Property Owner in Name Only Found Not Entitled to Coverage for Fire Loss of Rental Income Property

COMMERCIAL PROPERTY – INSURABLE INTEREST – DE FACTO OWNERSHIP
Porter v. State Farm Fire & Cas. Co.
(WDNY, decided 6/6/2019)

If your name is on the deed and insurance policy but you invested no money in the acquisition,  operation and insuring of rental income property and want nothing to do with its post-loss claim, are you entitled to policy proceeds in the event the property burns down?

Under the facts of this case, the court said no, you (and the real owner) get nothing.

Plaintiff went to a property foreclosure auction in Buffalo, New York, and, as an accommodation to her sister's boyfriend, successfully bid on 254 Strauss Street.  Plaintiff paid the required $500 deposit, but her sister and sister's boyfriend reimbursed her that amount in full and paid the remaining balance of the auction price.  Although the Strauss Street property was placed in plaintiff's name, she did not manage or have any interest in the subject property. Rather, her sister's boyfriend maintained, and leased the subject property, made renovations, paid property taxes on the property and "handled everything" pertaining to evictions.

Plaintiff testified that she had no authority to sell the property, and did not receive any economic benefit from the property. With regard to the property's insurance policy, plaintiff testified that she was not involved in obtaining the policy; rather, her sister's boyfriend obtained the policy providing plaintiff's information as the owner and he paid the premiums on the policy. Plaintiff knew nothing about the basic coverage of the policy insuring the property and only learned of the policy limits when she "started receiving letters after the property was burned down."

As to her receiving any economic benefit from the property, plaintiff explained to the insurance agency salesman, "I told Mike from State Farm I just — they say sign here, I just sign. I don't even read. I don't even know what I be signing, I just sign."  At a second deposition plaintiff testified that any money she would receive from State Farm "will go straight to [her sister's boyfriend] . . . [b]ecause it's his property."  Plaintiff further testified that, although what remained of the subject property was demolished after the fire, she was not aware who paid for the demolition costs.

In GRANTING State Farm's motion for summary judgment, the District Court (Telesca, J.), held:

• Replacement Cost Coverage Claim:  "Plaintiff has repeatedly disclaimed any interest in the subject property and testified unequivocally that she had no plans to replace the property. Accordingly, the 'equitable considerations' the Court considered in Zaitchick are not present in this instance. The Court therefore adopts Judge Schroeder's recommendation that the Court grant summary judgment to Defendant on Plaintiff's claim for replacement cost coverage."


• Debris Removal Coverage:  "It is also undisputed that [the sister's boyfriend] used Plaintiff's auction identification number to bid on the subject property. Although the deed to the subject property lists Plaintiff as the owner, she clearly explained that [the boyfriend] managed and received any benefit from the property in all respects. She was at best an accommodating owner benefitting [the boyfriend] for reasons best known to them. In short, the Demolition Invoice does not create a genuine issue of material fact as to Plaintiff's claim for debris removal coverage. Plaintiff made it very clear in her sworn testimony that "I didn't put any money into the property, [and] I shouldn't get anything from it." She further testified that any payment from the insurance policy would go straight to [the boyfriend] "[b]ecause it's his property."  Accordingly, the demolition costs should be the responsibility of the property owner, which Plaintiff has testified unequivocally is [the sister's boyfriend] . Thus, the responsibility, if any, for the payment of demolition costs is left to be resolved between Plaintiff and [the boyfriend]. Accordingly, the Court declines to adopt Judge Schroeder's recommendation that the Court deny Defendant's motion for partial summary judgment on Plaintiff's claim for debris removal coverage.  

In conclusion, Judge Telesca held:

Based on the above-mentioned information, the Court concludes that Plaintiff's complaint must be dismissed in its entirety. The debt created by the loss of the subject property is not remedied through the insurance policy, based on the understanding as to actual ownership which existed between Plaintiff and Mr. Spencer. Therefore, it is undisputed that Plaintiff is unable to recover under the insurance policy. Her complaint, which alleges that she is entitled to reimbursement under that policy, is inconsistent with her testimony and is hereby dismissed. See Wierzbic v. Cnty. of Erie, No. 13-CV-978S, 2018 WL 550521, at *4 (W.D.N.Y. Jan. 25, 2018); Brandon v. Bd. of Educ. Of Guilderland Cent. Sch. Dist., 487 F. Supp. 1219, 1233 (N.D.N.Y. 1980) (the court may search the record on a motion for summary judgment, and grant relief as it deems proper).

In a decision issued the very following day, the District Court DENIED plaintiff's motion for reconsideration, reiterating:

The evidence shows that Plaintiff clearly and unequivocally claimed no interest in the proceeds of the insurance policy as a result of the fire damage to the property by stating that the insurance proceeds belong to Mr. Spencer, and that she did not want any proceeds paid out to her.  Plaintiff was emphatic that she wanted no financial benefit from the policy, even though she is the named insured, by stating, "I didn't put any money in to the property, [and] I shouldn't get anything from it.".  * * * Plaintiff has failed to articulate a valid basis upon which reconsideration is warranted, and the June 6th Decision and Order dismissing the complaint in its entirety stands.

Plaintiff has filed an appeal to the Second Circuit Court of Appeals. If that appeal is perfected, I'll report the outcome. Scott Storm oversaw the litigation of this matter. Questions about this case may be directed to him or me.

When Someone Other Than Your Named Insured Co-Owns the Insured Building

PROPERTY – TENANTS IN COMMON – INSURABLE INTEREST – INSURANCE IN NAME OF ONLY ONE COTENANT
Gilbert v. Allstate Ins. Co.
(2nd Dept., decided 5/15/2012)

This is a bit of back fill.  But important back fill.

You insure one person but find out after a fire that destroyed the insured dwelling that another person, who is not listed or named on the policy, is listed as a co-owner on the property's deed.  There's no mortgagee.  Do you:

a.  pay 100% of the dwelling loss to just your named insured?
b.  pay 100% of the dwelling loss to both your named insured and the other co-owner? -or-
c.  pay 50% of the dwelling loss to just your named insured?

If you were Allstate, you do c., pay 50% of the dwelling loss to just your named insured.  And in the recent opinion of the Second Department, Appellate Division, you would be correct in doing so.

The plaintiff owned property as a tenant in common with a business partner, who was not a party to this action. In 1996 the plaintiff procured a policy of fire insurance on the property from Allstate solely in his own name. On October 2, 2009, the premises were destroyed by a fire. Allstate paid the plaintiff one-half of the value of the property on the ground that the plaintiff had only a one-half insurable interest in the property. The plaintiff, arguing that a tenant-in-common has an undivided right to the full use, enjoyment, and possession of the entire property (and therefore had a 100% insurable interest in that property), brought this action to recover the full value of the destroyed premises. The Supreme Court, Orange County (Slobod, J.), denied the plaintiff's motion for summary judgment on the issue of liability and granted Allstate's cross motion for summary judgment dismissing the complaint.

In AFFIRMING the grant of summary judgment to Allstate, the Appellate Division, Second Department, succinctly reasoned:

Insurance Law § 3401 limits a contract or policy of insurance to the insured's "insurable interest." When two cotenants own real property which is damaged by a fire and insurance is procured in the name of only one contenant, recovery under the policy is limited to the insured cotenant's one-half interest in the real property (see Graziane v National Sur. Corp., 120 AD2d 773, 775 [1986]; Krupp v Aetna Life & Cas. Co., 103 AD2d 252 [1984]).

New York Court of Appeals Finds Stranger-Owned or Stranger-Originated Life Insurance (SOLI or STOLI) Policy Not Prohibited by Then-Existing Sections of New York Insurance Law

LIFE INSURANCE – STRANGER-ORIGINATED OR STRANGER-OWNED POLICY – INSURABLE INTEREST – INSURANCE LAW § 3205
Kramer v. Phoenix Life Ins. Co.
(Ct. Apps., decided 11/17/2010)

New York insurance law, alike the law in many other jurisdictions, has long prohibited the procurement of life insurance payable to one who lacks an insurable interest in the person insured at the time the life insurance contract was made.

New York's insurable interest requirement is codified in Insurance Law § 3205(b).  Section 3205(b)(1) addresses individuals obtaining life insurance on their own lives:

"Any person of lawful age may on his own initiative procure or effect a contract of insurance upon his own person for the benefit of any person, firm, association or corporation. Nothing herein shall be deemed to prohibit the immediate transfer or assignment of a contract so procured or effectuated."

Section 3205(b)(2) addresses a person's ability to obtain insurance on another's life and requires, in that circumstance, that the policy beneficiary be either the insured himself or someone with an insurable interest in his life:

"No person shall procure or cause to be procured, directly or by assignment or otherwise any contract of insurance upon the person of another unless the benefits under such contract are payable to the person insured or his personal representatives, or to a person having, at the time when such contract is made, an insurable interest in the person insured."

New York Insurance Law § 3205(a)(1) defines insurable interest as, "in the case of persons closely related by blood or by law, a substantial interest engendered by love and affection" or, for others, a "lawful and substantial economic interest in the continued life, health or bodily safety of the person insured."

On this appeal, the New York Court of Appeals addressed this certified question from the United States Court of Appeals for the Second Circuit:

"Does New York Insurance Law §§ 3205(b)(1) and (b)(2) prohibit an insured from procuring a policy on his own life and immediately transferring the policy to a person without an insurable interest in the insured's life, if the insured did not ever intend to provide insurance protection for a person with an insurable interest in the insured's life?"

In a 5-2 decision, the Court answered that question in the negative, holding that at the time the policies at issued in this case were procured and assigned, New York law permitted a person to procure an insurance policy on his or her own life and immediately transfer it to one without an insurable interest in that life, even where the policy was obtained for just such a purpose.

At issue in this case was $56,200,000 in coverage under several stranger-owned or stranger-originated life insurance policies (SOLI or STOLI policies) issued on the life of Arthur Kramer, a prominent attorney.  Although the policies originally named one or more of Kramer's adult children as beneficiaries at inception, they were immediately assigned to stranger investors and eventually sold.  Neither Arthur Kramer nor his children ever paid premiums on the policies, and the Kramer children were never "true beneficiaries" of the trusts the policies had funded after the policies were issued.

Kramer died in 2008 and his widow refused to turn over copies of the death certificate to investors holding beneficial interests in the policies.  She filed this action in federal court, alleging that the SOLI policies violated New York's insurable interest rule and so should be paid to her as the representative of her deceased husband's estate. 

In ruling on various motions to dismiss, the federal district court held that defendant Steven Lockwood, the principal of Lockwood Pension Services and the person who had originally approached Kramer in 2003 about participating in the SOLI scheme, "breached provisions of the New York Insurance Law in that he caused to be procured directly or through assignment or other means, a contract of insurance upon the life of the decedent [Kramer] for the benefit of strangers who did not have an insurable interest in his life at the time the policy was obtained."  The district court granted an interlocutory appeal of the interpretation of New York Insurance Law § 3205 to the Second Circuit, Court of Appeals, and that court certified the dispositive  question to the New York Court of Appeals, leading to this decision.

In strictly interpreting and applying the language of 3205(b)(1) and (b)(2), the five-justice majority, in a opinion by Justice Ciparick, found that those sections and others of the New York Insurance Law did not prohibit SOLI or STOLI policies at the time the policies at issue in this case were issued, assigned and sold:

In light of the overwhelming textual and historical evidence that the Legislature intended to allow the immediate assignment of a policy by an insured to one lacking an insurable interest, we are not persuaded by plaintiff and the insurers' argument that § 3205 (b) is limited by the common law requirement that an insured cannot obtain a life insurance policy with the intent of circumventing the insurable interest rule by immediately assigning it to a third party (see Steinback v Diepenbrock, 158 NY 24, 30-31 [1899]).  To the extent that there is any conflict, the common law has been modified by unambiguous statutory language.  We note further that if our Legislature had intended to impose such a limitation, it could easily have done so.  The Legislature has been very active in this area, most recently in its redrafting of Article 78 of the Insurance Law.

Finally, we recognize the importance of the insurable interest doctrine in differentiating between insurance policies and mere wagers (see Caruso, 73 NY2d at 77-78), and that there is some tension between the law's distaste for wager policies and its sanctioning an insured's procurement of a policy on his or her own life for the purpose of selling it. It is not our role, however, to engraft an intent or good faith requirement onto a statute that so manifestly permits an insured to immediately and freely assign such a policy.

In footnote #5, the majority noted that in 2009, the New York State Legislature added several new provisions to the Insurance Law regulating permissible "life settlement contracts," i.e. agreements by which compensation is paid for "the assignment, transfer, sale, release, devise or bequest of any portion of: (A) the death benefit; (B) the ownership of the policy; or (C) any beneficial interest in the policy, or in a trust . . . that owns the policy" (see Insurance Law § 7802 [k]).  In addition to regulating the life settlement industry (see Insurance Law art 78), this new law prohibits "stranger-originated life insurance," defined as "any act, practice or arrangement, at or prior to policy issuance, to initiate or facilitate the issuance of a policy for the intended benefit of a person who, at the time of policy origination, has no insurable interest in the life of the insured under the laws of this state" (Insurance Law § 7815). It also prohibits anyone from entering a valid life settlement contract for two years following the issuance of a policy, with some exceptions (see Insurance Law § 7813 [j] [1]).  Because these provisions did not go into effect until May 18, 2010, however, they did not govern the Court's decision on this appeal.

In his dissenting opinion, Justice Smith disagreed with the majority's holding that, in effect, Insurance Law § 3205(b) displaced the common law, and eliminated the exception recognized in late 19th and early 20th century United States Supreme Court cases to the rule of free assignability.   Justice Smith opined that this was an incorrect reading of the statute and saw no reason to believe the Legislature ever intended to abolish the common law anti-wagering rule:

The majority today . . . holds in substance that Insurance Law § 3205 (b) enacts the general rule of free assignability, while abolishing the "cloak for a wager" exception.  For the reasons I have explained, I think this holding is unnecessary and unfortunate.  I agree with the majority that there may be cases where a policy can be valid, even though the insured bought the policy intending to assign it to someone (perhaps a charity, or the insured's domestic partner) without an insurable interest in the insured's life. Thus, I would not answer with an unqualified yes the Second Circuit's question whether an insured must have intended to "provide insurance protection for a person with an insurable interest."  But I think the answer should be yes when the question is limited to a case, like this one, in which the parties attempted the kind of wagering transaction forbidden by the common law.

The majority's negative answer to the Second Circuit's question, though I think it is wrong, may be of limited importance. Any harm done may have already been repaired by the 2009 enactment of a statutory prohibition on stranger-originated life insurance (see majority op at 7 n 5). The new statute may create its own problems; insurable interest rules, as our opinions in this case surely demonstrate, are tricky to handle. But I view the new statute as an attempt to implement what I think has always been the public policy of New York to condemn wagers on the early death of an insured.