Insurance is a contract between an insurer and insured, where the insurer agrees to compensate the insured or their representative in exchange for payment of a stipulated premium. Because insurance involves risk transfer, it has been hailed as one of mankind’s greatest inventions. It is arguably second only to commerce and trade itself! Furthermore, given that most other human inventions have had adverse effects on the environment, insurance has perhaps been one of mankind’s greatest benefits to society.
However, as good as the concept of insurance is, it would be unwise to pay for something without knowing exactly what kind of insurance it is. It would also help if we understood how much coverage we actually have and how our privacy may be impacted along with any associated costs such as premiums. Also it makes sense to know just whom we are insured with.
What is insurable interest?
Many people are familiar with life insurance – which pays out if you die – but what about other types of insurance? For instance, can I insure my car? Can I insure against damage or theft? Can I insure my house?
The answer to all of these questions is yes, but there are two major conditions. Firstly, you need to have an insurable interest in the insured object. Secondly, your insurance claim must be verifiable. These “conditions” are essentially rules set out by law under the Financial Services Act 2012 (the Act) to ensure the insurance sector remains fair and transparent.
An insurable interest is a connection or link between you and an insured object that gives you a stake in its well-being, such as the value of the object, any income it may generate etc. So, for example, if your car were stolen, this would clearly have a negative financial impact on you. Therefore, it can be insured against. The Act sets out three types of insurable interest in an insurance contract:
(i) Financial interest
You have a financial interest if the object’s destruction or damage would cause you to lose money e.g. by mortgaging your house instead of renting it out.
(ii) Intangible interest
You have an intangible interest if the object’s destruction or damage would cause you to experience emotions that are so strong that they cannot be reasonably regarded as transient or insubstantial.
(iii) Pecuniary interest
You have a pecuniary interest if the object is capable of producing financial gain or loss to you. The Act imposes stricter rules on some types of insurance.
Can I insure my car?
Yes, but only if the financial interest test is met – that is, you have a “pecuniary” interest in your car. This means that you are either the owner of the car or you stand to make a financial gain or loss if the car is damaged.
Can I insure against damage or theft?
Yes, but only if the financial interest test is met – that is, you have a “pecuniary” interest in the thing being insured against damage or theft. This can be difficult to prove and insurers will require evidence of this insurable interest.
Can I insure my house?
Yes, but only if the financial interest test is met – that is, you have a “pecuniary” interest in your house. This means that you are either the owner of the house or you stand to make a financial gain or loss if the house is damaged.
What about damage to property at work?
You can also insure against damage to property at work, but you must have a “pecuniary” interest in the business. So for example if your employer allows you to store an expensive bike at work, this would qualify as a “pecuniary” interest.
Can I insure other people’s property?
In general, you can only insure other people’s property if they give their explicit consent in writing – but there are exceptions. For example, a parent is allowed to take out insurance policies on her child for accident or death cover. As well as requiring an insurable interest in the insured object, your insurance claim must be “verifiable”. This means that you must have paperwork or other evidence to prove your loss.
Can I make a claim if my insurer does not?
While this may seem unfair, the Act states that an insurance contract requires your consent at every stage of the claims process. As long as it is reasonable for an insurer to request the documents it needs to pay your claim, then you must provide them if asked.
So what are some examples of non-verifiable claims?
A householder was not able to claim for a new kitchen after his insurer paid out following a flood because he could not prove that his old kitchen did not need replacing before the incident happened.
A householder was not able to claim for a new car after his insurer paid out following a theft because he could not prove that his old car did not need replacing. A person who claims for a refund of utility charges from their water company is only covered if the charges were already in arrears before the loss.
Insurance companies should ensure that, at the time a life insurance policy is issued, all parties involved have an insurable interest in the individual whose life is insured. If a particular party to a contract does not have an insurable interest in the life of another party to the same contract, then it would be unfair and highly risky for any company to issue an insurance policy.
Where there is no insurable interest, the party who wants the insurance will refuse to pay premiums and so on, and probably cancel the policy after a few years.
Generally speaking, insurable interest exists when:
(a) A person or organization would suffer financial loss or some other type of detriment if a person dies without a beneficiary.
(b) A business or organization is insured by employees or members of its board of directors.
(c) An individual has an insurable interest in the life of his/her child, spouse, parent, grandparent, sibling, step-sibling and other family member as well as any dependents.
(d) A life insurance policy is issued in favor of a charity when the donor has an insurable interest in the life of another party to whom he/she donates.
An individual or organization can have more than one type of insurable interest at a time, and what counts as an insurable interest may differ from state to state.
For example, in the state of California, an individual or organization can have all types of insurable interest in the life of another party at once. But in New York, an individual must choose one type of insurable interest in case his/her beneficiary dies before him/her. If the beneficiary dies after he/she does, the beneficiary loses all insurable interests in the policy.
In North Carolina, an individual or organization can have different types of insurable interest with a person, as long as they do not contradict each other.
For example, if A has a life insurance policy on B and C is designated as a secondary beneficiary, and then A cannot have some type of insurable interest in B and a different type at the same time.
Insurable interest is essentially the requirement that an individual have a substantial, direct personal interest in the life of another being insured.
Insurable interest “is one of those legal concepts that has been hard to define because it seems so easy to understand.”
Insurable interest is not simply an interest of any kind in another’s life, but rather it is a substantial, direct, immediate and vital interest in the continued existence of the other person. This means that insurable interest exists where someone would suffer financially or otherwise if the insured died without being replaced by another individual with an equal chance of living.
A person who has an insurable interest in another’s life is one whose life is insured under the same policy, thus benefitting from its proceeds. The basic idea is that of “insurance”, where two parties are bound together to make good on the financial loss which would befall one if the other were to die.
Individuals with insurable interests include family members, business associates, and others who would suffer financial loss if the insured died without being replaced.
Any party who is not financially or otherwise affected by the death of another party does not have an insurable interest. This means that life insurance contracts are usually between “two parties” only, rather than among a group of individuals.
Although an insurance company will not necessarily contest the existence of insurable interests, it may refuse to pay if an insurable interest is found after the insured dies.
Therefore, in most cases where claims are made under life insurance policies upon the death of their insured, there must have been an insurable interest at the time the policy was purchased and at the time of death.
The insurable interest doctrine is a concept adopted by state courts to determine whether an interested party should be legally permitted to recover under a life insurance contract.
Under this doctrine, if an individual has sufficient financial interest in another’s life, that person can lawfully purchase life insurance on the other’s life.
There are four basic elements which must be established before an individual who lacks the status of a spouse can have insurable interest in another person under common law.
These include:
(1) ownership or other economic interest,
(2) expectancy or intent to acquire economic benefit,
(3) direct and immediate peril to that interest, and
(4) some form of direct connection between the interest and the risk to be insured.
The insurable interest doctrine is flexible.
it is recognized that interests may be both present (existing at the time the contract is made) or future, contingent, vested, absolute.
Conditional vs unconditional
While most life insurance policies are either a “conditional” or an “unconditional” type, the insurable interest rule is generally applied to conditional contracts by looking at how much of a vested interest one has in another person’s life. The policy must be considered “insurance”, not a mere investment vehicle.
A conditional insurance contract attaches only if certain conditions are met, such as the death of the insured. Such contracts are commonly used in business agreements, which can be triggered by an event like a president’s death.
It may also be used when the policy owner surrenders insurance when he doesn’t have insurable interest to collect the proceeds of his own life insurance policy after his death.
Insurance purchased by a beneficiary under the insured’s contract without insurable interest is considered to be legal and valid; however, such an insurance policy can only be enforced against the insurer for claims paid out. The proceeds of the life insurance will not go to the party who purchased it. They must instead go to “the next person down” on the list of beneficiaries.
If a party purchases life insurance on another without insurable interest, that party can still collect from the insurer if it turns out that there was an insurable interest at the time of death. This means that “anyone who has been adjudged to have had an insurable interest, however slight, at any time before the death of the insured, is entitled to recover at least the amount of the premiums paid.”
Insurance agents have a duty to ensure that their policyholders have insurable interest when purchasing life insurance.
When an agent fails to recognize that lack of insurable interest exists, they are liable for any subsequent claims made by the beneficiary. This can occur when an agent sells a life insurance policy to a party that has no relationship with the insured, or where a policy is sold where the requirements of insurable interest are not met.