Insurable interest
Encyclopedia
Insurable interest exists when an insured person derives a financial or other kind of benefit from the continuous existence of the insured object (or in the context of living persons, their continued survival). A person has an insurable interest in something when loss-of or damage-to that thing would cause the person to suffer a financial loss or other kind of loss.
Typically, insurable interest is established by ownership, possession, or direct relationship. For example, people have insurable interests in their own homes and vehicles, but not in their neighbors' homes and vehicles, and certainly not those of strangers.
The "factual expectancy test" and "legal interest test" are the two major concepts of insurable interest.
provided leadership by passing legislation that
prohibited insurance contracts if no insurable interest could be proven, notably the Life Assurance Act 1774
which renders such contracts illegal, and the Marine Insurance Act 1906
, s.4 which renders such contracts void
.
dictates that the insured is compensated for a loss of property,
but is not compensated for more than what the property was worth. A lender who accepts a house as a mortgage, has an insurable interest on the property used as security, but the insurable interest is not in excess of the value of the loan.
to be insured. It may also mean the interest of a beneficiary
of a life insurance
policy to prove need for the proceeds, called the "insurable interest doctrine". Specifically, insurable interest is:
Insurable interest is no longer strictly an element of life insurance contracts under modern law. Exceptions include viatication agreements and charitable
donation
s.
The principle of insurable interest on life insurance
is that a person or organization can obtain an insurance policy on the life of another person if the person or organization obtaining the insurance values the life of the insured more than the amount of the policy. In this way, insurance
can compensate for loss. A company may have an insurable interest in a President/CEO or other employee with special knowledge and skills. A creditor has an insurable interest in the life of a debtor, up to the amount of the loan. A person who is financially dependent on a second person
has an insurable interest in the life of that second person.
Legal guidelines have been established in many jurisdictions which establish the kinds of family relationships for which an insurable interest exists. The insurable interest of family members is assumed to be emotional as well as financial. The law allows insurable interest on the presumption that a personal connection makes the family member more valuable alive than dead. Thus, husbands/wives have an insurable interest in their spouse, and children have an insurable interest in their parents (and vice-versa). Brothers/sisters and grandchildren/grandparents are also assumed to have an insurable interest in the lives of those relatives. But cousins, nieces/nephews, aunts/uncles, stepchildren/stepparents and in-laws cannot buy insurance on the lives of others related by these connections.
UK Law
A person is presumed to have an insurable interest in his or her own life, preferring to be alive and in good health rather than being sick, injured or dead.
The unlimited interest extends to the life of their spouse (and since 2004 their civil partner). Even if not financially dependent on the other, it is legitimate to insure against the death of a spouse.
UK law does not recognize other classes of so-called 'natural affection' however, thus:
Nor is insurable interest recognized for cohabiting
couples. Although many insurers will accept such policies, they could potentially be invalidated because they have not been tested in court. In recent years, there have been moves to pass clear statutory provisions in this regard, which have not yet borne fruit.
In practice these problems are solved by people assigning their policies or placing them in trust with named beneficiaries. If a person obtains an insurance policy on their own life, it is presumed that the person would only name a beneficiary who wants the insured to be alive and healthy. There is no requirement that the beneficiary have a proven insurable interest in the life of the insured when the insured has purchased the insurance.
In 2008, the English and Scottish Law Commissions tentatively proposed some reforms to the existing law, hoping to clarify the complex rules. Their preliminary recommendations included increasing the category of ‘natural affection’ to include dependent children and parents and also cohabitees. Officially this is still under review.
Typically, insurable interest is established by ownership, possession, or direct relationship. For example, people have insurable interests in their own homes and vehicles, but not in their neighbors' homes and vehicles, and certainly not those of strangers.
The "factual expectancy test" and "legal interest test" are the two major concepts of insurable interest.
Historical background
Establishing the principle of insurable interest as a requirement for purchasing insurance distanced the insurance from gambling, thereby leading to better reputation and greater acceptance of the insurance industry. The United KingdomUnited Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
provided leadership by passing legislation that
prohibited insurance contracts if no insurable interest could be proven, notably the Life Assurance Act 1774
Life Assurance Act 1774
The Life Assurance Act 1774 was an Act of Parliament of the Parliament of Great Britain, which received the Royal Assent on 20 April 1774. The Act prevented the abuse of the life insurance system to evade gambling laws. It was extended to Ireland by the Life Insurance Act 1866, and is still in...
which renders such contracts illegal, and the Marine Insurance Act 1906
Marine Insurance Act 1906
The Marine Insurance Act 1906 is a UK Act of Parliament regulating marine insurance. The Act was drafted by Sir Mackenzie Dalzell Chalmers, who had earlier drafted the Sale of Goods Act 1893. The Marine Insurance Act 1906 is of huge significance, as it does not merely govern English Law, but...
, s.4 which renders such contracts void
Void (law)
In law, void means of no legal effect. An action, document or transaction which is void is of no legal effect whatsoever: an absolute nullity - the law treats it as if it had never existed or happened....
.
Property insurance
People have an insurable interest in their property up to the value of the property, but not more. The principle of indemnityIndemnity
An indemnity is a sum paid by A to B by way of compensation for a particular loss suffered by B. The indemnitor may or may not be responsible for the loss suffered by the indemnitee...
dictates that the insured is compensated for a loss of property,
but is not compensated for more than what the property was worth. A lender who accepts a house as a mortgage, has an insurable interest on the property used as security, but the insurable interest is not in excess of the value of the loan.
Life insurance
Insurable interest refers to the right of propertyProperty
Property is any physical or intangible entity that is owned by a person or jointly by a group of people or a legal entity like a corporation...
to be insured. It may also mean the interest of a beneficiary
Beneficiary
A beneficiary in the broadest sense is a natural person or other legal entity who receives money or other benefits from a benefactor. For example: The beneficiary of a life insurance policy, is the person who receives the payment of the amount of insurance after the death of the insured...
of a life insurance
Life insurance
Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
policy to prove need for the proceeds, called the "insurable interest doctrine". Specifically, insurable interest is:
Insurable interest is no longer strictly an element of life insurance contracts under modern law. Exceptions include viatication agreements and charitable
Charity (practice)
The practice of charity means the voluntary giving of help to those in need who are not related to the giver.- Etymology :The word "charity" entered the English language through the Old French word "charité" which was derived from the Latin "caritas".Originally in Latin the word caritas meant...
donation
Donation
A donation is a gift given by physical or legal persons, typically for charitable purposes and/or to benefit a cause. A donation may take various forms, including cash, services, new or used goods including clothing, toys, food, and vehicles...
s.
The principle of insurable interest on life insurance
Life insurance
Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
is that a person or organization can obtain an insurance policy on the life of another person if the person or organization obtaining the insurance values the life of the insured more than the amount of the policy. In this way, insurance
can compensate for loss. A company may have an insurable interest in a President/CEO or other employee with special knowledge and skills. A creditor has an insurable interest in the life of a debtor, up to the amount of the loan. A person who is financially dependent on a second person
has an insurable interest in the life of that second person.
Legal guidelines have been established in many jurisdictions which establish the kinds of family relationships for which an insurable interest exists. The insurable interest of family members is assumed to be emotional as well as financial. The law allows insurable interest on the presumption that a personal connection makes the family member more valuable alive than dead. Thus, husbands/wives have an insurable interest in their spouse, and children have an insurable interest in their parents (and vice-versa). Brothers/sisters and grandchildren/grandparents are also assumed to have an insurable interest in the lives of those relatives. But cousins, nieces/nephews, aunts/uncles, stepchildren/stepparents and in-laws cannot buy insurance on the lives of others related by these connections.
UK Law
A person is presumed to have an insurable interest in his or her own life, preferring to be alive and in good health rather than being sick, injured or dead.
The unlimited interest extends to the life of their spouse (and since 2004 their civil partner). Even if not financially dependent on the other, it is legitimate to insure against the death of a spouse.
UK law does not recognize other classes of so-called 'natural affection' however, thus:
- Parents have no interest in the lives of their children
- Siblings have no interest in the lives of their fellow siblings
- Children have no interest in the lives of their parents (not in England / Wales / NI though Scottish law recognizes this)
Nor is insurable interest recognized for cohabiting
Cohabitation
Cohabitation usually refers to an arrangement whereby two people decide to live together on a long-term or permanent basis in an emotionally and/or sexually intimate relationship. The term is most frequently applied to couples who are not married...
couples. Although many insurers will accept such policies, they could potentially be invalidated because they have not been tested in court. In recent years, there have been moves to pass clear statutory provisions in this regard, which have not yet borne fruit.
In practice these problems are solved by people assigning their policies or placing them in trust with named beneficiaries. If a person obtains an insurance policy on their own life, it is presumed that the person would only name a beneficiary who wants the insured to be alive and healthy. There is no requirement that the beneficiary have a proven insurable interest in the life of the insured when the insured has purchased the insurance.
In 2008, the English and Scottish Law Commissions tentatively proposed some reforms to the existing law, hoping to clarify the complex rules. Their preliminary recommendations included increasing the category of ‘natural affection’ to include dependent children and parents and also cohabitees. Officially this is still under review.