A client based in Ohio purchased a commercial property at a sheriff's sale. The winning bid was $170,000. They made a down payment of $5,000 and were told it will be three months before they receive the deed. 

Q: Does the client have an insurable interest in this property while the deed is pending and need to insure it?

Response 1: In 1943, property policies in the U.S. changed from “ownership interest" to “financial interest." 

Ohio does not follow the broad evidence rule that the majority of the states follow. The broad evidence rule finds that actual cash value (ACV) is synonymous with fair market value (FMV). FMV would include land. From the question, FMV would equal $170,000. However, this may not be the appropriate limit because this property was won in an auction. ACV, functional replacement cost or replacement cost valuation could be more or less than FMV.

In the 1973 case Paterson-Leitch Company v. Insurance Company of North America, Ohio courts defined ACV by stating:

It is also clear… that in the case of partial loss the test ordinarily utilized in Ohio for determining damages to dwellings is the cash amount that would be required to put the property in the same condition in which it was at the time of the loss, i.e., in general, replacement cost minus depreciation, and not market value.

The new owner has a $5,000 present interest and a $170,000 future interest in the property. The three-month waiting period is probably the upset period, which is common in sheriff sales. After the upset period, the full payment is due and the deed, which is no longer a warranty deed, is executed upon receipt. 

The statutory sale terms with the sheriff sales typically do not have a force majeure exception; the sheriff can still collect the remaining $165,000, building standing or not.

Response 2: Did they received ownership of the property and the deed is just delayed because of the transfer system? If they put a down payment on it, they have paid consideration. It sounds like there is a contract of sale and insurable interest. This is really a legal question. You might want to have your insured contact an attorney. 

Response 3: Yes, there is an insurable interest. They should be named as an additional insured on the current policy that covers the location.

Response 4: If the title has not yet transferred, they might have an inchoate interest in the property. For example, assuming the property is insured, if it's a commercial building and it burns down before they receive the property, do they get to back out of the deal or do they receive insurance proceeds from the former owner to rebuild it? Or will they have overpaid for a pile of rubble?

Check your insurance code for the definition of insurable interest and ask a lawyer about the “what if" scenarios.

Response 5: Yes, they have an insurable interest in the property. Insurable interest can arise from ownership, contract, legal liability and factual expectancy. Would they suffer a financial loss if something happened to the property?

Response 6: Some governmental jurisdictions insure property subject to auction, but most don't. There is probably no coverage anywhere. A purchaser has an interest in the property. I would insure it in the name of the owner pending completion of the transfer of title. You need to clearly disclose the status of the property to the carrier.

In addition, the owner needs to address vacancy issues. Temporary occupancy arrangements may be possible working with the governmental body.

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