INSURABLE INTEREST
The word ‘interest’ can have a number of meanings. In the
present context, it means a financial relationship to something or
someone. There are a number of features to be considered with ‘insurable
interest’, as below.
Definition
Insurable interest is a person’s legally recognised
relationship to the subject matter of insurance that gives them the right
to effect insurance on it. Since the relationship must be a legal one, a
thief in possession of stolen goods does not have the right to insure them.
Importance of Insurable Interest
An insurance agreement is void without insurable
interest. The rules relating to return of premiums under such an agreement vary
as between the different classes of insurance. These rules are the general
rules on illegality of contract and the relevant provisions of the Insurance
Companies Ordinance (‘ICO’) and of the Marine Insurance Ordinance.
Its Essential Criteria
For insurable interest to exist, the following criteria
must be satisfied:
(a) there must be some person (i.e. life, limbs,
etc.), property, liability or legal right (e.g. the right to
repayment by a debtor) capable of being insured;
(b) that person, etc. must be the subject matter of
the insurance (that is to say, claim payment is made contingent on a mishap to
such person, etc.);
(c) the proposer must have the legally recognised
relationship to the subject matter of insurance, mentioned in 3.1.1 above,
so that financial loss may result to him if the insured event happens.
(However, insurable interest is sometimes legally presumed without the need to
show financial relationship. For example, any person is regarded as having an
insurable interest in the life of their spouse.)
Note: A financial
relationship alone is not sufficient to give rise to insurable interest. For
instance, a creditor is legally recognised to have insurable interest in the
life of his debtor, but is not allowed to insure the debtor’s property despite
his financial relationship to it, unless the property has been mortgaged to
him.
How It Arises
Insurable interest arises in a variety of circumstances,
which may be considered under the following headings:
(a) Insurance of the Person: everyone has an insurable
interest in his own life, limbs, etc. One also has an insurable interest in the
life of one's spouse. Further, one may insure the life of one's child
or ward (in guardianship) who is under 18 years of age, and a policy
so effected will not become invalid upon the life insured turning 18.
(b) Insurance of Property (physical things): the
most obvious example arises in absolute ownership. Executors,
administrators, trustees and mortgagees, who have less than absolute ownership,
may respectively insure the estate, the trust property and the mortgaged
property. Bailees (i.e. persons taking possession of goods with the consent of
the owners or their agents, but without their intention to transfer ownership)
may insure the goods bailed.
(c) Insurance of Liability: everyone facing potential
legal liability for their own acts or omissions may effect insurance to cover
this risk (sometimes insurance is compulsory), such liability being
termed ‘direct liability’ or ‘primary liability’. Insurance
against vicarious liability (see 2.2(c) above) is also possible,
where, for example, employers insure against their liability to members of the
public arising from negligence, etc. of their employees.
(d) Insurance of Legal Rights: anyone legally in
a position of potential loss due to infringement of rights or loss of future
income has the right to insure against such a risk. Examples include landlords
insuring against loss of rent following a fire.
Note: Anyone (agent)
who has authority from another (principal) to effect insurance on the
principal’s behalf will have the same insurable interest to the same extent as
the principal. For instance, a property management company may have obtained
authority from the individual owners of a building under its management to
purchase fire insurance on the building. There is no question of a fire
insurance effected under such authority being void for lack of insurable
interest, even if it is the property management company (rather than the
property owners) which is designated in the policy as the insured.
When Is It Needed?
(a) With life insurance, insurable interest is only needed
at policy inception. Suppose a woman had effected a whole life policy on
the life of her husband, who died some years later. When the woman presented a
claim to the insurer, the latter discovered that at the time of the man’s
death, they were no longer in the relationship of husband and wife. That means
the woman had no insurable interest in the life of the deceased at the time of the
death. Nevertheless, this lack of insurable interest will not disqualify her for
the death benefit.
(b) However, with marine insurance, insurable interest
is only needed at the time of loss.
(c) The above marine insurance rule is probably applicable
to other types of indemnity contracts as well.
Assignment
‘Assignment’ is a legal term that generally means a transfer
of property. In insurance, there are broadly two types of assignment:
assignment of the insurance contract (or insurance policy) and assignment
of the right to insurance money (or insurance proceeds). They are
different from each other in the following manner:
(a) Effect of an assignment of the insurance contract:
With an effective assignment of a policy (or contract) from the assignor
(original policyholder) to the assignee (new policyholder), the interest of the
assignor in the contract passes wholly to the assignee to the effect that when
an insured event occurs afterwards, the insurer is obliged to pay the assignee
for his loss, not that suffered by the assignor, if any. In the case of life
insurance, assignment will never substitute a new life insured.
(b) Effect of an assignment of the right to insurance
money (sometimes simply referred to as an assignment of policy proceeds):
Assignment of policy proceeds will have an effect on both losses that have arisen
and those that may arise. An assigned policy remains to cover losses suffered
by the assignor, not those by the assignee, although it is now the assignee
(instead of the assignor) who has the right to sue the insurer to recover under
the policy.
(c) Necessity for insurable interest: With
assignment of the insurance contract, both the assignor and the assignee need
to have insurable interest in the subject matter of insurance at the time of
assignment; otherwise the purported assignment will not be valid. (Taking
assignment of motor policy as an illustration, the requirement of insurable
interest will be satisfied by having the motor policy assigned to the purchaser
contemporaneously with the transfer of property in the insured car.) However,
with assignment of the right to insurance money, no insurable interest is
needed on the part of the assignee, so that it may actually take effect as a
gift to the assignee.
(d) Necessity for insurer’s consent: An assignment
of the right to insurance money requires no consent from the insurer,
irrespective of the nature of the insurance contract concerned. But the
position is not that simple with assignment of the insurance contract.
Different types of insurance are subject to different legal rules as to whether
a purported assignment of the insurance contract will have to be agreed to, by
the insurer. The matter is further complicated by the fact that very often
non-marine policies include rovisions that override these legal rules.
Fortunately, it is sufficient for you simply to know that, in practice, unlike
all other types of policies, life policies and marine cargo policies are
assignable without the insurers’ consent.
(e) Assignment of benefits as opposed to obligations:
Assignment does not have the effect of transferring the assignor’s
obligations under the insurance contract to the assignee. Such a transfer
requires the insurer’s consent.
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