The Aspect of Insurable Interest and its Transferability

Did you know you can't buy insurance for just anyone... or a cover for an asset owned by someone? 

A person who takes out insurance must have an insurable interest in the subject matter of the insurance; otherwise the contract will be invalid. In some instances, it may be illegal.

A person has an insurable interest in something when loss or damage to it would cause that person to suffer a financial loss or certain other kinds of losses. 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 concept of insurable interest is important in the insurance industry and it appears differently to a layman and to the insurance company. Insurance is supported on 3 main principals – Utmost good faith, Insurable interest and Indemnity followed by Subrogation and Contribution. When speaking of insurable interest, the aspect of financial evaluation does come to the fore but there are other parameters too. Again, since Life cannot be evaluated financially, insurable interest is examined separately through the eyes of a Life and General Insurer.

Ownership gives the owner an insurable interest in that property. However, there are other factors that can also give rise to an insurable interest:

Who	Has Insurable Interest in whom
Person	Own life (unlimited)
Creditor	Debtor to the extent of his outstanding debt
Employer	Employee to the extent of the value of his services.
Employee	Employer to the extent of his remuneration
Secured creditors	Property used as security
Bailor	Property of the Bailee (legal liability)
Buyer	Property he is contracted to buy in the future.
Business Partners	Lives of each other
Spouse	Life of the other
Parents	Life of children (as long as they are minor)
Surety	Debtor and Co-Surety

When it should exist?

Type of Insurance	At the time of purchase	At the time ofloss
Life Insurance	yes	not reqd.
Property/Liability Insurance	yes	Yes
Marine Insurance	Not reqd.	Yes

Not to forget, Insurable Interest is definitely necessary but not sufficient to obtain a policy. Moral hazard and character of the person are some of the other matters that are considered when issuing a policy.

TRANSFERABILITY

Is the request of the original insured or change of interest in the subject matter, sufficient to transfer the policy in the name of the new interest?

Life Insurance Policy: It can never be transferred. At most it can be assigned (Assignment is transfer of rights under the policy to another at the request of the original insured), that too only if the insurer agrees. Under assignment, the covered person remains the same, only the proceeds become payable to someone else.

Motor Insurance Policy: When a vehicle is sold, the Third Party (compulsory) portion of the Insurance is automatically transferred to the new owner to take care of his liability. But if the Policy also has “Own Damage” insurance, this part of the policy has to be specifically transferred by way of endorsement within 14 days of official transfer at the RTO, in case of sale and within 90 days in case of transfer due to death of original insured by paying transfer charges. Though the old policy itself is transferred, the contract with the new owner is totally distinct and even the no claim bonus which was allowed to the original insured is recovered proportionately from the new policyholder. 

Marine Insurance Policy: Only if the terms of sale is CIF or CIP (Cost, Insurance, Freight or Paid), Marine cargo policies are freely assignable. Otherwise it cannot be transferred/assigned.

Property Insurance : Different insurers follow different practices when handling such transfers. Generally an endorsement is passed when transferring the policy to the new insured.

Never Risk Your Risk

Many people in India think that paying Insurance Premium is a waste of money. So much so that some even stop paying premiums for compulsory insurance – Motor Insurance. Lesson needs to be learned from cases that happen not just in our nation but worldwide.

The following is a true incident that happened in China in May, 2011. The moral from it is self explanatory. Wu Yuanbi, a 53-year-old migrant worker living in Chongqing municipality, had declined for years to buy medical insurance because she wanted to save money. Result - Rather than pay medical bills, she cut into her own belly with a kitchen knife to perform self surgery.

Wu, who moved with her family to Chongqing in 1989 in search of better-paying jobs, has been suffering for about 13 years from Budd-Chiari syndrome, a chronic condition that caused her stomach to fill with fluid. In 2002, she and her family pooled their savings to pay for a procedure that resulted in the removal of 25 kilograms of water from her midsection. But a relapse of the condition followed and the family found itself too poor to pay 50,000 yuan ($7,686) for a second operation.

It was once common for poor rural families to go bankrupt after they had paid high medical costs. But not anymore. With the introduction of health insurance policies, some being highly subsidized by the government, basic healthcare has become more accessible to rural people.

Most of us can hardly afford to bear the full cost of medical treatment. Whereas the premiums charged by most policies are very reasonable. Hope lessons are learned!!