The Duplex That Burned Before Closing
Marcus owns a duplex and signed a contract to sell it to Priya for $320,000. Closing is set for June 15. Priya paid $20,000 earnest money and moved in June 1 under an early-occupancy agreement; the deed has not been delivered or recorded. Marcus kept his HO-3 in force with a $300,000 dwelling limit, $50,000 personal property, and a $5,000 deductible. Priya bought her own HO-3 effective June 1 with a $320,000 dwelling limit, $10,000 deductible, and a mortgagee clause for the lender that will finance her purchase. On June 10 a kitchen fire causes $90,000 of dwelling damage and $15,000 damage to Priya's furniture. Marcus's insurer questions coverage because he no longer occupies the duplex; Priya's insurer says she has no insurable interest until closing.
1. At the time of loss, who has an insurable interest in the duplex and in Priya's furniture? Explain the judgment call each insurer is making.
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Insurable interest is a pecuniary interest in the property such that the insured would suffer a financial loss if it were damaged. The key is the interest at the time of loss, not just who holds the deed.
- Duplex: Marcus still holds legal title, remains obligated on the mortgage, and has not delivered the deed. Priya has possession, an equity stake through earnest money, and a contractual right to purchase. Depending on the risk-of-loss clause in the sale contract, either or both may bear the economic loss. Both can have an insurable interest even though the deed is not recorded.
- Priya's furniture: Only Priya has an insurable interest. Marcus's HO-3 does not cover the tenant/buyer's personal property.
The insurers should not treat 'no occupancy' or 'no closing' as an automatic denial. They should examine the sale contract, occupancy agreement, and mortgage terms, then pay the insured's actual interest.
2. Assume both HO-3 policies respond. How should the insurers allocate the $90,000 dwelling loss and $15,000 furniture loss so no one profits? Address deductibles and the mortgagee clause.
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The settlement must respect indemnity and avoid double recovery.
- Dwelling loss: Marcus's policy can pay its insured interest, subject to the $300,000 limit and $5,000 deductible, but the mortgagee clause protects the lender even if Marcus's claim faces a coverage dispute. Priya's policy can pay her insurable interest, subject to her $10,000 deductible. The insurers should coordinate so the total paid does not exceed the actual loss. If one pays more than its insured's interest, subrogation or an agreed allocation can recover the excess.
- Furniture loss: Priya's policy pays the $15,000 loss less the $10,000 deductible, or $5,000, subject to policy valuation terms. Marcus's policy does not respond.
A practical approach is to obtain a signed assignment/agreement among Marcus, Priya, and the mortgagee, document each party's interest, and pay the mortgagee to the extent of its interest.
3. What principle bars Priya from collecting the full $320,000 dwelling limit and keeping the property? How should the adjuster document the settlement?
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The principle of indemnity bars Priya from recovering more than her actual financial loss. She cannot collect the full $320,000 limit for a $90,000 partial loss and also keep the property; that would be profit, not indemnity.
The adjuster should document:
- The sale contract and risk-of-loss clause.
- The deed status and mortgagee information.
- Each insured's insurable interest and valuation basis.
- The actual repair/replacement cost and any deductible.
- Any allocation agreement and subrogation rights.
The goal is to make each insured whole for its interest, not to pay a policy limit for a partial loss.