Titleholder Lost Insurable Interest in Property Following Foreclosure

By Don R. Sampen, published, Chicago Daily Law Bulletin, August 20, 2024

The 7th U.S. Circuit Court of Appeals recently held that a homeowner whose house was in foreclosure with the redemption period having expired, lacked sufficient insurable interest to collect the replacement value of the home for loss after a fire, even though he continued to hold legal title.

The case is Werner v. Auto-Owners Insurance Co., 2024 U.S. App. Lexis 16607 (7th Cir., July 9). The homeowner, William Werner, was represented by the Hall Law Office of Springfield. Heyl, Royster, Voelker & Allen P.C. of Peoria represented the insurer, Auto-Owners.

Werner, a resident of Springfield, fell behind on his mortgage payments in 2013. The holder of his mortgage filed to foreclose and obtained a default foreclosure judgment finding that he owed more than $80,000. The court ordered the property sold upon expiration of Werner’s redemption rights, and the highest bid at auction was $23,600.

Prior to judicial confirmation of the sale, a fire destroyed the home, through no apparent involvement by Werner. The home was insured by Auto-Owners, subject to a limit of $174,000. Werner and Auto-Owners estimated the replacement cost at $225,000, which Werner sought to recover. The policy provided, however, that the insurer would pay no more than Werner’s insurable interest in the property at the time of loss.

Werner brought this suit claiming that as titleholder he continued to have an insurable interest in the entire property. The district court found otherwise, holding that his insurable interest was limited to the 30-day period Illinois law gave him to occupy the premises following confirmation of the sale. It thus awarded him about $4,000, and he filed this appeal.

Analysis

In an opinion by Judge David F. Hamilton, the 7th Circuit affirmed. He began his analysis observing that the concept of an insurable interest lies at the heart of the business and law of insurance and separates genuine risks of loss from wagers on calamities.

While neither Illinois statute nor the Auto-Owners’ policy defined the concept, the courts have referred to it as an interest in property by which someone would profit or gain an advantage by its existence and suffer a loss by its destruction.

Hamilton noted that in condemnation cases, courts tend to focus on the change of title at the end of the proceeding as the key moment when an owner loses an insurable interest. In demolition cases, the courts appear to focus on whether the demolition could still be canceled or had already begun when a loss occurs.

In this case, Auto-Owners emphasized the loss of Werner’s redemption rights before the fire and argued that a loss should not put the insured in a better position than he would have been in if the loss had not occurred. Werner, on the other hand, contended that a foreclosure is not complete, nor is title divested, until judicial confirmation of the sale.

Hamilton wrote that Werner’s reasoning was flawed in that, although the foreclosure was not complete, Werner’s right to redeem the property expired on its judicial sale and that right could not be revived. He therefore no longer had a legal path to retain ownership.

Werner nonetheless argued that he might have convinced the mortgagee to redeem the property as a matter of grace, or, alternatively, he might have been able to show that the mortgagee through fraud or otherwise prevented him from raising meritorious defenses to foreclosure.

Hamilton, however, found both arguments speculative and noted that Werner had never identified any meritorious defenses.

In addition, as a matter of public policy, Hamilton found that ruling in Werner’s favor would provide him with a windfall, whereas the purpose of fire insurance is to put the insured in the same position as if the fire had not occurred. Allowing a recovery here would also create a moral hazard and an incentive for arson or other property damage at a time when an owner has little left to lose.

Hamilton thus agreed with the district court that Werner’s insurable interest at the time of the fire was limited to his right to occupy the house until 30 days after the sale was confirmed.

The court therefore affirmed in favor of Auto-Owners.

Key Point

A homeowner whose home is in foreclosure ordinarily has no insurable interest in the home once the homeowner has lost the right to redeem the property, except to the extent the homeowner by law may be permitted a temporary right of possession.