the payment and state the valuation rule.
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Compare the cost to repair with the ACV:
- Repair cost: $16,000
- Actual cash value: $22,000
- Payable loss: lesser of the two = $16,000
- Less deductible: $16,000 − $1,000 = $15,000
The rule is that a partial loss is settled at the lesser of the cost to repair or replace, or the ACV, and a total loss at ACV. ACV means replacement cost minus depreciation - here already reflected in the $22,000 market value. Paying the full $40,000 limit would over-indemnify Sam by $18,000 and would reward a stale, inflated limit that no one adjusted as the boat aged.
Notice the direction of the deduction: the deductible comes after valuation, never before. Applying it to the $22,000 ACV first would be wrong, because the loss itself is only $16,000.
3. Still assuming an April loss, what subrogation rights does the insurer have against the buyer, and what limits them?
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After paying Sam $15,000, the insurer is subrogated to Sam's rights against the party that caused the fire. The buyer installed the faulty heater and is not an insured under Sam's policy, so he is a permissible target; an insurer may never subrogate against its own insured.
Three limits apply:
- Recovery is capped at what the insurer paid. It can pursue $15,000, not $22,000.
- The made-whole doctrine delays subrogation until the insured is fully compensated. Sam ate a $1,000 deductible, so he is not whole; he is entitled to be made whole out of any recovery before the insurer takes its share.
- The insurer stands in Sam's shoes and inherits his weaknesses - any comparative fault by Sam, any release he signed, any statute of limitations problem.
Also note the practical reality: the buyer had no insurance, so a judgment may be uncollectible. Subrogation is a right, not a guarantee.