Insurable Interest Question
October 9, 2012
The insureds brought a lawsuit seeking recovery for fire damage to their property. The insurer denied coverage claiming that the insureds had no insurable interest in the property. This case is Murphy and Murphy v. State Farm Fire & Casualty Company, 2012 IL App (1st) 112143.
The insureds bought a parcel of land in 2004 and the land had a multi-unit residential building on it. Initially, tenants occupied three of the four units in the building, but the insureds did not renew any of the leases. The intent of the insureds was to demolish the building and construct a new residential luxury home on the property. So, after all of the tenants left, the insureds cancelled all of the utilities and had the gas meters removed. The insureds posted a sign advertising the sale of a new single-family luxury home that they were considering constructing on the site. However, they testified later that they were considering whether to sell the building as is, knock it down and rebuild the new luxury home, or renovate the existing building.
In September, 2004, the insureds signed a contract with a construction company to demolish the building and paid a nonrefundable deposit of $500. Six months after the insureds signed the demolition contract, a fire took place, causing extensive smoke and water damage to the vacant building. The Murphys sought coverage for the damage but State Farm denied the claim filed a motion for summary judgment. The insurer asserted that Murphys had no insurable interest in the building because they had contracted to demolish the structure. The trial court agreed with the insurer and this appeal followed.
Upon appeal, State Farm contended that the insureds lacked an insurable interest because they had arranged to have the building demolished and so, the fire damage to the building did not cause them to suffer any economic loss. The appeals court said that it, thus, had to determine whether a property owner has an insurable interest when the building is under contract to be demolished but the demolition has not yet begun. (This was a matter of first impression for Illinois courts.)
The appeals court noted that in Illinois, there is no statutory definition for “insurable interest”, although most courts there have adhered to the position that a person has an insurable interest in property whenever he would profit by or gain some advantage by its continued existence and suffer loss or disadvantage by its destruction. The court then reviewed rulings from other jurisdictions and found that a majority of state and federal courts have held that, when a building is destroyed by fire or other disaster, the insured may recover from its insurer despite the building being subject to removal, provided it is destroyed before removal. So, unless the demolition has begun and there is some physical damage to the property, the potential demolition of the property should not be considered when determining whether the property owner possessed an insurable interest in the property.
To the court, the dispositive fact of this case was that the building was not in the process of being demolished and so, the insured still maintained an insurable interest. The court found that as a matter of law, the insureds had an insurable interest at the time of the fire and reasonably believed that they would be reimbursed for the damage done to the building. The decision of the trial court was reversed.
Editor's Note: The question about insurable interest centered, for this appeals court, on whether a property owner has an insurable interest when a building is under contract to be demolished but the demolition has not yet begun. Since the question was one of first impression for the Illinois courts, this appeals court looked to other jurisdictions for guidance. A clear majority of those other jurisdictions held that a property owner has an insurable interest in property despite the existence of a demolition contract as long as demolition has not yet started; as long as there is no actual physical damage to the building, the insured's insurable interest remains. The Illinois Court of Appeals found this line of reasoning to be persuasive.