Insurance and the ''Subject to'' Dilemma
I will do my best to clarify the timeless issue of how to properly insure a "subject to" property. The obvious dilemma with this situation is the "Due on Sale" (DOS) clause being invoked and the mortgage company calling the note. Though seemingly complex, some common sense rules-of-thumb usually apply.
If you (or your entity) own, or have a financial "stake" in the property, be the "first named insured". The first named insured is the primary recipient of any potential claim benefit or liability protection. An "additional insured" will garner liability protection only. A "loss payee" will have it's interests protected in the event the property itself is damaged. (A mortgagee is inherently BOTH). If you decide to keep the "homeowner's" policy in place and be named as the additional insured, be advised. If it is discovered that the ex-owner, the first-named insured in this case, no longer owns the property, expect the insurer to deny based upon the fact the policyholder no longer owns the property. Even if you manage the claim to be paid, you are not the entity to receive the proceeds, as you are not the first-named insured. If you did attempt to be added as a loss payee as well, chances are the insurer will question the necessity for you being named as such. When the insurer discovers you now own the property, they will need to write a new policy.
The proper way to insure the property, once you (or your entity) own it, is to have a non-owner occupied "landlord" policy, with you as the new first named insured. The bank/mortgage company is named, as normal, as mortgagee. The prior owner should be named as the additional insured ONLY. Naming the prior owner as additional insured will usually keep the mortgage company happy.
But, you may ask, why not keep the ex-owners policy in place? One concern of carrying 2 policies on the same property is that most policies have "excess" clauses. In other words, the policy will pay only excess amounts, if any other policy exists. If each of the 2 policies have such a clause it will create havoc in getting a loss paid...
To further clarify the scenario here is a hypothetical example:
Property has a "homeowner" and a "landlord" policy (both) on it. Fire occurs. Owner files a claim under the landlord policy. So far, so good. However, "tenant" (prior owner, or new occupant), has personal property damage. He must also file claim, but against his "homeowners" or tenants policy. The respective insurance company on each claim is bound to find out of the other policy's existence and could (more than likely would) attempt to invoke the "excess" clause of it's own contract, potentially leaving the owner waiting for courts/arbitration to settle... I wouldn't take the chance with 2 policies. If an insurer has an opportunity to mitigate, or deny, a loss if there are contractual issues, be sure they'll try!
(As an added note, if the prior owner moves out, the "homeowners" policy is no longer valid as the property is now "non-owner-occupied").
Bottom line: if you own it, you insure it. If the fact that a DOS clause is/would be invoked if the insurance policy changes, I would walk away before potentially diminishing or even sacrificing coverage by trying to "skirt" the correct way to insure the property. In 12 years, we have yet to have a loan called (knock wood) by insuring the new owner on a "landlord" policy and naming the bank (and the old owner) as mortgagee and additional insured respectively.
Hope this helps your understanding. Feel free to PM me if you have any questions.
Happy Holidays!
Well done article, and it points out the one big area I see Sub To buyers generally ignoring, out of their ignorance-and to their detriment..
As a lawyer I sure agree that if the insurance co. CAN deny or contest coverage under the terms of its policy, you can bet it WILL.
There are lots of policy suits between insurer and insured to clarify insurance coverage..
And many is the lawsuit I've handled against a 3d party, where the insurer let me know, simultaneously with their Original Answer, that they were defending on "Non Waiver" basis-that is, they would hire the lawyers to defend the claim, but would NOT be paying any claims, as the insurance co. had a policy defense against their own insured.
After all, they owe it to their other policy holders and shareholders to minimize all the cost they legally can. If that means they deny coverage for that fire, or injury, zobitte!
This is also an area where adequate written disclosures need to be made to the Sub To's subsequent buyer or tenant...so that person is told, in writing, that he/she needs to carry his own tenant's policy for his own protection...and if the Sub To buyer/seller does NOT so disclose, it could cost him if that tenant/buyer is damaged and has not been so warned.
Thanks, John. Thanks also for adding the disclosure point between new and subsequent owner/tenant. Happy New Year!
Nice Article! Question regarding your comment:
Naming the prior owner as additional insured will usually keep the mortgage company happy.
Is the mortgage company going to question a new insurance policy and that the mortgagee is now not the primary insured?
They may, but the prior owner being named as the "additional insured", usually satisfies the CSR from the mortgage company that may have questioned it. For the rare occasions it is a further issue, we simply explain the validity of the new contract and the fact the mortgage company is still protected accordingly. Knocking wood, have never had the new insurance policy cause the loan to be called...
Tim