Is insuring an item or a person open to, or for anyone, and any item regardless of ownership, blood ties or other specific relationships? The answer to this question lies in the concept of insurable interest.
Insurable interest is one of the key principles of insurance and it simply borders on relationships, i.e., the relationship or interest that a person has in the item (property) or an individual they want to insure. It is defined as the right or stake that a person has in an asset or a person to the extent that a damage or loss to that asset or life will cause a financial loss or other hardship to that person.
What insurable interest seeks to do is to ensure that for anybody carrying out the transactions of insurance, the item or person they seek to cover will have a direct financial impact on them in the event of a loss.
Let’s examine this in two ways – in the context of Non-Life Insurance which takes care of physical assets such as cars, buildings, machines etc., and in the context Life Assurance which takes of human lives.
Non-Life or General Insurance allows a person to cover their assets, businesses and property they own or have a stake in. The rights to insure your property or business results directly from the financial investment and share in the property and the financial loss you will suffer the unforeseen insured eventualities occur. Upon the happening of the insured event, the insurance company will seek to put you back at the financial position you were immediately before the loss occurred; this is called Indemnification. It seeks to replace the lost item and not to profit the insured.
The insurable interest here can be proven with whatever receipts or legal titles that a person holds for the assets or the business and on that basis, cover can be provided and claims to be made with ease when required.
Life Assurance on the other hand deals with the subject of insuring or covering lives – either the life of the person taking the insurance or those of their loved ones. The principle of indemnity however does not apply to life assurance because no one can place a specific value on life- The loss of life receives a compensation because that life and all the sentimental and other benefits associated with it cannot be replaced.
The principle of Insurable interest applies in this case to ensure the right persons are compensated when they lose a loved one. For the person taking out insurance it is easier to prove insurable interest because everyone has an interest in their own life and require compensation and survival income for the dependents they have if they should pass on or be permanently incapacitated.
The Policy holder also has insurable interest in his dependents but not quite to the same degree or impact in financial terms. What this means is that dependents generally would suffer a greater impact financially if the bread winner (one who provides for and cares for their financial needs) passes on earlier than anticipated.
However, the Breadwinner often only has an obligation to give their loved ones/dependents a befitting burial or funeral should they pass on. The degree or impact then in terms of financial burden is greater in the former rather than the latter situation. The cover limit for the breadwinner should be higher than those for the dependents.
How then do you prove insurable interest when it comes to dependents? In generic terms this is a lot easier proven in situations where documentation shows a direct relationship between the insured life and the insuring party. So, in nuclear family situations for example it is easy to get marriage certificates to prove a union of spouses and birth certificates to prove procreation (children of the union).
The challenging part of insurable interest occurs when the relationship is not so direct – especially in the extended family settings. Proving relationships with Uncles, Aunties, Grandparents, Nephews, and Nieces can prove a challenge as there is often no documentation that shows such relationships. Accordingly, most insurance companies will often allow only for relationships that can easily be proven as against those that would be challenging to prove or cannot be proven at all.
To address this issue and acknowledge the importance of extended family relationships in the African setting, a few companies, like Hollard Life Assurance allow people to cover the lives of their extended family members albeit within some underwriting and benefit limits.
Employers also have insurable interest in their employees as it can be demonstrated that they suffer a financial impact when any staff member suffers an injury, critical illness or even in the case of death. Employers can thus take out Group Life Insurance on their employees using each employee’s annual salary (or its multiples) and the coverage limits or in the very least a Group Funeral Policy which pays out to company a specified amount they could donate as their contribution to the funeral arrangements of their deceased employee.
In conclusion, insurance companies may not allow you to insure anything or any life you want to insure. One must have an insurance interest in any property or life he seeks to insure. The principle examines the rights or lack thereof in seeking to pay premiums to cover unforeseen eventualities that may lead to the right to be indemnified or compensated upon the happening of the insured event. But for this principle many people could insure the property or lives in which they have no interest whatsoever, stage a loss and then claim financial compensation from insurance companies.
This would obviously have led to chaos and increased crime in society. Insurable interest thus is the very basis on which any insurance policy is taken and affirms your rights to make a claim. Want to know more? Look for your nearest Hollard Insurance or Life Insurance office and we’ll explain further! We’ve got you covered!
>>>The writer is the Head of Operations, Hollard Life Assurance