Property owners may see many benefits to financing the sale of property themselves, including a higher sale price and a more expedient closing. Many times such owner-financed sale agreements can take the form of "lease to own" transactions in which a landlord-tenant relationship quickly transitions into a seller-buyer relationship. Caught unaware, a seller-insured can unintentionally void coverage under his or her homeowners' insurance policy by keeping his or her insurer in the dark about the property sale.
Most homeowners' insurance policies contain a provision rendering the entirety of the policy null and void in the case of "any change in interest, title or possession" unless the insurer provides written consent to the same. Under Georgia law, "[t]here is no question as to the validity of the stipulation that the policy would become void at the option of the insurer in case of any change in the title or possession by legal process." Aronoff v. U.S. Fire Ins. Co. of New York, 178 Ga. 97, 172 S.E.59 (1933)(voiding policy for fire insurance based on the policy's provision barring "any change . . . in interest, title , or possession of the subject of insurance , whether by . . . voluntary act of the insured or otherwise" when a secured party repossessed certain insured property that was the subject of a purchase money security agreement); see also Curtis v. Girard Fire & Marine Ins. Co., 190 Ga. 854, 11 S.E.2d 3 (1940)(voiding policy of insurance based on statutory grounds and terms of policy where the policyholder issued a bill of sale to another, holding "a bill of sale to secure debt is something more than a mere lien. It is an alienation. It divests the maker of title in the property; and both the policy and the statute provide that it shall cause a forfeiture of the policy."); see also Aldridge v. Dixie Fire & Cas. Co., 223 Ga. 130, 153 S.E.2d 723 (1967) (voiding policy where insured conveyed fee simple title in insured property without notifying insurer); distinguished on other grounds by Hillary v. Burrell, 237 Ga. App. 792, 516 S.E.2d 836 (1999).
In recent history, the Georgia Code included a statutory prohibition against the "alienation" of property, a violation of which resulted in the rendering of the policy void. While the Georgia code no longer includes a statutory prohibition against the change in an insured's interest in the loss location, Georgia courts still generally uphold "change in interest" policy terms such as the one referenced above with a few folds of confusion. See Georgia Farm Bureau Mut. Ins. Co. v. Brown, 260 Ga. 160, 390 S.E.2d 586 (1990).
One such wrinkle involves a scenario where an insured initially conveys an interest in the property but subsequently reacquires the previously-conveyed interest before the loss occurs. In such a situation, the insurer cannot void the policy. See Home Ins. Co. of New York v. Johnson, 49 Ga. App. 709, 176 S.E. 513 (1934). In Home Ins. Co., the Georgia Court of Appeals found that the policy was not forfeited where the named insured conveyed the insured property by warranty deed to his brother-in-law, who, on the same day and by warranty deed, reconveyed the property to the named insured. The first conveyance was recorded; the conveyance back to the named insured was not. The court found that "where the loss was in nowise affected by [the alienation], [the alienation] did not void the policy." The Georgia Supreme Court affirmed Home Ins. Co. in Brown, holding that where property is initially conveyed and later reacquired, "the contract of insurance may be only temporarily suspended by the violation of a stipulation in the contract similar to that now before us, and may thereafter be revived, and [] if no loss was caused or can be attributed to the violation of one of these conditions, the company is not relieved from liability." Georgia Farm Bureau Mut. Ins. Co. v. Brown, 260 Ga. 160, 390 S.E.2d 586 (1990). If, however, the loss occurs "during the existence of the increased risk" (the change in property interest), "then the case would come within the holdings of Aronoff; Curtis; and Aldridge, supra, and the policy would have been voided." Id. at 162. Thus, after Brown, the policy could not be voided if the "change in interest [did not] persist[] through the time of the loss. Id. at 161.
After Home Ins. Co. and Brown, plaintiff-insureds attempted to convince Georgia courts that a causal connection must exist between the change in interest and the loss for the forfeiture provision to have teeth. Georgia courts rejected such a causal requirement, while, at the same time, upholding the Brown court's prerequisite that the property be "during the existence of the increased risk" when the loss occurs. In Schroeder, a case involving a separate condition of a commercial policy, the Georgia Court of Appeals held "[t]here is no requirement that a causal connection between the increased risk, in this case the operation of a commercial enterprise, and the loss itself be shown." Schroeder v. Georgia Farm Bureau Mut. Ins. Co., 211 Ga. App. 302, 439 S.E.2d 18 (1993).
For homeowners wishing to self-finance, this coverage dilemma can be avoided by following some general rules of thumb. First, sellers should inform their insurer of any land sale agreement and inquire about how the sale will affect the underwriting of an insurance policy. To best preserve its interest, a seller-insured should request a written acknowledgement of the transfer in interest. Secondly, sellers should require buyers to obtain a separate homeowners' insurance policy specifically identifying the seller as a loss payee. Keeping clear records at the time of the sale can greatly benefit a seller-insured should the property suffer a loss.
On the other side of the coin, insurers looking to void coverage on the grounds that an insured changed its interest in the policy should consult its underwriting department to determine if the insurer ever received notice of the change. If underwriting confirms that no such notice has been received, the insurer should then ask underwriting if knowledge of such a change would have a material affect on the terms of the policy. At this stage, the insurer must determine if it would have altered the terms of the policy, had underwriting been notified of the insured's change in interest. Here, materiality is key. If the underwriting department contends that the change in interest would have had no effect on the writing of the policy, an insurer should pursue this coverage defense no further. On the other hand, if an underwriting can show that the ownership shift would have affected the drafting of the policy or premiums associated with the same, the "change in interest" clause may provide a valid coverage defense.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
