Determining who is an Insured and in what capacity he or she is an Insured is a critical part of analyzing a Homeowner’s Insurance claim in any state. Obviously, the right of a person to obtain insurance claim proceeds depends upon his status as an Insured. Also, a determination as to whether coverage is afforded depends, in many claims, upon who is designated as an Insured. An analysis of subrogation potential depends upon an analysis of whether a person responsible for a loss is an Insured.
Many times claims representatives do not recognize important issues that arise out of whether a person is an Insured under the policy. Often, the claim representative simply refers to the Declarations Page of the policy and considers only the Named Insured. By doing so, legitimate policy defenses are often inadvertently wasted. By the same token, actions are sometimes taken by claims representatives by considering only the Named Insureds that result in a useless waste of insurance company resources. Finally, there are times when individuals or companies are listed as “Named Insureds” when, in reality, their status is different than what is reflected on the Declarations Page. By simply taking the Declarations Page and considering nothing more, serious mistakes are made in the analysis of Homeowner’s insurance claims.
The purpose of this paper is to provide assistance in conducting an evaluation of insured status. By conducting a proper evaluation using the analysis provided, the goal of preventing those mistakes can be achieved.
Definition of an Insured
Simply put, an Insured is a person or entity who is entitled to benefits afforded by a Homeowner’s Insurance Policy. Insureds fall into the following broad categories:
- Named Insured and Additional Named Insured;
- Defined Insured;
- Mortgagee’s Insured; and
- Loss Payees.
A person or entity named as an Insured on the Declarations Page of the policy carries the status of an Insured. However, there are rare occasions when the Declarations Page of the policy creates ambiguities as to who is a Named Insured. For example, if a Homeowner’s Insurance Policy names John Doe and wife, Jane Doe as Named Insureds, there may be an ambiguity if, at the time of the loss, Jane and John were divorced. Does the wording on the Declarations Page of the policy require that Jane only be a Named Insured as long as she is the wife of John? This creates real issues if, as part of the divorce, Jane’s interest in the house was conveyed to John in the divorce decree. This creates even more problems if the divorce degree requires John to pay Jane monthly installments, presumably in exchange for her conveying to John her interest in the house. As a result of the divorce and the divorce decree, is Jane an Insured? This question becomes even more challenging if, after the divorce, Jane is responsible for the loss, whether intentionally or by accident.
Additional Named Insured status
Another category is an “Additional Named Insured.” Generally an “Additional Named Insured” is a person or entity specifically named in the policy as an insured subsequent to the issuance of the original policy. Mark Pomerantz, Note, Recognizing the Unique Status of Additional Named Insureds, 53 Fordham L. Rev. 117, 118-119 (1984). A party typically becomes an additional Named Insured pursuant to an agreement obligating the Named Insured to add the additional Named Insured to the Named Insured's pre-existing insurance policy. Id.; see, e.g., Landry v. Oceanic Contractors, Inc., 731 F.2d 299, 303 (5th Cir. 1984). “Additional Named Insureds” are usually entitled to the full benefit of the policy. See, e.g., W. Indem. Ins. Co. v. Am. Physicians Ins. Exch., 950 S.W.2d 185, 191 (Tex. App. – Austin 1997, no writ). Additional Named Insured status occurs more frequently in commercial situations, but could easily arise in situations where a homeowner is renovating or expanding his or her house.
Named Insureds in “Contract for Deed” transactions
Many times, property is conveyed by what is commonly referred to as a “contract for deed”. Under this scenario, the “Seller” enters into a contract with the “Buyer” wherein the Buyer is making monthly installment payments to the Seller. After all of the monthly installment payments are made, then the Buyer receives a deed. Until then, the legal title to the property remains with the Seller. Many times the Seller will take out Homeowners Insurance that specifies the Seller as the Named Insured. As an example, a house that is sold under a contract for deed specifies the Seller as Named Insured and provides coverage in the amount of $100,000.00. One month before the last installment payment is to be made, the house is totally destroyed. The policy provides that, when the house is totally destroyed, the policy becomes a liquidated demand. In other words, the insurance company owes $100,000.00. Under that scenario, is the insurance company obligated to pay $100,000.00 to the Seller as Named Insured? That question has not been answered in many states. In most states, a Seller under a contract for deed is actually considered to be a Mortgagee. Therefore, his interest is limited to the unpaid balance under the contract for deed. Under that scenario, what is the obligation of the insurance company? Is the obligation limited to paying the Named Insured the one remaining installment payment? What obligation, if any, does the insurance company have to the Buyer, who is not a Named Insured under the policy? Does the insurance company have a right of subrogation against the Buyer, if the fire was caused by the Buyer’s negligence?
In addition to Named Insureds, policies typically provide the status of an Insured to unnamed individuals who are defined as an Insured under the insurance policy. These individuals are usually referred to as either “defined insureds” or “additional insureds.” For example, the Texas Standard Homeowner’s Insurance Policy defines an Insured as:
“Insured means you and residents of your household who are
- your relatives; or
- other persons under the age of 21 and in the care of any person named above.”
In addition Black's Law Dictionary defines "additional insured" as follows:
“Person(s) covered by policy in addition to the named insured; e.g. in an automobile liability policy, the "named insured" is usually the purchaser or the owner of the insurance policy, while an "additional insured" or an "insured" is one who is not specifically identified by name in the policy, but enjoys status of an insured under the named insured policy, for example, as a result of being the operator of the named insured's automobile.”
Black's Law Dictionary (8th ed. 2004) (emphasis added). A common example of an additional insured is a person who, although may or may not specifically named, is covered under a liability policy by a definition of "insured" that extends protection to interests, strictly according to a status, such as employees or common members of a household. See Pomerantz, supra, at 118 n.6; see, e.g., State Farm Mut. Auto. Ins. Co. v. Walker, 334 S.W.2d 458, 460 (Tex. Civ. App.--Fort Worth 1960, writ ref'd n.r.e.).
Determining who is a Defined Insured is sometimes a very difficult task. Appellate Courts having the benefit of legal briefs, clerking attorneys and vast law libraries are often inconsistent when determining who is a Defined Insured. The challenge is even greater for the claim representative who is trying to make that determination.
The most difficult analysis is whether a person is a part of the “Household” of the Named Insured. The following are examples of circumstances that Courts have dealt with in trying to determine who is a member of the “Household” of the Named Insured:
- College Students;
- Military Personnel;
- Children whose parents have divided custody;
- Relatives who are staying at the Insured location for an extended period of time; and
- Exchange Students.
In the modern world, the list could go on.
Courts have had an extremely difficult time in determine what a “Household” is. The Courts generally hold that a family member who actually lives under the roof of the Named Insured residence is a member of the Household. The difficulty comes in when a child of the Named Insured lives somewhere else to go to college, but returns back to the insured premises from time to time when school is not in session. Typically, Courts have held that these individuals are members of the Insured’s Household. However, there are cases where the child has never permanently lived at the Insured premises so he has never “gone off” from the Insured premises to college. Generally in those cases, Courts have held that the child is still a member of the “Household” even though that child has never had an extended stay at the Insured premises. Therefore, “Household” means more than the insured dwelling.
It becomes even more difficult when the child enters the military and is assigned to a base that is generally far away from the Insured premises. That child may never spend the night at the Insured premises. Generally, Courts have still generally held that children in the military are still part of the Named Insured’s “Household”. However, there are cases that go the other way.
Another interesting scenario occurs then there are children of divorced parents. Most child custody orders provide that one parent is the “Custodial” parent and the other is the “Possessory” parent. Typically the child “lives with” the Custodian parent and then visits the Possessory parent. Is the child a member of only the Custodian parent’s Household or is he a member of the Household of both parents or does his status change from one parent to the other depending upon where he is actually located at the time of the loss?
Another challenge in analyzing who is a defined Insured is determining the meaning of a “Relative”. There are many circumstances where a child is “adopted” but there are never any formal adoption proceedings. Many states recognize the concept of “Adoption by Estoppel,” where if an adult is given custody of a child, provides the support and shelter for that child and represents to others that the child is his own, then that child can take on the legal status of being the adopted child of the Custodial adult. Also, the policy does not specify to what degree the relation has to be. For example, a person may be a 10th cousin, 5 times removed. Is that person a “relative” so as to qualify as a defined Insured under the policy?
A Mortgagee Insured is a person or entity who holds a mortgage on the Insured property. The interest of a Mortgagee Insured is the unpaid balance of the mortgage at the time of the fire. Under Texas Homeowner’s policies, a Mortgagee is entitled to payment, even if the loss was intentionally caused by a Named Insured as long as the Mortgagee did not also intentionally cause the loss. This “no fault” protection is not offered to Mortgagee Insureds in all states. Therefore, in cases involving intentional losses, it is critical to determine the status of a Mortgagee beneficiary. Interesting problems arise when a person or entity is both a Named Insured and a Mortgagee beneficiary Insured. For example; a home is owned by a partnership who is the Named Insured, but the mortgage is held by an individual who happens to be one of the partners. An owner partner (who is not the mortgagee) burns the dwelling. Under that scenario, is the Mortgagee beneficiary entitled to recover benefits under the policy? Does the answer change if the Mortgagee is a general partner or a limited partner?
A Loss Payee is typically a Mortgagee that is not named as a Mortgagee beneficiary under the policy. His interest is limited to the amount of the unpaid balance of the debt at the time of the fire. However, the Loss Payee is not entitled to “no fault coverage.” If it is determined that coverage is not afforded to the Named Insured, then the Loss Payee is not entitled to benefits.
A Determination of Who is an Insured is Important!
Under subrogation concepts, an insurance company is entitled to seek reimbursement for insurance proceeds paid from a third party who negligently causes the loss. However, an insurance company is not entitled to seek subrogation from an Insured. Therefore, it is critical in analyzing subrogation potentials to determine whether the responsible person could be determined to be an Insured. If the responsible person is not an Insured then a subrogation action is allowable. Unfortunately, when there is not a careful analysis, subrogation actions are brought against individuals not properly subject to suit. After the expenditure of time, expense and attorneys’ fees, it is a bad day when the insurance company realizes that the defendant is actually a defined Insured under the policy. It is even a worse day if the defendant realizes that not only is the subrogation case lost, but the defendant may have a right to seek damages from the insurance company. Most insurance companies that we deal with do not particularly enjoy paying attorney’s fees to its attorney, must less having to pay attorney’s fees of the opposing counsel.
Most insurance policies contain a fraud provision that provides that coverage is voided if the loss is caused by the intentional act or fraud of an Insured. Most fraud concealment provisions do not limit the fraud to the Named Insured. Therefore, in claims involving intentional acts, it is extremely important to determine whether the actor is an Insured. For example, the intentional act by a 12-year-old child of a Named Insured who is a Possessory parent could, depending upon the circumstances, avoid coverage. Therefore, it is critical to make a determination as to whether the intentional actor is an Insured under the policy.
The same is also true in the liability context. Most Homeowner’s insurance policies provide liability coverage. Obviously, it is critical to determine whether the defendant is an Insured in order to make an evaluation as to whether the insurance company owes a defense and indemnity. This is especially important when a lawsuit is brought by one Insured against another. Some liability provisions of Homeowner insurance policies preclude an obligation to provide liability coverage if it is a claim against an Insured by another Insured.
As can be seen, determining who is an Insured is much more complicated than one would think. Also, a determination of who is an Insured is one of the most critical decisions made by the claims representative. Unfortunately, this presentation probably raises more questions than it answers. Hopefully, you have received some insight concerning these issues and you may be more readily attuned to recognizing a potential problem.
Insurance law is state specific. Different states interpret the exact same policy language in different ways. Therefore, when faced with an issue as to who is an Insured, it is critical for the claim representative to seek legal advice in the state where the issue is pending.