INSURABLE INTEREST

If you have ever watched the television series, Crime and Investigation, you would have seen episodes where a spouse took out life policy on his/her wife/husband. A couple of months later the wife/ husband died. If the death was natural or accidental or it was proven that the spouse had no hand in it (which was often not the case in the series), he/she was fully entitled to the full sum assured (insurance payment). The issue here is what gives an individual the right to insure another person’s life? In insurance, it is called insurable interest, one of the six principles or pillars of insurance.

Insurable interest simply means your legal right to insure, arising from a relationship with the subject matter of insurance which is recognised at law. This legal right is validated by the presence of three basic factors. One, there must be a life, limb, or property, potential liability, financial interest or right to be insured. Two, the life, limb, property, etc., must be the subject matter of insurance. Finally, the potential policy holder must be in a legally recognised relationship with the subject matter of insurance, whereby he benefits from its continued safety, wellbeing or absence of liability and he is prejudiced or negatively affected by its destruction, damage, loss, injury, or creation of a liability.

Now, let us come down to specifics so that what we have said so far can be better understood. A husband and wife have a relationship which is recognised at law. This gives either party the insurable interest to insure the other. The death or injury or loss of limb of one affects the other. You cannot place value on life, so the sum assured is determined by the financial capacity of the policy holder to pay the periodic premium. Also, once a person becomes an employee of a company, there is a contractual relationship (employee/employer) recognised at law. This gives the company the legal right to effect a (group) life policy and (group) personal accident to cover its (legal) liabilities in the event of death, permanent or temporary disablement of the employee as long as he is in the company’s employment. This right terminates when he leaves the company.

A creditor has a legal right to insure the life of his debtor to the extent of his indebtedness. An artisan (tailor, mechanic, laundry man, etc) has insurable interest in the property of customers in his possession because he is liable for the loss of or damage to these properties while they are in his custody. A landlord, as owner, has insurable interest in his building to effect a fire and special perils policy to cover his financial interest. But he cannot insure the contents of his tenants because he stands to lose nothing financially if the properties of his tenants are destroyed. But if he shares the building with his tenants and is liable to replace the tenants’ property in the event of a fire that starts from his (landlord’s) apartment, he has insurable interest in the tenants’ properties.

A tenant has insurable interest in the building, especially if the tenancy agreement specifically makes him liable for any damage to the building caused by his fortuitous or negligent actions. If you own an apartment in a block of terrace buildings, you have insurable interest in your apartment only. If your apartment is worth N30 million, that is your financial interest in the building. But if you insure the whole building for its total worth of N300m and the building is razed by fire for which you are not liable, what insurance will pay you remains N30m because that is your financial interest in the burnt building and financial interest determines limit of indemnity. You cannot claim for what you did not lose. But if the fire started from your apartment and you are legally liable to co-occupiers, then you are entitled to full indemnity of N300m, depending on the extent of damage.

This brings us to a very important aspect of insurance. When you insure the subject matter of insurance (vessel, building, motor vehicle, office complex, factory, etc), it is not the subject matter per se that you are insuring, but your financial interest in the subject matter of insurance. That is why, if you co-own a subject matter, you can insure only your financial interest, which is a proportion of the value at risk, for instance, 40 percent. As long as this is known ab initio to the insurance company, it cannot be interpreted as underinsurance.