It is a commonly misunderstood challenge: clarifying the timeless issue of how to properly insure a “Subject To” property. A “Subject To” deal is when you agree to purchase a property subject to the existing mortgage along with all other liens attached. The existing homeowner deeds the property to you and you take over making the payments to the lending institution. You do not assume the loan through the bank.
The obvious dilemma 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 only.
- A “loss payee” will have its 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 not 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.
Need another reason why being named as an “additional insured” on an existing homeowner’s policy is not sufficient coverage? In the event you do go through a claim at one of your locations, the claim’s settlement check(s) paid to repair the property are made out to the first “named insured” AND all “additional insured.” Therefore if you are only listed as an “additional insured” on the homeowners’ policy, say a fire damages the property, the previous homeowner has the same rights to the claims check as you. We have witnessed instances with a previous company where the insurance carrier made a mistake and only listed the first “named insured” on the claim settlement check, failing to list the lender. In this instance, the owner of the property made $1.2 million on the claim settlement, left the country, and the lender was left with a burned out apartment building.
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.
If you have ownership and financial interest in the property, you better be first “named insured” on the insurance policy. The lender is going to receive notice from the carrier when the homeowner’s policy is cancelled. If they are doing their job, they are hounding the homeowner for proof of replacement coverage. This is where the policy you purchased will suffice. When reviewing the evidence of insurance you provide, the lender will make sure:
- The business entity is listed as first “named insured”
- Their mortgagee clause is listed correctly to protect their interest in the property
- The building value provided by your carrier meets or exceeds the amount of the loan to satisfy the lender’s interest in the location
- Most importantly, the homeowner must be listed somewhere on the certificates
NREIG lists the owner on the documents, but on the liability certificate only. Owners are included on the liability only because on a liability loss the settlement check(s) are made out to the injured party, not the “named insured” or any “additional insured” parties. In the event of a liability loss occurring at the property with the homeowner named in the lawsuit, your liability policy coverage will extend to them.
But, you may ask, why not keep the ex-owners policy in place? One concern of carrying two 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 two 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 tenant’s 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 its own contract, potentially leaving the owner waiting for courts/arbitration to settle. I wouldn’t take the chance with two 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 on wood) by insuring the new owner on a “landlord” policy and naming the bank (and the old owner) as mortgagee and additional insured respectively.