I’ve seen this drawback too many occasions to rely. A latest federal court docket choice out of Tennessee drives the lesson dwelling with painful readability. Property house owners routinely assume they’re protected as a result of their tenant procured insurance coverage, listed them as a loss payee, and possibly even added them as an extra insured. Then a hearth happens, the constructing is a complete loss, and the proprietor learns far too late that they have been by no means actually insured for what they thought mattered most.
The case concerned a business constructing owned by Steadfast Investments and leased to a tenant. The tenant purchased the insurance coverage coverage and was the one named insured. The proprietor was listed as a loss payee and likewise appeared in an extra insured endorsement restricted to legal responsibility protection. After a hearth destroyed the constructing, the insurer paid an precise money worth quantity collectively to the tenant and the proprietor. The proprietor believed the coverage was a valued coverage and demanded the complete coverage restrict for the constructing. The insurer refused. Litigation adopted.
The court docket first dominated that the coverage was an open coverage, not a valued coverage, as a result of the contract language required valuation after the loss, included substitute price provisions, and contained an appraisal clause. 1 That a part of the ruling is essential, however the extra instructive and troubling lesson for property house owners lies within the newer findings ending the case.
The proprietor argued that, as a loss payee and meant beneficiary of the coverage, it had the proper to problem the insurer’s valuation and implement the coverage’s fee obligations. The court docket agreed, partly, that the proprietor was an meant beneficiary, however solely of a really slim promise. The coverage provision that mattered mentioned the insurer would modify the loss with the tenant and concern fee collectively to the tenant and the loss payee. That promise was saved. The insurer adjusted the loss with the tenant and issued a joint test.
The court docket famous that what the coverage did not do was give the constructing proprietor any proper to take part within the adjustment, dispute the quantity of loss, demand appraisal, or declare substitute price or coverage limits. These rights belonged completely to the named insured, who was the tenant. The court docket emphasised that even an meant third-party beneficiary can solely implement the particular guarantees made for its profit, not the whole insurance coverage contract.
In plain English, the court docket dominated that the proprietor had a proper to be on the test, however no proper to argue about how large the test ought to be. 2
This end result ought to concern each property proprietor and actual property lawyer working with business property house owners who depend on tenant-placed insurance coverage. Loss payee standing is commonly handled as a security internet. It’s not. Being a loss payee usually ensures fee is made collectively, however it doesn’t confer management, valuation rights, or standing to problem how the insurer adjusts the declare. Extra insured endorsements will be equally deceptive, particularly after they apply solely to legal responsibility protection and to not property injury.
I’ve written and spoken about this concern for many years as a result of it retains recurring. House owners signal leases requiring tenants to insure the property. Certificates of insurance coverage are collected and filed away. Everybody feels snug till a catastrophic loss exposes the hole between perceived safety and precise protection. At that time, the coverage language, not assumptions or intentions, controls the end result. Some insurers agree to regulate the declare with the proprietor, whereas others take a really exhausting stance.
The repair is just not difficult, however it requires vigilance. Property house owners, property managers, and actual property attorneys concerned with these points ought to insist on being named insureds on property protection, or not less than make sure the coverage features a true constructing proprietor loss payable clause that provides the proprietor adjustment rights and direct fee obligations. Reviewing declarations pages and endorsements is just not busywork. It’s threat administration in its most simple type.
This Tennessee case is a reminder that courts will implement insurance coverage contracts precisely as written. They won’t rescue house owners from unfavorable constructions just because the end result feels unfair after a loss. Insurance coverage is a contract drafted lengthy earlier than the hearth, not a sympathy instrument utilized afterward.
The attorneys on either side of this case are wonderful. I count on there could also be an attraction. I’ll preserve readers abreast of what occurs.
Thought For The Day
“An oz. of prevention is price a pound of remedy.”
—Benjamin Franklin
1 Steadfast Investments & Properties v. AmGuard Ins. Co.No. 1:23-CV-01091 (WD Tenn. Julu 1, 2024).
2 Steadfast Investments & Properties v. AmGuard Ins. Co.No. 1:23-CV-01091 (WD Tenn. Jan. 8, 2026).
