The Fire Before Closing
Priya signs a binding contract to buy a 12-unit apartment building for $2,400,000, closing in 30 days, with $50,000 earnest money at risk. Her lender requires property insurance in place before closing, so her producer binds a $2,400,000 replacement-cost policy on the building effective the day after signing. Eleven days later - still before closing - a kitchen fire started by a tenant's unattended cooking causes $600,000 in damage. The seller's own policy on the building is still in force, and the purchase contract puts risk of loss on the seller until closing. Priya submits a claim for the full $600,000 and tells her producer she will close at the original price because the repairs will restore the building. The seller's insurer also pays its insured and then looks for someone to pursue.
1. Does Priya have an insurable interest in the building at the time of loss, and does that answer resolve her claim?
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Insurable interest: yes, but that is only the first gate.
- An insurable interest is a lawful economic relationship in which the insured benefits from the property's continued existence and would suffer a pecuniary loss from its destruction. A binding, enforceable purchase contract gives Priya an equitable interest in the building even though title has not passed. She has more than a bare expectation, so the interest requirement is satisfied.
- Insurable interest is not the same as indemnity. The policy promises to make her whole for her actual loss, not to pay a stated sum. Until closing, the contract places risk of loss on the seller, so the seller must deliver the building undamaged or adjust the price/credit. Priya's actual economic loss may therefore be zero, or limited to delay costs, lost rents, and financing costs.
- If Priya collects $600,000, closes at full price, and also receives a repaired building, she has recovered more than she lost - the definition of a moral hazard the indemnity principle exists to prevent.
Conclusion: the claim is not payable at $600,000 merely because she had an insurable interest. The adjuster must establish what loss Priya actually bore at the date of loss, and coordinate with the seller's insurer so the single physical loss is paid once.
2. Both policies are in force for the same building. Explain how indemnity, other insurance, and subrogation keep the two insureds from recovering twice for one fire.
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Three principles work together:
- Indemnity caps the total. Across all sources, recovery cannot exceed the actual loss. One fire = one loss = one economic amount, no matter how many policies describe the property.
- Other insurance allocates, it does not multiply. Whichever policy is primary pays first; the other responds only to the extent of uncompensated loss. If the seller's insurer pays the owner's full loss, there is nothing left for Priya's policy to indemnify.
- Subrogation moves the cost to the responsible party. After paying, the seller's insurer steps into the seller's shoes and pursues the negligent tenant (and anyone else legally liable) for the loss. It does not pursue Priya, who is not the tortfeasor and whose own premiums did not buy the seller's loss.
Practical risk for Priya: if she collects from her carrier and later closes at full price with a repaired building, the carrier may demand restitution of the windfall. Overlapping coverage for a property in transition should be handled by allocation up front, not by two claims.
3. What should Priya's producer have done differently when the lender demanded coverage before closing?
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The producer should have separated the lender's requirement from the buyer's exposure:
- Defer the effective date to closing (or to transfer of title), which is the cleanest fix. Risk of loss sits with the seller until then.
- If the lender insists on coverage earlier, confirm the seller's policy carries a mortgagee/lender's loss payable clause naming Priya's lender, or arrange a short-term policy expressly written for the purchase-pending period.
- Read the purchase contract's risk-of-loss clause and align the insurance to it: who restores the building, who bears delay, and what happens to earnest money if the building is damaged.
- Consider a contract provision assigning insurance proceeds to Priya at closing, rather than buying a second policy on property she does not yet own.
- Document the advice in writing. Binding a $2.4M policy to satisfy a lender is an administrative convenience, not a transfer of risk, and the client should never be allowed to believe the two are the same thing.