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Question of the Week: Insurance

Someone wrote and asked the question, “Where can I find insurance for my tax certificate property?”

I think it will require a work-around. The problem is caused by the fact that you do not yet have ownership. The insurance industry says you do not yet have an “insurable interest.” If the house burns to the ground, you have lost your possession rights, until such time as there might be a redemption. It’s hard to put a price tag on that, to know how much the insurance check should be. You have lost the possibility of maybe owning the property in the future, but that is pretty far-fetched to an insurance company. The easy answer to these difficult questions is for insurance companies to say, “We won’t insure your tax certificates.” Because Alabama is the only state that has the tax certificate and possession format, the market is just not large enough for insurance companies to figure out a risk vs. premium structure.

On the other hand, they do have a lot of nationwide experience with a different kind of delayed ownership situation. That is when someone sells property on a contract for deed or similar arrangement. The buyer does not get a deed until some time in the future, when they’ve made all their payments. Despite that, they are able to buy full value property insurance.

With that in mind, I recommend the following work-around. Acme LLC buys the tax certificate. It then “sells” the property to Jim Acme (sole owner of Acme LLC) on a contract for deed. The contract requires Jim Acme obtain casualty insurance. Jim goes to his insurance agent with his contract for deed and obtains property insurance. Jim should disclose to the agent that it is tax certificate property he is buying. Full disclosure is important with insurance companies. Otherwise, if you have a loss they will claim fraud and refuse to pay your claim.

Note: Big changes are coming in 2020, that can affect the insurance issue. Be sure to attend the class on “2020 Tax Sale Changes” in a city near you, or watch the streaming video. Click HERE for more information.

What do you think?