And Why Do I Need One?
This article addresses the concept of the “insurable interest.” The existence of an insurable interest is essential to any insurance contract. As a general matter, an insurance policy is void unless the insured has an “insurable interest” in the subject of insurance. An insurable interest helps establish the validity of an insurance contract and distinguishes an insurance contract from a wagering contract (which are illegal).
In the property context, Section 281 of the California Insurance Code defines an “insurable” property interest as “[e]very interest in property…of such a nature that a contemplated peril might directly damnify the insured.” California courts have stated more simply that the insured must have a “pecuniary interest” in the preservation of the property. See Liberty Mut. Fire Ins. Co. v. McKenzie, 88 Cal. App. 4th 681 (2001).
Thus, an interest in the property insured must exist when the insurance takes effect and when the loss occurred. However, absolute ownership is not required for an insurable interest to exist. An insurable interest can take many forms and various individuals may have an insurable interest in a piece of property. Typical examples include multiple owners; mortgages and mortgagors; executors and trustees; landlord and tenant; bailees; and business partners.
In the property context, insurable interests come into play most frequently when individuals are looking to insure property they only own a part of. Failing to account for other insurable interests may result in that insured taking out a policy they are paying too much for in premiums. It also comes into play when there is a loss of a property that multiple parties have an interest in, but not all of them are named on the declarations pages. For example, if one buys a home in a community property state, takes out a policy, and then gets married, the insured may only have a 50% insurable interest. This also typically occurs after divorce, death, expirations of leases or contracts, and even where lien holders buy insurance for greater than their interest.
In other contexts, courts have dealt with very interesting cases involving insurable interests. These include cases involving corporations that take out disability and life insurance policies on their employees and people with terminal diseases who transfer their interest in insurance policies to others for an immediate payout.