As Divorce Mortgage Planners, we regularly see divorcing homeowners not updating their insurance policy until later. For example, they may wait until they refinance the marital home mortgage or when only one spouse remains in the marital home until selling the house at a date in the future.
Commonly with a divorce, if the parties are thinking about insurance, it might be concerning a life insurance policy or an auto policy, but homeowners insurance should be a priority. Becoming recently separated or divorced is a challenging time for couples. Policyholders need to know how divorce can impact a current or future property insurance damage claim.
Understanding the necessary steps in updating your insurance coverages will help reassure you that all assets are adequately protected.
The homeowner's insurance policy is directly related to the deed to the property. Therefore, if both spouses' names are on the deed, you can't simply remove one spouse's name from the insurance policy. So, for example, if you and your spouse are divorcing and one spouse is keeping the home, the other will need to sign a quitclaim so that the deed to the house can be reissued in the sole owner's name. This action then allows the existing insurance policyholders to be updated to reflect the current homeowner properly.
The issue of a resident spouse involves the husband or wife of a party who is the sole legal owner of the home. Some insurers list the spouse as a named insured even though the spouse's name does not appear on the deed. Resident spouse is a term that does not name the person and requires the spouse to live in the home to be insured. Your particular insurance needs depend, in part, on who you live with and your relationship with them. Therefore, most changes to your relationship status will warrant an insurance policy update.
Each state has its department of insurance with state-specific insurance rules, so check with your state's department and your insurer for requirements unique to your state.
For residential policies in some states, a spouse may have an interest in an insurance claim. Whether or not both spouses are named explicitly on the insurance policy, residential policies may provide married couples coverage. For example, standard language may read something like, "in this policy, 'you' and 'your' refer to the 'named insured' shown in the Declarations and the spouse if a resident of the same household."
Awareness concerning the requirements for a married couple or one married person to bring a claim under the policy is something policyholders and public adjusters should be considering during the claim process, even if the couple is not contemplating separation or divorce. For instance, these considerations are essential for complying with post-loss conditions for proof of loss and the examination under oath requirement.
It is also not uncommon for a loss to happen when a couple is in the process of divorce, newly divorced, or separated. There may be a circumstance where the couple decides to end the marriage in the middle of the claim. Unfortunately, a long and arduous claim process can impact relationships. Those who either have a claim or represent claimants need to know how a change in marital status can affect an insurance claim.
When a divorce happens before a loss, the Morgan1 case shows how one couple lost their marriage and insurance coverage. Dorothy and James Morgan were a married couple living in Florida, and:
[W]hile the Morgans were still married, Dorothy Morgan purchased insurance on their home from American Security. The policy was issued on November 3, 1981, and provided that the term "insured" included the named insured-Dorothy L. Morgan-and any relative residing in the household. The definitional section provided that throughout the policy, "you" and "your" refer to the "named insured" in the declarations and the spouse if a resident of the same household. Shortly thereafter, the Morgans entered into a separation agreement and Dorothy quitclaimed her interest in the house to her husband as she was required to do by this agreement. The Morgans divorced on August 26, 1982…On November 28, 1982, the house was destroyed by fire…When the Morgans sought to recover on Dorothy Morgan's insurance policy, American Security refused to pay, and this suit followed.
American Securities argued it did not have to pay the claim because Mrs. Morgan had no insurable interest in the property at the time of the loss. After all, she transferred her interest via the quitclaim deed to Mr. Morgan. Further, Mr. Morgan was not an insured under the policy because he was not a spouse or relative of Dorothy Morgan's residing in the home at the time of loss. The trial court agreed with American Security, and after an appeal, the Court of Appeal affirmed the ruling, explaining:
Insurance is considered a personal contract, and the hazards the insurance company elects to assume run to the individual rather than upon the property. Therefore, there may be no coverage if the insured parts with all interest in the property before the loss.
There may be a window of opportunity for a lapse in coverage during a divorce. For example, when one spouse is awarded the marital home and cannot refinance the existing mortgage into their name until a later date, often they wait until the time of refinancing to execute a quitclaim deed and update homeowners insurance. Another example may be when the divorcing couple decides to sell the property later, and one spouse remains in the home without amending the insurance policy.
Divorce and property division can be complex and further complicated by loss and damage to property. Both policyholders and their divorce team should be mindful of how changing residences and deeding property can potentially impact both parties. Unfortunately, property insurance may take low priority for separation or divorce. Still, a property damage claim can be another devastating loss when proper actions are overlooked.
Divorce Mortgage Planning is a holistic approach to the process of evaluating mortgage options in the context of the overall financial objectives as they relate to divorcing situations. As a divorce mortgage planner, a CDLP™ can help you identify any potential conflicts between the divorce settlement, financial planning, and home equity solutions, as well as any real property issues involved in your case.
The role of the CDLP™ is to help integrate the mortgage selected into the overall long and short-term financial and investment goals to help minimize taxes, minimize interest expense, and maximize cash flow. In addition, our goal is to help divorcing homeowners make more informed decisions regarding their home equity solutions and mortgage financing opportunities during and after the divorce.
Incorporating divorce mortgage planning into the settlement process makes it easier to identify possible solutions and assists both parties in letting go of counterproductive positions and emotions. In addition, a CDLP™ can assist in taking stock of possibilities, resources, and answers regarding the marital home, other real property, and mortgage financing opportunities.
A successful divorce settlement results from effective communication and strategic negotiations in such a manner that both divorcing parties come out whole or at least on the road to recovery. Working together as a team and incorporating divorce mortgage planning into the settlement cycle with a Certified Divorce Lending Professional will ultimately result in a better solution and better outcome for the divorcing couple.
Involving a Certified Divorce Lending Professional (CDLP™) early in the divorce settlement process can help the divorcing homeowners set the stage for successful mortgage financing in the future.
This is for informational purposes only and not to provide legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided for informational purposes only and are subject to market changes. This is not a commitment to lend. Rates change daily – call for current quotations.
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