Demonstration of Insurance Policies as Contracts

Insurance policies are in fact contracts. All contracts, including insurance policies, contain rights and duties.

A recent Michigan Court of Appeals case demonstrates that insurance policies are contracts. In the case of Fabatz v. Auto-Owners, December 17, 2020, Fabatz made an addition to their home in early 2017 at a cost of $150,000. The insurance policy contained Guaranteed Replacement Cost respects the valuation of coverage at the time of a loss.

However, the policy also contained a homeowner’s duty to notify the insurance company of any additions, alterations, or improvements to the dwelling that increased the replacement cost by $10,000 or more. Fabatz failed to do so. After a fire destroyed the home, they found their recovery under the policy inadequate to replace the entire value of the home. The court found Fabatz violated the notification requirements of the policy and ruled in favor of the insurance company.

What this case illustrates: it is important to review and understand the notification obligations in your insurance policies. As a broader rule, the failure to advise an insurance carrier of changes in exposures may have negative consequences at the time of a loss. When in doubt, it is best to have these discussions with your insurance agent before a loss occurs.

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