Insurance Issues For the “Subject To” Deal

This is a common misunderstood problem: how to correctly insure “subject to” property. It is obvious that the “Due on Sale (DOS)” clause will be invoked, and the mortgage company will call the note. Despite being complex, there are some common sense rules of thumb that usually apply. Be the “first named insurance” if you or your company own the property. Any potential claim benefit or protection is given to the first named insured. A “supplementary insured” will not be eligible for liability protection. In the event that the property is damaged, the interests of the “loss payer” will be protected. A mortgagee is inherently BOTH. Be advised if you decide to keep your “homeowner” policy and name yourself as the additional insured. The insurer will deny coverage if it becomes apparent that the ex-owner (the first-named insured) no longer owns or controls the property. You are not the entity entitled to the proceeds even if you manage the claim. The insurer may question your request to be named as a loss payer if you tried to add yourself. The insurer will have to write a new policy if they discover that you own the property.

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Once you own the property, the best way to insure it is to have a non owner occupied policy with you as the first insured. As usual, the bank/mortgage company should be named as mortgagee. Name the prior owner as the additional insured only. The mortgage company will be happy if the prior owner is named as an additional insured. You may wonder, “Why not keep the ex-owners’ policy in place?” There are many policies that have excess clauses, so it is a concern to have two policies covering the same property. This means that the policy will only pay excess amounts if there is another policy. It will be difficult to get a loss paid if both policies contain such a clause.

Here’s a hypothetical example to clarify the situation: Property has a homeowner and a landlord policy (both). Fire occurs. The landlord policy covers the owner who files a claim. So far, so good. But, the “tenant”, or prior owner, has personal property loss. He can also file a claim against his “homeowners”, or tenants policy. Each claim will be investigated by the respective insurance company. They may also attempt to invoke the excess clause in their own contract. This could leave the owner waiting for the courts/arbitrations to resolve. I would not take the risk with 2 policies. You can be certain that an insurer will try to minimize or negate a loss if they have contractual issues.

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(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 must insure it. If a DOS clause was/will be invoked in the event of a policy change, I would not hesitate to walk away. We have not had a loan called in 12 years. This was done by insuring the new owners on a “landlord’ policy and naming both the bank and the old owner as mortgagees and additional insured, respectively.