Are You Covered? What’s In A Name?

One issue I frequently encounter is a commercial property insurance policy that has the wrong named insured. This usually causes a few minutes of sheer panic followed by the relief that Texas jurisprudence does allow for common sense remedies. That’s because even when the “wrong party” is listed as the insured the courts will look beyond that designation if the party listed has an “insurable interest” in the insured property.

An ownership interest is different from an “insurable interest.” Texas courts have long recognized this important distinction and given wide latitude to the term “insurable interest.” The seminal case in this area is Jones v Tex. Pac. Indem. Co., 853 S.W.2d 791 (Tex. App. – Dallas, no writ).

But the most interesting and expansive opinion on the matter is Dana O’Quinn v. General Star Indemnity Co., a case out of the United States District Court for the Eastern District of Texas. That case was about a fire loss which occurred at a nightclub called Alibi’s, the most perfectly named property for an overly suspicious insurance carrier.  Alibi’s  was founded by Brian O’Quinn, who was also President and Director of Cahoots Entertainment, Inc., which owned the business and entered into a lease with the owner of the premises.

Brian’s wife, Dana O’Quinn, purchased a commercial property policy from General Star. The policy identified Dana O’Quinn as the named insured.  Dana managed the club along with her husband but was neither an owner nor an officer of Cahoots,

After the club’s interior was damaged by fire in July 2011, Dana filed a claim under the policy.  In February 2012, the insurer issued a final payment of $429,211, based on ACV.  This amount reflected depreciation of $139,296.

The insurer moved for summary judgment on the ground that Dana, who was neither an owner or an officer of the corporation that owned and operated Alibi’s, had no insurable interest in the club.  The U.S. District Court for the Eastern District of Texas disagreed, explaining that insurable interest is not equivalent to legal title.  Under Texas law, “[a]n insurable interest in property exists when the insured party derives pecuniary benefit or advantage by the preservation and continued existence of the property or would sustain pecuniary loss from its destruction.”  Danna O’Quinn testified that she and her husband intended ownership of Alibi’s to be “a partnership between the two of them,” and that the club was her primary source of income.  The court found, therefore, that the club was “owned by Cahoots Entertainment, but for the use and benefit of [Danna] and her family.”  The “pecuniary loss” Ms. O’Quinn had suffered from the destruction of Alibi’s gave her an insurable interest in the property.

There are a number of issues that need to be explored in the event you review the Policy and it has the wrong insured. Of course the best measure to have employed is to read the Policy at inception and made sure the named insured was correct. If it’s too late, you should consider seeking a reformation of the contract to reflect the true intent of the parties and allege a mutual mistake in the designation of the named insured. You might even have to consider a waiver argument if the actual insured has paid the premiums without protest during the term of the contract.