Insurance For The Subject To Deal
By Tim Norris
The author has permitted the reprinting and redistribution of this
article.
It is a commonly misunderstood challenge clarifying the timeless issue
of how to properly insure a “subject to” property.
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. An
“additional insured” will garner 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 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 bankmortgage
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 courtsarbitration
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 iswould 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.
Tim Norris National Real Estate Insurance Group, LLC
httpwww.nreinsurance.com 2008
James-andrew1_comment_thumb
At 0734PM on February 01, 2009 - James Miller said...
Great article. I get insurance on all of my subject to's, but there
could be an argument against getting your own policy if you have very
little invested, or are going to flip it quickly. If you choose to do
either of those you are certainly rolling the dice and need to fully
understand the risk being taken. James
httpwww.realestategozone.wordpress.com
Tn_photo_b_comment_thumb
At 0754PM on February 01, 2009 - Tim Norris said...
Thanks...if you have multi-property policy andor an insurer that will
pro-rate a credit or a refund, I'd buy the coverage, even if I only
owned it for a day. Remember, liability is at least as important as the
property coverage. No sense taking a chance for even a day! ; )
If
you would like to take advantage of the market and learn how to invest
in real estate and you are local to the Dallas Fort Worth area, I know
a really great teacher and mentor here in Arlington Texas. Please take
a look at his web site: DennisJHenson.com,
Dennis has a great Mentoring and training program, I know because I am
one of his former students. I learned a lot from his one on one
teaching technique. - Michael Harman 817-457-7572
mchfun.business@gmail.com
http://www.biggerpockets.com/articles/