Insurable interest: What affects you directly

When we hear of accidents occurring on our major roads with gory pictures, especially those involving death, we tend to think these could only happen to some other people and not us or close relations.

Agreeably, it is human to think so. However, it is often prudent for us to consider insuring ourselves and relatives as well as properties. The question then is what can we insure or not insure? This is where the principle of insurable interest in insurance practice comes into play.

What is Insurable Interest? It is legal right to insure something arising out of a financial relationship recognised under the law between the insured and the subject matter of insurance.

There are three essential components of insurable interests which must be present.

- There must be some property, right, interest, life or potential liability capable of being insured in monetary value.

- The insured must have ownership or stand in a legal relationship with the subject matter for the insurance.

3) The insured must demonstrate that s/he benefits from its safety, well-being or freedom from liability and would be adversely affected by its loss due to damage or any existence of liability. Typically, insurable interest is established by ownership, possession, or direct relationship. For example, people have insurable interests in their own vehicles and businesses, but not other persons’ vehicles and business.

How is insurable interest created? There are a number of ways by which insurable interest arises or is restricted, common among which are;

(a) By Common Law: Cases where the essential elements are automatically present can be described as insurable interest having arisen by common law. Ownership of a building, car, etc.

(b) By Contract: A lease deed for a house, for example, may make the tenant responsible for the repair and maintenance of the building. Such a contract places the tenant in a legally recognised relationship with the house or potential liability and this gives him / her that insurable interest.

(c) By Statute: Sometimes an Act of Parliament may create an insurable interest by granting some benefit or imposing a duty and at times removing a liability.

In spite of the above which seek to demonstrate that insurable interest must be as a result of ownership or by law, the following circumstances also allows for insurable interest to be present.

1. Mortgage — both the lending institution and the borrower have an interest in the property and can both exercise insurable interest.

2. Bailee — Bailee are entities or persons such as motor garages, repairers who are legally holding the goods of another, maybe for payment or other reasons.

3. Trustees — They hold properties in trust for others which give them the legal right to exercise insurable interest.

4. Part Ownership — When one has part ownership in a property he can exercise insurable interest over the property.

5. Agents — When the principal has an insurable interest then his agent can insure the property

6. Husband & Wife — Each has unlimited interest on each other’s life

7. Creditor — A creditor may lose financially if a debtor dies and can insure the debtor

8. Liability — In Liability Insurance, a person has insurable interest to the extent of any potential liability which may be incurred due to damages and other costs.

When should insurable exist? (i) In Life Insurance- An entity also obtains an insurance policy on the life of its CEO and other employees if the entity values the life of the CEO and others with indispensable skills. It must exist at the time of inception of insurance and it is not required at the time of claim.

(ii) In Marine Insurance- It must exist at the time of loss / claim and it is not required at the time of inception.

(iii) In Property and other Insurance- It must exist at the time of inception as well as at the time of loss/ claims.

How it started The development of the concept of insurable interest as a prerequisite for the purchase of insurance distinguished the insurance business from gambling, leading to an enhancement of the industry's reputation. In the UK for instance, insurance contracts without proof of insurable interests were prohibited.

There are some legal guidelines on insurable interest on family relationships in life insurance.

There are legal guidelines in many jurisdictions which establish the kinds of family relationships for which an insurable interest exists.

• Children have an insurable interest in their parents and the reverse is equally acceptable.

• Siblings are also naturally seen as having an insurable interest in the lives of their forebears.

However, nephews and nieces, stepchildren and in-laws are not permitted to buy policies on the lives of cousins, nephews, etc. It is worthy to note that based on competition and market forces, some life companies in Ghana accept that a husband could purchase a life policy on his mother-in-law.

Way forward The stakeholders must see it as a duty to always educate the insuring public on the core principles of insurance, by so doing the insuring public will appreciate what they need to do when it comes to insuring their lives, the lives of relations and properties. Until next week, ‘This is insurance from the eyes of my mind’.— GB