PRINCIPLES OF INSURANCE

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.

Note: 1. It is sometimes misunderstood that any policy provision that claim payments have to be made to a designated person other than the insured is an assignment of the right to insurance money. In fact, the courts may construe such a provision as a mere instruction to pay, which will at most give the designated payee an expectation to be paid, rather than the right to sue the insurer, which right remains in the hands of the insured. 2 Statutory assignment, the best known form of assignment, is subject to the requirements of Section 9 of the Law Amendment and Reform (Consolidation) Ordinance.