DOCSLIB.ORG

Insurable Interest: How Far Will It Stretch?

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Insurable Interest: How Far Will It Stretch? New Condo Laws Insurable interest Insurable interest—how far will it stretch? Resource kit 90118 By Dan Corbin, CPCU, CIC, LUTC Insurance practitioners know that although an event under a property insurance policy is covered, that does not necessarily mean that a claimant will be paid. Two additional considerations stand out when determining the legitimacy of a claim: 1) the claimant must be an insured under the policy; and 2) the insured must have an insurable interest. For the most part, when consumers buy insurance policies, they do not stop to ask if they have an insurable interest, because the whole process is a common and natural part of contemporary living. When most people do think of insurable interest, it is usually in terms of property ownership. Unquestionably, there is an insurable interest in the house or the automobile that is owned. Legal interests Insurance practitioners, on the other hand, must have a more comprehensive view of insurable interest in order to serve the needs of consumers. Behind every insurable interest is a legal interest, with property rights being just one type. Consequently, without a legal interest, a claimant cannot prevail in enforcing an insurance contract, though named as an insured for a covered event. Legal interests have their origins in common law. However, statutory law and/or new case law may expand or restrict the definition of insurable interest. Principle of indemnity Insurable interest is so closely tied to legal interest because our society attempts to prevent certain unacceptable behavior which is against public policy. And to do so, it must adhere, as near as possible, to the principle of indemnity, which states that a person should not profit from an insured event, but should simply be made whole again. Insuring something, or someone, where no potential for loss exists, becomes nothing more than gambling. Insuring over and above, or in the absence of, an actual potential for loss leads to moral hazard; for an incentive to profit may lead an insured to promote a loss. While the pursuit of profit works well in the American economy, it would collapse the insurance industry. Timing Insurable interest can change with the passing of time. Knowing when an interest must exist to make a policy enforceable is critical, and that will depend on whether the subject is life insurance or property (and casualty) insurance. With regard to life insurance, the beneficiary must have an insurable interest in the life of the insured at the time application is made. It is irrelevant whether an insurable interest still exists when death occurs and a claim is made. When so much can be invested in a policy over potentially many years, it would be too inequitable to withhold the payment of its proceeds over a question of insurable interest. Besides, under most circumstances, the beneficiary can be changed along with underlying interest changes. Not so with property (and casualty) insurance. What determines contractual enforcement here is the insurable interest that exists at the time of loss. Payment for a property loss to someone without an insurable interest could easily be abused and would violate the principle of indemnity. Can you imagine a homeowner sharing the settlement on a fire loss with a mortgagee that never got deleted from the policy following satisfaction of the debt? Insurance law A starting place to define insurable interest is in state insurance laws. New York defines an insurable interest as "any lawful and substantial economic interest in the safety or preservation of property from loss, destruction or pecuniary damage" (Section 3401). This can be contrasted with the more restrictive definition in the California Insurance Code, which states that "a mere contingent or expectant interest in anything, not founded on an actual right to the thing, nor upon any valid contract for it, is not insurable" (Section 283). Connecticut defines an insurable interest as "an interest which is subject to a risk of loss through destruction or impairment of that interest" (Section 38a-1.10). New Jersey law defines an insurable interest applicable to life insurance, but it is silent on the property and casualty side. In the absence of a definition, one might construe a very broad interpretation. Property rights Property that is owned can be described as a "bundle of rights" that has economic value. Certainly, one of these rights is the preservation of the property. The right of preservation equates to an insurable interest. Stated another way, an insurable interest is derived from legal property rights, when the value of the property can be diminished by loss. Having introduced property rights as the most obvious legal interest forming the basis of an insurable interest, it is appropriate to continue the discussion with additional legal theories that make an insurance contract enforceable. But first, it should be noted that ownership interests do not always exist without some complications. Very frequently, multiple insurable interests apply to the same property. Therefore, a corporate entity and a stockholder may each have an insurable interest in corporate assets. Various kinds of tenancy ownership of real estate involve multiple insurable interests in the same property. Condominiums, corporations, community property, life estates, partnerships and dower all create their own unique characteristics which must be addressed with regard to matters of insurable interest. Policy provisions are needed to limit the recovery to correspond with the extent of the interest held and to prevent duplication of coverage. Contract rights Secured debts proceed from contracts which give a mortgagee or lienholder an insurable interest in property to the extent of the debt. Note that this interest is concurrent with the owner's interest. A use interest in property is implied in a lease of premises. In addition, the lease may obligate the tenant to preserve the property under specified circumstances (some possibly beyond the control of the tenant), extending the interest to the full value of the property. A contract of primary insurance gives a ceding insurer an insurable interest with which to enforce a reinsurance contract. A contract of sale produces an enforceable legal interest. Sometimes the contract results in both buyer and seller having an insurable interest in the property for a temporary period of time. A buyer's equitable title to real estate, created by an agreement on the price and other terms of sale, gives the buyer an insurable interest for the full value of the property. This coincides with the seller's interest, which does not expire until the deed is delivered to the buyer. Similar conditions occur with the sale and delivery of personal property. Rules of title in the Uniform Commercial Code address the identification of insurable interests under these circumstances. Once again, both buyer and seller may each have a legitimate interest in the property at the same time. Tort liability Under a liability policy, an insured must have an insurable interest, which is equated to legal liability to the injured third party bringing the action. This requisite is stated in the insuring agreement without actual reference to insurable interest. A liability claim is, of itself, sufficient proof that an insurable interest exists. Insurable interest in property policies likewise can be triggered by tort liability. The operation of law creates liabilities for people who damage the property of others while it is in their care, custody and control. A liability interest simply requires some degree of legal culpability; the commission of a tort. Common carriers, garages, dry cleaners and other bailees, as well as estate executors and tenants are familiar examples of persons or entities that have a potential liability for nonowned property. Agency What about direct primary or direct excess coverage options on bailee policies or the inclusion of nonowned property as covered property in various policies? These coverages pay for damage to bailed property that has not been caused by the insured's negligence (no legal liability). You may be surprised to discover that someone having no independent insurable interest in property may acquire it simply by representing someone else (the law of agency). The person or entity represented by the insured may be known at the time coverage is requested or a class of persons or entities may be named instead, even if not individually identified ahead of time. However, the person or entity must be in the class intended to receive the insurance benefit and such protection must not have been rejected. Consequently, a bailee may obtain insurance for the benefit of others, with coverage broader than the extent of such bailee's legal liability. It must be stressed that if an insured derives insurable interest in this manner, the insured (agent) must act in the best interest of those represented (principals) and fulfill all duties owed, including the payment of insurance proceeds to those represented. Often the policy will state that settlement will be made directly with the property's owner. Economic interest A limited or qualified interest or any expectancy of gain or advantage may be sufficient to attain an insurable interest. Such is the development of factual expectation as an insurable interest. Some U.S. jurisdictions have given the mere expectation of economic loss the status of insurable interest, apart from the concurrent requirement to have a traditional legal interest. One example comes from an Illinois court, which ruled that an insurable interest existed when a father orally expressed his intention to will a building to his son. This contradicts a section of property law that does not give future interest to an heir expectant, until the testator actually dies. New York courts generally apply the pecuniary interest test to the facts of a particular case.
Load more

Recommended publications
  • Introduction the Insuring Agreement...Deductible
    WORTH AVE. GROUP _ ELBCTRONIC DEVICE PROTECTION Introduction ................2 The Insuring Agreement................. ..................3 What This Agreement Covers....... ..........3 Deductible. ........3 Insurable Interest....... ...........3 Limit of Insurance........ ....,...3 Policy Period....,,.. ................3 Policy Territory.... ........,...,...3 Losses We Will Not Cover.. ................... 3 Property We Will Not Cover ..................4 Your Duties in the Event of Loss or Damage .....................4 Settlement Options ........................4 GeneralRules and Conditions .......5 Coverage Begins .................5 Abandonment ............... ....... 5 Appraisal ..........5 Assignment.................. ........ 5 Benefit to Others.... ..............6 Cancellation ,........................6 Misrepresentation, Concealment or Fraud ... ............6 Nonrenewal ................. ........6 Pairs, Sets or Parts...... .........7 Policy Changes ....................7 Salvage and Recoveries ............ .............7 State Law... .......7 Subrogation .........................7 Suit Against Us ........... ........8 GlossaryofTerms........ ..................8 INTRODUCTION This is a Policy between you and us. Your rights and duties under this Policy may not be assigned without our written consent. Please read your policy carefully. The items covered under this policy, limit of insurance, deductible amount and your premium are shown on your Policy Declarations page. Your Personal Electronic Device Protection Policy will only cover
    [Show full text]
  • Insurance Fraud Awareness Casualty
    TB-GL27 (11/10) THE State Auto Group Your Business Insurance Specialists Risk Control Services Insurance Fraud Awareness Casualty THE State Auto Group Corporate Headquarters Address: 518 E. Broad Street, Columbus, Ohio 43215 Middle Market Insurance Office Address: 580 N. Fourth Street, Fifth Floor, Columbus, Ohio 43215 Phone: (614) 464-5000 The information contained in this publication was obtained from sources believed to be reliable. The State Auto Insurance Companies make no representations or guarantee as to the correctness or sufficiency of any information contained herein, nor a guarantee of results based upon the use of this information and disclaims all warranties expressed or implied regarding merchantability, fitness for use and fitness for a particular purpose. State Auto does not warrant that reliance upon this document will prevent accident and losses or satisfy federal, state and local codes, ordinances and regulations. You assume the entire risk as to the use of this information. Further, this document does not amend, or otherwise affect the terms, conditions or coverage of any insurance policy issued by the State Auto Insurance Companies. Much research has been done about insurance fraud committed in the processing of a claim, qualifying for insurance or creating an artificial insurable interest. Insurance fraud occurs when a person intentionally lies to obtain a benefit or advantage to which he or she is not otherwise entitled. By the same token, fraud also occurs when a person knowingly denies a benefit that is due and to which a person is entitled. In the processing of a claim, there are phases during which a person could knowingly misrepresent information to the insurance company in order to obtain a benefit.
    [Show full text]
  • Over Insurance Statutes by State State Statute Statutory Wording Alabama Alaska Over-Insurance Prohibited
    Over Insurance Statutes by State State Statute Statutory Wording Alabama Alaska Over-Insurance Prohibited. (a) Over-insurance shall be considered to exist if property or an insurable interest in property is insured by one or more insurance contracts against the same hazard in an amount in excess of the fair value of the property or of the interest, as determined on the effective date of the insurance or the renewal of it. AS 21.60.010 (b) In this section the term "fair value" means the cost of replacement less depreciation that is properly applicable to the subject insured. (c) A person may not knowingly issue, place, procure, or accept an insurance contract that would result in over-insurance of the property or interest in the property proposed to be insured, except as provided in AS 21.60.020 . (d) Each violation of this section shall subject the violator to the penalties provided in AS 21.90.020 . Arizona 6-909 Prohibited Acts (Banking Law) P. A mortgage broker shall not require a person seeking a loan secured by real property to obtain property insurance coverage in an amount that exceeds the replacement cost of the improvements as established by the property insurer. 44-1208 44-1208. Loans secured by real estate; prohibited practices; insurance Except for consumer lender loans regulated pursuant to section 6-636, for any loan that is secured by real property, a person shall not require as a condition of the loan that the borrower obtain property insurance coverage in an amount that exceeds the replacement cost of the improvements as established by the property insurer.
    [Show full text]
  • Chawla, Irrevocable Life Insurance Trusts, and the Insurable Interest Problem
    Chawla, Irrevocable Life Insurance Trusts, and the Insurable Interest Problem By James R. Robinson and Stephen "Bo" Wilkins Introduction Although it is a concept with solid policy underpinnings and a long pedigree, the notion of "insurable interest" has, until recently, been given little thought by the planning community. That changed dramatically with the ruling of the U.S. District Court for the Eastern District of Virginia in Chawla v. Transamerica Occidental Life Insurance Company. 1 In that case, the court, applying Maryland law, determined that a trust established by the decedent insured did not have an insurable interest in the decedent's life, and therefore the policy issued by the insurer (Transamerica) was void. Although this aspect of the court's ruling was overturned on appeal, the case nevertheless served to bring to light a problem lurking in the laws of many states: that a common planning device, namely the irrevocable life insurance trust, or ILIT, may lack an insurable interest in the life of its settlor, and therefore the policy issued to the trust may be void. This article examines some of the implications for planners of the Chawla decision and the issues it raises, as well as some of the policy concerns supporting the insurable interest rule. After a brief discussion of the rule itself, the article examines the facts of the case, its implications for planners who establish ILITs, and the larger (and more contentious) issue of "stranger owned life insurance," or SOLI. The article concludes with a recommendation that states examine their insurable interest statutes, with an eye toward conforming them with modern practice, particularly regarding trust ownership of policies.
    [Show full text]
  • Charitable Giving Through Life Insurance – the Other Right Stuff
    Charitable Giving Through Life Insurance – The Other Right Stuff Louis S. Shuntich, J.D., LL.M. Director, Advanced Consulting Group Nationwide In Tom Wolfe’s 1979 book, “The Right Stuff” he celebrates the qualities of the test pilots that became our first astronauts. In doing this he likened them to warriors who receive the honor and adoration of their people before going into battle on their behalf. This brings to mind another kind of right stuff mirrored in the character of those that go forth to better our world through their charity. While less celebrated, if you wonder at the significance of what they do consider the words of Margaret Mead who said: “Never doubt that a group of thoughtful, committed citizens can change the world. Indeed it is the only thing that ever has.” So now you may be wondering what all of this has to do with life insurance. The answer is that life insurance is the tool with the right stuff for people with the right stuff that want to make a difference. This is because it is the only financial instrument that enables us to leverage our good to the one or the many. Indeed it is intended by design to do that through premiums representing pennies on the dollar, tax deferred cash values and income tax free death benefits. In essence, if you want to make a difference, give but if you want to make a big difference give through life insurance. The specific advantages of giving to a charity through life insurance are: The death benefit is generally many times larger than the total premium payments.
    [Show full text]
  • Property Insurance - When Interest in Property Must Exist J
    Louisiana Law Review Volume 5 | Number 4 May 1944 Property Insurance - When Interest in Property Must Exist J. N. H. Repository Citation J. N. H., Property Insurance - When Interest in Property Must Exist, 5 La. L. Rev. (1944) Available at: https://digitalcommons.law.lsu.edu/lalrev/vol5/iss4/8 This Note is brought to you for free and open access by the Law Reviews and Journals at LSU Law Digital Commons. It has been accepted for inclusion in Louisiana Law Review by an authorized editor of LSU Law Digital Commons. For more information, please contact [email protected]. LOUISIANA LAW REVIEW [Vol. V provocation in mitigation of actual or compensatory damages.20 The leading case in these decisions is Robison v. Rupert,21 in which the Pennsylvania court said that if there were a reasonable ex- cuse for the defendant arising from the fault of the plaintiff but not enough to entirely" justify the act there can be no exemplary damages and the circumstances of mitigation must be applied to the actual damages. Provocation and malice on the defendant's part are punished by awarding damages exceeding the measure of compensation, and on the plaintiff's part by giving him less than that measure. Despite the contrary holding at common law, there is much to be said in favor of the Louisiana theory which denies recovery to the person who provokes the attack by abusive languages. A person must come into court with clean hands and if both parties are at fault neither of the two wrongdoers can recover. The prin- cipal case, Manuel v.
    [Show full text]
  • Core Standards for Individual Long Term Care
    Date: 8/13/10 December 2015 Adopted by the IIPRC Industry Comments: 5 Year Review CORE STANDARDS FOR INDIVIDUAL LONG-TERM CARE INSURANCE POLICIES Scope: These standards apply to individual long-term care insurance. Any product advertised, marketed or offered as long-term care insurance shall be subject to these standards. Long-term care insurance shall provide benefits for one or more of the following: nursing home care, assisted living care or home health care and adult day care. Only those policies, riders, endorsements or amendments that provide all such benefits may be titled “long-term care insurance” without further clarification. Policies, riders, endorsements or amendments that provide less than all such benefits shall be titled appropriately to indicate to the owner the types of coverages available under the policy, and may be filed and approved under these standards. With regard to accelerated death benefits that are advertised, marketed, offered or Formatted: Font color: Red designed as providing coverage for long-term care services, these standards shall apply, as stated above, but in addition, these benefits are also subject to the Interstate Insurance Product Regulation Commission’s standards for accelerated death benefits, as applicable. Formatted: Font color: Red Partnership: Approval by the Interstate Insurance Product Regulation Commission (“IIPRC”) of long-term care insurance product filings in compliance with one or more of the Uniform Standards for Individual Long-Term Care Insurance shall not be deemed as approval to use or provide any component of the product filing pursuant to any federal or state Individual Long- Term Care Insurance Partnership Program (“Partnership”).
    [Show full text]
  • If You Need Long-Term Care
    Pacific Life Insurance Company Pacific PremierCare1 Universal Life Insurance with Long-Term Care Benefits Get MORE out of LIFE 1 Pacific Life Insurance Company’s Pacific PremierCare (Policy Form #P11PPC or ICC11 P11PPC—policy form number based on state in which policy is issued) is a flexible premium adjustable life insurance policy with long-term care insurance payable through reimbursements. Pacific PremierCare is not a Partnership Qualified product. For more information on Partnership Qualified products, please contact your state department of insurance. This policy has certain exclusions and limitations. For costs and complete details of the coverage, contact your life insurance producer. ICC12 PPC-1A Get MORE out of LIFE Pacific PremierCare You and your family enjoy a special quality of life because you’ve wisely nurtured your financial well-being. Yet what would happen to your financial independence if you were to suddenly fall ill and require long-term care? Who would pick up the pieces for unplanned expenses? How could the cost of care impact what you’ve carefully saved for retirement? Pacific PremierCare’s universal life insurance with long-term care benefits can help. It may increase the funds you have available to help pay for long-term care, should you need it, and help you maintain the quality of life you’ve come to expect and the freedom of choice you want to protect. Pacific PremierCare: • Increase Funds Available for Long-Term Care Expenses2 • Money Back Option (Return of Premium Benefit)2 • Tax-Free3 Death Proceeds to Beneficiaries2 Help DEFEND Your RETIREMENT 2 Policy benefits are reduced by any policy loans, withdrawals or Terminal Illness Benefit paid under the policy.
    [Show full text]
  • In the United States Court of Appeals for the Eleventh
    Case: 13-15859 Date Filed: 01/25/2017 Page: 1 of 5 [PUBLISH] IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT ________________________ No. 13-12135 ________________________ D.C. Docket No. 9:10-cv-80804-JIC PRUCO LIFE INSURANCE COMPANY, Plaintiff/Counter-Defendant/Appellee, versus WELLS FARGO BANK, N.A., as Securities Intermediary, Defendant/Counter-Claimant/Appellant. ________________________ No. 13-15859 ________________________ D.C. Docket No. 1:12-cv-24441-FAM PRUCO LIFE INSURANCE COMPANY, Plaintiff/Appellant, versus U.S. BANK, N.A., as Securities Intermediary, Case: 13-15859 Date Filed: 01/25/2017 Page: 2 of 5 Defendant/Appellee. ________________________ Appeals from the United States District Court for the Southern District of Florida ________________________ (January 25, 2017) Before TJOFLAT and JULIE CARNES, Circuit Judges, and DUBOSE∗, District Judge. PER CURIAM: These consolidated appeals require us to determine the validity of two individuals’ Stranger-Originated Life Insurance (“STOLI”) policies that the issuing insurance company sought to have invalidated several years after their issuance. Arguing that the policies were invalid, the insurance company relied on a Florida statute that requires a person who procures life insurance to have an insurable interest in the life of the insured at the inception of the policy.1 The insurance company contends that no such interest is present when a STOLI policy is purchased and accordingly such policies should be considered void ab initio. The owners of the policies relied on a second Florida statute that requires all insurance ∗ Honorable Kristi K. DuBose, United States District Judge for the Southern District of Alabama, sitting by designation.
    [Show full text]
  • Insurance Act
    Province of Alberta INSURANCE ACT Revised Statutes of Alberta 2000 Chapter I-3 Current as of December 9, 2020 Office Consolidation © Published by Alberta Queen’s Printer Alberta Queen’s Printer Suite 700, Park Plaza 10611 - 98 Avenue Edmonton, AB T5K 2P7 Phone: 780-427-4952 Fax: 780-452-0668 E-mail: [email protected] Shop on-line at www.qp.alberta.ca Copyright and Permission Statement Alberta Queen's Printer holds copyright on behalf of the Government of Alberta in right of Her Majesty the Queen for all Government of Alberta legislation. Alberta Queen's Printer permits any person to reproduce Alberta’s statutes and regulations without seeking permission and without charge, provided due diligence is exercised to ensure the accuracy of the materials produced, and Crown copyright is acknowledged in the following format: © Alberta Queen's Printer, 20__.* *The year of first publication of the legal materials is to be completed. Note All persons making use of this consolidation are reminded that it has no legislative sanction, that amendments have been embodied for convenience of reference only, and that the original Acts should be consulted for all purposes of interpreting and applying the law. Amendments Not in Force This consolidation incorporates only those amendments in force on the consolidation date shown on the cover. It does not include the following amendments: 2020 c36 s3 adds s585.1. Regulations The following is a list of the regulations made under the Insurance Act that are filed as Alberta Regulations under the Regulations Act. Alta. Reg. Amendments Insurance Act Adverse Contractual Action .........................
    [Show full text]
  • California Insurance Code
    CALIFORNIA INSURANCE CODE TABLE OF CONTENTS GENERAL PROVISIONS .................................................. 1-48 DIVISION 1. GENERAL RULES GOVERNING INSURANCE PART 1. THE CONTRACT CHAPTER 1. CLASSES OF INSURANCE ............................... 100-124.5 CHAPTER 1.5. RISK RETENTION ..................................... 125-140 CHAPTER 2. PARTIES, EVENTS, AND INTERESTS Article 1. Parties to the Contract: Generally .................. 150-151 Article 2. Parties to Contract: Mortgagor and Mortgagee ........ 170-172 Article 3. Events Subject to Insurance ......................... 250-253 Article 4. Insurable Interest: Generally ....................... 280-287 Article 5. Insurable Interest: Effect of Transfer .............. 300-305 CHAPTER 3. NEGOTIATIONS BEFORE EXECUTION Article 1. Concealment ......................................... 330-339 Article 2. Representation ...................................... 350-361 CHAPTER 4. THE POLICY Article 1. Definition and Scope ................................ 380-395 Article 2. Types of Policies ................................... 410-413 Article 3. Insurer's Name on Policy ............................. 430 Article 4. Warranties .......................................... 440-449 Article 5. Inception Hours ...................................... 460 CHAPTER 5. THE PREMIUM .......................................... 480-491 CHAPTER 5.2. RENEWAL NOTICES ..................................... 500 CHAPTER 5.3. CONSUMER COMPLAINTS ................................. 510 CHAPTER 5.4. PROOF OF COVERAGE DISCLOSURE
    [Show full text]
  • Charitable Gift of Life Insurance Policy
    Charitable Giving CHARITABLE GIFT OF A LIFE INSURANCE POLICY Presented for Valued Client Presented by John M. Webster HMS Insurance Associates, Inc. [email protected] 443-632-3436 Page 1 of 7 Charitable Giving CHARITABLE GIFT OF A LIFE INSURANCE POLICY The Rationale… ■ Life insurance can be used to make a substantial, cost-effective gift to charity. ■ A life insurance gift allows heirs to inherit other assets. ■ Life insurance proceeds are paid to the charity without delay. ■ A life insurance gift is private, whereas a gift in a will is a matter of public record. ■ An outright gift of a policy to charity creates a current income tax charitable deduction equal to the lesser of the policy’s fair market value or the donor’s basis in the policy. ■ Death proceeds paid to charity from an estate are deductible for federal estate tax purposes. ■ Remaining premiums paid by a donor are deductible when a charity owns the policy, or when the donor gifts premium amounts directly to the charity. The Choices… There are three basic options when making a charitable gift of a life insurance policy: ■ The policy owner gives an existing policy to charity, assigning all incidents of ownership to the charity by naming the charity both owner and beneficiary of the policy. ■ The donor applies for a new policy on his or her own life with the charity as the policy owner and beneficiary (subject to state insurable interest laws). ■ The donor names the charity as a beneficiary of a policy the donor continues to own. The Tax Impact… ■ A gift of an existing life insurance policy to charity qualifies for an income tax charitable deduction, provided the donor itemizes deductions and assigns all rights to the charity by naming the charity owner and beneficiary.
    [Show full text]