A Burning Need: Pay Attention to Insurance Coverage Policy Terms

I read an interesting article in the Wall Street Journal Law Blog, “No Fire Fee? Let Your House Burn!” about a fire department in South Fulton, Tennessee that watched a house burn because the owners had not paid a $75.00 annual fire protection subscription fee. It should be noted that the South Fulton mayor promised the fire department would do everything it could to protect all human life, even if the person had not paid the fee. However, failure to pay means the homeowner is not entitled to firefighting services to protect real property, personal property or pets.  Incredibly, the article stated that in subscription-based systems, less than 70% of persons pay.

There is no doubt many local governments and special purpose districts are under financial pressure, but while the wisdom of such a policy is questionable, for our purposes, it raises interesting insurance questions.

It may be more of an underwriting concern as to whether the house sits in a subscription-based area. The risk of total fire loss likely rises exponentially if it is likely no one will even attempt to put out the fire. Also, coverage issues arise in this scenario. Could failure to pay the subscription be considered an “intentional act” that would be a basis for denying coverage? I guess the homeowner could always argue he did not intentionally fail to pay but was merely negligent in failing to do so. Certainly the insurer could argue that the homeowner’s failure to pay is a failure to mitigate his damages.

Practice Point: The best policy for insurers in these areas may be to have the homeowner certify that he will pay the subscription or be in direct violation of the policy terms. Thus, just like when the homeowner fails to pay his premium, if he fails to pay for fire service, the insurer could deny coverage. If the insurance company gets serious about this, banks and lenders would probably start requiring borrowers to escrow fire subscription services just like taxes and insurance premiums. Thus, the lender can be assured its collateral is safe from thus type of government policy or from a homeowner who intentionally or accidentally lets his fire subscription get cancelled.