Acquiring property is always a momentous achievement for a proud owner; however, the risk in acquiring real property is that you could also lose it. These risks come in the form of fire, explosions, or damage caused by extreme weather conditions such as lightning and flood. Every year, there is a threat of a catastrophic storm, and those that were not perceived to be catastrophic proved to be otherwise.
Aside from a contract of sale, an insurance policy is another commercial transaction and legal document most property owners will want to sign if only to protect their asset in case of a fortuitous event. Black’s Law Dictionary defines insurance as “A contract whereby, for a stipulated consideration, one party under- takes to compensate the other for loss on a specified subject by specified perils. The party agreeing to make the compensation is usually called the “insurer” or “underwriter;” the other, the “insured” or “assured;” the agreed consideration, the “premium;” the written contract, a “policy;” the events insured against, “risks” or “perils;” and the subject, right, or interest to be protected, the “insurable interest.”
Insurance is not a modern day invention that others liken to legalized gambling in as much as the contract is speculative in nature and is hinged on the happening of a contingent event. In 1666, more than 13,000 houses burned in what is known as the Great Fire of London and this prompted Sir Christopher Wren, a highly renowned English architect who played an important role in rebuilding London after the fire, to propose for the inclusion of a site for an Insurance Office in his new plan for London in 1667. After a series of failed attempts to establish fire insurance over the years, economist Nicholas Barbon and his eleven associates established the first insurance company in 1681. Barbon's Insurance Office was known as an "Insurance Office for Houses" and its office was at the back of the Royal Exchange. The purpose of this insurance was to insure that people build brick and frame homes to more or less protect their property from fires. Approximately 5,000 homes were insured.
Other companies with a similar purpose were founded, one of them being the Hand in Hand Fire & Life Insurance Society at Tom's Coffee House in St. Martin's Lane in London which was founded in 1696. Among the old ones that were founded around this time is the 'Sun Fire Office' of 1710 which is known today as the RSA Insurance Group after a series of mergers and acquisitions. The accompanying photo that you see is the Sun Fire Office plaque at the Brodie Castle (photo credit: www.geograph.org.uk).
Here in the United States, Benjamin Franklin popularized property insurance to protect property owners from the risk of fire by founding the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire, a company that was also known for refusing to insure high risk properties such as those made of wood. Perpetual property insurance was popular back then, although nowadays, fire insurance is usually valid for just one year, but subject to renewal at the option of the parties. Over the years more and more insurance companies were established and were able to help people rebuild using the compensation they got.
World Trade Center leaseholder and developer Larry A. Silverstein sought more than $7 billion in insurance money from insurers Chubb Corp. and Swiss Reinsurance Co. as a consequence of the 9/11 attacks. Silverstein claimed that there were two attacks at the WTC, the insurers argued that there was only one coordinated attack. The Federal jury ruled in favor of Silverstein. Major insurance claims were settled and New York Governor Eliott Spitzer claimed that over $4.5 billion of this amount will be made available to rebuild the 16-acre WTC complex.
Property insurance protects its owner from damage caused by a fortuitous event or an “act of God.” Natural events such as calamities which humans have no control of are considered as acts of God, and this legal term applies regardless of the religious belief of the parties to the contract (also known as “policy”). Property insurance come in special forms such as fire insurance, flood insurance, earthquake insurance, home insurance, and boiler insurance, among others.
A policy may insure two different kinds of perils – named perils or open perils. Named perils are fortuitous events or “acts of God” specifically enumerated in the policy. This means that other events not listed in the policy are not covered by insurance and the owner will have to bear his own loss. On the other hand, open perils cover all kinds of perils as long as it is not excluded in the policy. Perils are not the one items enumerated in the contract; the policy specifies the properties covered and the period of coverage. For example, the owner suffers a loss caused by a fire on the policy holder’s adjacent lot, the insurer will not be liable if said property is not covered by the insurance. Even if this property is covered, if the fire happened outside of the coverage period, say, the coverage expired but the policy holder failed to renew it, the insurer is not liable for the loss.
Insurable interest is an essential element of a contract holder. A person who derives financial or material benefit from the property has insurable interest and it is usually defined by ownership, possession, or direct relationship. A policy holder is not always an owner; he may be an heir, tenant or a mortgagee. One cannot be a policy holder in the absence of an insurable interest.
A contract of insurance is a contract of indemnity. Liability lies against the insurer only if there is actual loss. Conversely, no loss means no liability. Good faith is material when entering into a contract of insurance. Good faith means not deliberately causing damage to the property if only to collect from the insurance company; this is insurance fraud which is a crime. Unlike the present healthcare law more commonly known as Obamacare, where pre-existing conditions are rendered immaterial to the validity of the policy, property insurance requires the policy holder to disclose all re-existing conditions, relevant information that may influence the insurer in accepting the contract or not. Some insurers refuse high risk properties, others accept but require a higher premium (in the form of monthly contributions, which is the consideration and an indispensable element in insurance contracts). The more a property is exposed to risks, the more expensive it is to insure. This was proven true in the aftermath of Hurricane Katrina where insurance premiums doubled after the storm (Katrina survivors mired in taxes and red tape). Amount of premiums are also influenced by the amount of protection the policy holder seeks.
Insurance contracts are take-it-or-leave it agreements; you can protect yourself from risks or choose to take the risk, which means bearing the burden and suffering from the losses you may incur as a business and property owner, and this includes damages and legal fees should injury be caused to third parties (third party liability).
This blog does not provide legal advice but simply shares general legal information everyone must know.
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