An agent’s insured holds a tax lien or tax deed on several homes, and is looking for coverage. The agent is having trouble finding an insurer who is willing to take on the risk.

Q: They say the insured does not have an insurable interest. Do you know of any companies that will write this risk?

A: The question of insurable interest in property is a function of timing. In property-casualty insurance, insurable interest must exist at the time of the loss—which means the destruction of the property must cause someone direct financial loss, and the limit of insurable interest is the amount of financial harm they suffer. In other words, what is the person actually out if the property is destroyed?

Owning a tax lien is not the same as owning the property. Until the person actually holds title to the structure, there is no insurable interest in the structure or the property; the delinquent taxpayer still owns the property for a specified amount of time. Then, the lienholder must sue to get the delinquent owner out of the house.

Likewise, owning a redeemable tax deed is not the same as owning the property, until the redemption period is up. If it’s a pure tax deed, there’s insurable interest upon purchase of the deed. But the problem then is vacancy—underwriters may not like that issue.

For tax liens and redeemable tax deeds, the insured is taking a business risk, not a personal one—the only loss they could suffer is the amount they paid for the liens or deeds. The hope of gaining title to the house is a speculative risk that may never materialize, so insuring it creates a moral hazard because the insured could profit from the destruction of the house.

You may have to find a financial hedging product to cover the risk of loss arising out of speculation. I’m not aware of any personal or commercial underwriter who would insure the properties until title is transferred.

However, in the case of tax deeds and properties for which the insured has actually taken possession of the title, there is an insurable interest—likely an excess & surplus lines situation.

Chris Boggs is executive director of the Big “I” Virtual University (VU).

This question was originally submitted by an agent through the VU’s Ask an Expert Service. Answers to other coverage questions are available on the VU website. If you need help accessing the website, request login information.