As Divorce Mortgage Planners, we regularly see divorcing homeowners not updating their insurance policies 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 later.
Commonly, with a divorce, if the parties think about insurance, it might concern a life or 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 coverage will help reassure you that all assets are adequately protected.
Directly Related to the Deed
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 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 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 own insurance department with state-specific insurance rules, so check with your state's department and insurer for requirements unique to your state.
'You' and 'Your'
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 consider 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 ends 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 Divorce Happens Before a Loss
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, 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 after that, 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 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:
It's the person, not the property!
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.
Even with a Legal Transfer Assumption...
With many divorcing homeowners not wanting to refinance for fear of losing their current low-interest rate, a simple legal transfer assumption is commonplace, and leaving the existing mortgage as-is. Overlooking the current property insurance policy may be a big mistake down the road.
Divorce and property division can be complex and further complicated by loss and damage to property. 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 during separation or divorce. Still, a property damage claim can be another devastating loss when proper actions are overlooked.
The Role of Divorce Mortgage Planning
Divorce mortgage planning is a specialized financial strategy and process to address the complex considerations associated with real estate and mortgages during a divorce. A common misunderstanding about divorce mortgage planning is that it solely involves refinancing or securing a new mortgage after divorce. In reality, divorce mortgage planning encompasses broader considerations including allocating mortgage obligations, and creating an economic framework to ensure the long-term stability of both parties involved.
The goal is to facilitate a fair and well-coordinated approach to handling real estate assets and mortgage-related matters as part of the divorce proceedings. Many individuals may underestimate the complexity of these factors and overlook the need for specialized guidance from a Certified Divorce Lending Professional (CDLP®) to navigate the intricate financial landscape associated with divorce-related mortgages.
A CDLP® is a specialized mortgage professional with additional training and education to assist individuals going through divorce with their mortgage and financial needs. When you see the CDLP® designation, it signifies that this professional deeply understands the intricate financial aspects of divorce, especially in relation to real estate and mortgages. They can assess whether it's feasible to keep or refinance the family home and offer valuable guidance on mortgage-related matters throughout and after the divorce.
A successful divorce settlement results from effective communication and strategic negotiations, ensuring that both divorcing parties come out whole or 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 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.
This is for informational purposes only and does not provide legal or tax advice. You should contact an attorney or tax professional for legal and tax advice. Interest rates and fees are only estimates provided for informational purposes and are subject to market changes. This is not a commitment to lend. Rates change daily – call for current quotations.
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