Insurable interest is vital in the world of insurance. By law, an insurance policy on property cannot be taken out without Insurable Interest. Insurable interest helps insurance companies prevent insurance fraud.

Have you wondered about the following?

• What is Insurable Interest?

• Insurable Interest in a Life Insurance Policy

• Insurable Interest Requirements

• Insurable Interest examples

• Important points

What is Insurable Interest?

Insurable interest refers to the interest of a person, financial, or otherwise, in obtaining insurance for a person or property. A person or an organisation having insurable interest is likely to suffer a loss due to damage or destruction of the insured object or person. Insurable Interest ensures that the property or person is insured through the policy to mitigate risk. This is a basic requirement for a life insurance contract: The person who is purchasing the policy needs to have an insurable interest in the insured person.

Photograph by Tierra Mallorca

Insurable Interest in a Life Insurance Policy

Life insurance policies always have an insurable interest requirement. In order to buy a policy on a life, the policy owner must show life insurance insurable interest. Immediate family qualifies automatically, but this rule comes into play more often if someone who is outside of the immediate family would like to take a life insurance policy on a client’s name because they rely on the client financially, such as a business partner. The client therefore, need to prove insurable interest at the time of the life insurance purchase. One of the main reasons that insurance companies use insurable interest in life insurance is to prevent insurance fraud. Insurance companies are in the business of protecting against losses, so evidence of actual economic loss needs to be provided.

Insurable Interest beneficiaries are as follows:

• Spouse or partner

• Children

• Other Relatives

• Business partner or employer

Insurable Interest Requirements

To verify the beneficiaries, the agent may ask the client for official identification, a medical exam, or interview the beneficiary on the phone to get more information about the declared relationship. 

Insurable Interest Examples

• The client and their spouse live in a two-income household supporting three children, then the spouse would clearly have an insurable interest in the client’s death since it would create a financial hardship to go from two incomes to one income.

• A homeowner with a mortgage has an insurable interest in their home. Their insurable interest is equal to their equity in the home: the amount they’ve paid between their down payment and their mortgage payments to date. Their mortgage lender holds the rest of the equity in the home, and therefore also has an insurable interest.

• Two sisters inherit a family home. The house does not have a mortgage and therefore both sisters own the house outright. Each sister owns 50% of the house thus, each sister has an insurable interest in 50% of the home’s value.

• A person borrows a friend's car to use as a taxi service. Who has the insurable interest, the owner or the friend? Who is using it to generate an income? Should both have insurable interest?

Insurable Interest Extended Example

Foster v Mutual & Federal (Unreported, TPD, 10 November 1995, case no 3239/1995: The Ombudsman Briefcase. Issue No1 of 2007, p 14):

The matter dealt with an aspect of the requirement of an insurable interest of particular importance, namely the insurable interest in stolen property. The Insured, Foster, bought a 1993 Mercedes Benz 220 for R145 000 from a private individual. He had it Insured with Mutual & Federal through brokers. He supplied the brokers with details about the year, model, make and registration number of the vehicle, but was not asked to furnish the engine or chassis number. Five months later the vehicle was stolen, and the Insured claimed the sum of R145 000 from the Insurer. The latter refused to pay as it appeared that the vehicle was stolen (engine and chassis numbers having been falsified and not agreeing with the manufacturers serial numbers) and the seller could not be located.

The Insured did not dispute the facts. The sole issue before the court was whether the Insured had an insurable interest in the vehicle when the contract was entered into and when the loss occurred. The Court started off by noting that if the Insured can show that he stands to lose something of an appreciable value by the destruction of the thing Insured, then his interest will be an insurable one. Here, the Insured bought a vehicle and paid money for it. It was for all intents and purposes his vehicle, as it was registered in his name and if anything happened to the vehicle that deprives him of his possession by theft, he would stand to lose the vehicle which was worth R145 000, the amount he paid and in respect of which he was insured and had paid premiums. His interest in it was clearly not without value. The fact that, in buying the vehicle in the way he did, the Insured had acted rather carelessly, gullibly and with what the Court termed “a lack of business acumen”, did not mean that he had not acted in good faith. He was not part of any scheme acquiring stolen vehicles, insuring them and endeavoring to claim from the Insurer knowing that he was not nor could be the owner.

In conclusion, the Court thought that the Insured had established on a balance of probabilities that he genuinely believed at the time he bought the vehicle that he would obtain ownership of it.

It was also satisfied that at the time the vehicle was stolen, the Insured “had a demonstrable insurable interest in the vehicle”. Therefore, the Insured was entitled to be paid “for the loss of his insurable interest” as agreed to by the parties at R145 000, less the amount of the excess on his claim.

The view of The Ombudsman is that a person has an insurable interest in property not only when he is the owner of the property but also, more generally, when he has some financial relationship with it.

The case demonstrates that the insured must not necessarily be the legal owner of the insured item/object. Nor is the insured required to exercise impeccable judgment in all matters.

It does, however, require the insured to act in good faith and to disclose all (known) material facts related to the insured object to the insurer.

Important Point

1.     Homeowners have an insurable interest in their homes. The mortgage lenders also have an insurable interest in the homeowner’s home.

2.     Renters do not have insurable interest in the property that they are renting. They only have insurable interest in their possessions.

3.     Insurable interest is a requirement for a life insurance policy. The client purchasing the policy needs to have insurable interest in the insured individual.

Insurable Interest Summary

• Where complex technical matters related to insurable interest can be presented and/or argued as the basis for repudiating short term insurance claims, the Ombudsman for Short Term Insurance incorporates a broader rather than a narrow view of insurable interest and considers principles of law and fairness.

• The litmus test appears to be concrete evidence of financial loss having been suffered by the insured related to the insured item. Under normal circumstances, the insured will have been faithfully paying an insurance premium for the (insured) item in question up until the date of loss and the first notification of the claim.

• To this end, valid, broadly defined insurable interest - whether legal, financial, social and/or moral in nature - also serves to safeguard the insurer against gaming/wagering insurance practices, as well as to minimise the insurer’s risk against fraudulent claims that could potentially unduly enrich the insured.