Insurable Interest

The term “insurable interest” refers to a relation or concern in a person or property that will support the issuance of an insurance policy.

“An ‘insurable interest’ is a relation or concern in property such that one will derive pecuniary benefit or advantage from its preservation, or will suffer pecuniary loss or damage from its destruction.”  JAM Inc. v. Nautilus Ins. Co., 128 S.W.3d 879, 895 (Mo. 2004).

“Insurable interest is a keystone of the concept of insurance, safeguarding the insurer against the risk that arises if one who will receive the monetary benefit from loss of the insured property (or life, as it may be) has no interest in the property not being destroyed.”  Woods v. Independent Fire Ins. Co., 749 F.2d 1493, 1496 (11th Cir. 1985).

“It is a rule of insurance generally that the person taking out the policy must have an insurable interest in the subject matter of the contract. In property insurance, the insurable interest must exist both at the time of the making of the contract and at the time of the loss, while in life insurance, it is sufficient if such an interest exists at the inception of the contract. A person is usually regarded as having an insurable interest in the subject matter insured when he will derive pecuniary benefit or advantage from its preservation, or will suffer pecuniary loss or damage from its destruction or injury by the happening of the event insured against.”  Crabb v. Calvert Fire Ins. Co., 255 S.W.2d 990, 991 (Ky. 1953).

“An ‘insurable interest’ is sui generis, and peculiar in its texture and operation. In general a person has an insurable interest in the subject matter insured where he has such a relation or connection with, or concern in, such subject matter that he will derive pecuniary benefit or advantage from its preservation, or will suffer pecuniary loss or damage from its destruction, termination, or injury by the happening of the event insured against. Great liberality is indulged in determining whether a person has anything at hazard in the subject matter of the insurance, and any interest which would be recognized by a court of law or equity is an insurable interest.”  Scarola v. Insurance Co. of North America, 31 N.Y.2d 411, 413 (1972).

“An insurable interest is created only through ownership, rightful possession, acquisition of a lien, etc.” Price v. United Pac. Cas. Ins. Co., 153 Or. 259, 264 (1936).

“It has been noted that in most states it is ‘axiomatic’ that a valid insurance contract must be based on an insurable interest.  Some jurisdictions require that the insurable interest exist at the time the contract of insurance is executed, some jurisdictions require that the insurable interest exist at the time of loss, and a number of other jurisdictions require that an insurable interest must exist both when the contract is created and at the time of loss.  Property insurance is a contract of indemnity, not a wagering contract, and one without an insurable interest in property incurs no redeemable loss by its destruction.  A policy reason for defining with concreteness the basis for an insurable interest is that the insurable interest rule exists, at least in part, to discourage illicit uses of insurance.  It is well settled that an insurable interest in property is not necessarily synonymous with absolute property rights.  In general, an insurable interest exists when a party has such a relation or concern with the subject matter insured that the party will derive pecuniary benefit or advantage from its preservation or suffer pecuniary loss or damage from its destruction.  It is essential, however, that there be a nexus between the loss to the insured and the damage to the insured property for the interest to be insurable.  Thus, a party has no insurable interest unless by the destruction of the property, the party will suffer a loss, whether the party has or has not any title to, lien upon, or possession of the property itself.  The burden of establishing the existence of an insurable interest rests on the insured.”  Technical Land, Inc. v. Firemen’s Ins. Co. of Washington, D.C., 756 A.2d 439, 444-45 (D.C. 2000).

Life Insurance Policies

“A life insurance policy without an insurable interest is nothing more than a wager on human life that is void as against public policy.”  PHL Variable Ins. Co. v. Price Dawe 2006 Ins. Trust, 28 A.3d 1059, 1065 (Del. 2011).

“Since the initial creation of life insurance during the sixteenth century, speculators have sought to use insurance to wager on the lives of strangers. In England, dead pools and the use of insurance to wager on strangers’ lives actually became a popular pastime. In response, Parliament enacted the Life Assurance Act of 1774 which prohibited the use of insurance as a wagering contract unlinked to a demonstrated economic risk. Although the Act did not use the words ‘insurable interest,’ the concept was embedded in the Act. This principle eventually crossed the herring pond and became firmly rooted in the common law of every state in the Union.  More than a century ago, the United States Supreme Court concisely articulated the public policy behind the insurable interest requirement:  ‘[T]here must be a reasonable ground, founded upon the relations of the parties to each other, either pecuniary or of blood or affinity, to expect some benefit or advantage from the continuance of the life of the assured. Otherwise the contract is a mere wage, by which the party taking the policy is directly interested in the early death of the assured. Such policies have a tendency to create a desire for the event. They are, therefore, independently of any statute on the subject, condemned, as being against public policy.’  Over the last two decades, however, an active secondary market for life insurance, sometimes referred to as the life settlement industry, has emerged. This secondary market allows policy holders who no longer need life insurance to receive necessary cash during their lifetimes. The market provides a favorable alternative to allowing a policy to lapse, or receiving only the cash surrender value. The secondary market for life insurance is perfectly legal. Indeed, today it is highly regulated. In fact, most states have enacted statutes governing secondary market transactions, and all jurisdictions permit the transfer or sale of legitimately procured life insurance policies. Virtually all jurisdictions, nevertheless, still prohibit third parties from creating life insurance policies for the benefit of those who have no relationship to the insured. These policies, commonly known as ‘stranger originated life insurance,’ or STOLI, lack an insurable interest and are thus an illegal wager on human life.  In approximately 2004, securitization emerged in the life settlement industry. Under this investment method, policies are pooled into an entity whose shares are then securitized and sold to investors. Securitization substantially increased the demand for life settlements, but did not affect the supply side, which remained constrained by a limited number of seniors who had unwanted policies of sufficiently high value. As a result, STOLI promoters sought to solve the supply problem by generating new, high value policies.”  PHL Variable Ins. Co. v. Price Dawe 2006 Ins. Trust, 28 A.3d 1059, 1069-70 (Del. 2011).

“The phrase ‘insurable interest’ is usually employed in the context of procuring insurance to restrict the class of persons who may be named beneficiaries when one person procures an insurance contract on the life of another.  At common law, it was recognized that insurance contracts upon matters in which the insured party had no interest were wagering policies void as against public policy. With respect to life insurance upon the life of another without interest in that life on the part of the insured, the objection was not the temptation to murder but the fact that such wagers came to be regarded as a mischievous kind of gaming.”  In re Estate of D’Agosto, 134 Wash. App. 390, 394-95 (2006).

“It will be proper, in the first place, to ascertain what is an insurable interest.  It is generally agreed that mere wager policies—that is, policies in which the insured party has no interest whatever in the matter insured, but only an interest in its loss or destruction—are void, as against public policy.  This was the law of England prior to the Revolution of 1688.  But after that period, a course of decisions grew up sustaining wager policies.  The legislature finally interposed, and prohibited such insurance: first, with regard to marine risks, by statute of 19 Geo. II. c. 37; and next, with regard to lives, by the statute of 14 Geo. III. c. 48.  In this country, statutes to the same effect have been passed in some of the States; but where they have not been, in most cases either the English statutes have been considered as operative, or the older common law has been followed. But precisely what interest is necessary, in order to take a policy out of the category of mere wager, has been the subject of much discussion.  In marine and fire insurance the difficulty is not so great, because there insurance is considered as strictly an indemnity. But in life insurance the loss can seldom be measured by pecuniary values. Still, an interest of some sort in the insured life must exist. A man cannot take out insurance on the life of a total stanger, nor on that of one who is not so connected with him as to make the continuance of the life a matter of some real interest to him.  It is well settled that a man has an insurable interest in his own life, and in that of his wife and children; a woman in the life of her husband; and the creditor in the life of his debtor. Indeed, it may be said generally that any reasonable expectation of pecuniary benefit or advantage from the continued life of another creates an insurable interest in such life. And there is no doubt that a man may effect an insurance on his own life for the benefit of a relative or friend; or two or more persons, on their joint lives, for the benefit of the survivor or survivors. The old tontines were based substantially on this principle, and their validity has never been called in question.  The essential thing is, that the policy shall be obtained in good faith, and not for the purpose of speculating upon the hazard of a life in which the insured has no interest.”  Connecticut Mut. Ins. Co. v. Schaefer, 94 U.S. 457, 460 (1876).

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