CHAPTER 2 THE CONTRACT OF PERSONAL INDEMNITY

• Jurisdiction: United States

A. Property Insurance

Contrary to popular belief, property insurance does not insure property. Rather, property insurance insures an individual or entity named as the insured against certain risks of loss faced by property in which the insured has an interest.

As a risk-spreading device, property insurance only insures people, corporations, partnerships, and other entities against the risk of loss of the property described in the policy.

Insurance against the loss of property is a contract of personal indemnity. It only insures the person(s) named in the policy against certain risks of loss to property in which that person has an interest. A person who has an interest in the property but is not named as an insured cannot recover under the policy. Similarly, a person named on a policy who has no interest cannot recover.

As the California Supreme Court observed in Garvey v. State Farm Fire & Cas. Co., 48 Cal. 3d 395, 770 P.2d 704, 257 Cal. Rptr. 292 (1989), a first-party insurance policy provides coverage for loss or damage sustained directly by the insured (e.g., life, disability, health, fire, theft, and casualty insurance). A third-party liability policy, in contrast, provides coverage for liability of the insured to a third party (e.g., a commercial general liability (CGL) policy, a directors' and officers' liability policy, an auto liability policy, or an errors and omissions policy).

The term "perils" in traditional property insurance language refers to fortuitous, active physical forces such as lightning, wind, and explosion, which bring about the loss. ¹ "[T]he cause of loss in the context of a property insurance contract is totally different from that in a liability policy."

[T]he right to coverage in the third-party liability insurance context draws on traditional tort concepts of fault, proximate cause, and duty. This liability analysis differs substantially from the coverage analysis in the property insurance context, which draws on the relationship between perils that are either covered or excluded in the contract. In liability insurance, by insuring for personal liability, and agreeing to cover the insured for his own negligence, the insurer agrees to cover the insured for a broader spectrum of risks. ²

In Russell v. Williams, 58 Cal. 2d 487, 374 P.2d 827, 24 Cal. Rptr. 859 (1962), the Supreme Court of California dealt with the issue of who could collect the proceeds of an insurance policy.

Dorothy Russell, the plaintiff, and John Mouser, now deceased, whose estate was being administered by Russell, while husband and wife, owned the subject property as joint tenants. Mouser continued to live in the house after Russell and Mouser's divorce until his death. Before he died, Mouser obtained a policy of fire insurance covering the improvements on that property, which was issued to him as the sole insured, the premiums being paid from his separate funds. Six weeks before Mouser's death, the house was destroyed by fire. The proceeds of the policy, representing the full value of the destroyed premises, were paid to the administrator of Mouser's estate.

[Russell] became the sole owner of the property and sued to recover the proceeds in question, alleging that the defendant estate became "indebted to plaintiff for moneys had and received for the use and benefit of plaintiff."

It is a principle of long standing that a policy of fire insurance does not insure the property covered thereby, but is a personal contract indemnifying the insured against loss resulting from the destruction of or damage to his interest in that property. This principle gives rise to the supplemental rule that, in the absence of a special contract, the proceeds of a fire insurance policy are not a substitute for the property, the loss of which is the subject of indemnity.

As a consequence, Russell had no claim to the proceeds of the insurance paid to Mouser's estate upon the ground that they were proceeds of the joint-tenancy property of which she now was sole owner. By reason of joint tenancy law, at Mouser's death, Russell became the sole owner, free from any claim of interest therein by Mouser's estate, of all the real property.

The fact that insurance is a contract of personal indemnity and does not insure property seems universal. For example, in Smith v. Jim Dandy Mkts., 172 F.2d 616 (9th Cir. 1949), the Ninth Circuit found that "regardless of Smith's interest in the building, he suffered no loss from its destruction."

In Lighting Fixture Supply Co. v. Fidelity Union Fire Ins. Co., 55 F.2d 110 (5th Cir. 1932), the policy as written was in form an open policy, complete in itself, and unambiguous. An insurable interest is the relationship or connection a person must have with the subject matter of an insurance policy in order to insure it.

In order to have an insurable interest in property under a contract for purchase, there must be a valid contract in existence both at the time the policy was issued and became effective, and at the time of the loss. South Carolina Ins. Co. v. White, 301 S.C. 133, 138, 390 S.E.2d 471, 475 (S.C. Ct. App. 1990); Powell v. Ins. Co. of N. Am., 285 S.C. 588, 590, 330 S.E.2d 550, 552 (S.C. Ct. App. 1985). When a contract to purchase property terminates, the purchaser's insurable interest is extinguished. If an insurable interest does not exist at the time the contract for insurance was made, the insurance contract is void from its...