Contrary to the belief of those insured, property insurance does not insure property. As a risk spreading device property insurance only insures people, partnerships or corporations against the risk of loss of 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 unless the policy is changed. Similarly, a person named on a policy who has no interest cannot ever recover.
As the California Supreme Court observed in Garvey v. State Farm Fire and Casualty Co., 48 Cal. 3d 395, 770 P.2d 704, 257 Cal. Rptr. 292 (Cal. 03/30/1989), 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, on the other hand, provides coverage for liability of the insured to a third party (e.g., a Commercial General Liability (CGL), a directors’ and officers’ (D & O) liability, or an errors and omissions (E & O) policy).
The term “perils” in traditional property insurance language refers to fortuitous, active physical forces such as fire, lightning, wind, and explosion, which bring about or cause the loss.
The cause of loss in the context of a property insurance contract is totally different from that in a liability policy. On the contrary, the right to indemnity in the third party liability insurance context draws on traditional tort concepts of fault, proximate cause, and duty. The 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 by the contract of insurance. 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 than those insured by a property policy.
For example, in Smith v. Jim Dandy Markets, 172 F.2d 616 (1949) the Ninth Circuit found that “regardless of Smith’s interest in the building, he suffered no loss from its destruction. Under California law, which the federal court was required to follow, a fire insurance policy is a personal indemnity contract and a showing of pecuniary damage is prerequisite to recovery. See also Davis v. Phoenix Insurance Co., 111 Cal. 409, 415, 43 P. 1115; and Alexander v. Security-First Nat’l. Bank, 7 Cal.2d 718, 62 P.2d 735; 14 Cal.Jur. 464, 37.”
For additional commentary in the field see:
1. Balandran v. Safeco Ins. Co. of Am., 972 S.W. 2d 738, 740–41 (Tex. 1998); National Union Fire Ins. Co. v. CBI Indus., 907 S.W. 2d 517, 520 (Tex. 1995).
2. Security Mut. Cas. Co. v. Johnson, 584 S.W. 2d 703, 704 (Tex. 1979).
3. Balandran, 972 S.W. 2d at 741 [quoting State Farm Life Ins. Co. v. Beaston, 907 S.W. 2d 430, 433 (Tex. 1995) and Forbau v. Aetna Life Ins. Co., 876 S.W. 2d 132, 133 (Tex. 1994)].
4. United States v. Winstar Corporation, 1996.SCT.143 (1996).
© 2011, Barry Zalma. Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” “Zalma on California Claims Regulations,” “Murder and Insurance Fraud Don’t Mix” and others that are available at on his website. Mr. Zalma can be contacted via his website http://www.zalma.com,or via email at zalma@zalma.com or you can access his free “Zalma on Insurance Fraud” newsletter. You can also access Mr. Zalma’s Martindale-Hubbell profile on martindale.com.