Willem Coetzee | CEO | Zenith | mail me |
An insurance concept that often gets misunderstood, despite underpinning every policy, is insurable interest. While it might sound technical, the principle is quite simple. Simply put, you can only insure something if its loss or damage would cause you a financial setback.
If you do not stand to suffer financial loss directly from the loss of or damage to an insured item, insurance will not cover that loss.
Understanding the principle
The lack of insurable interest invalidates any expectation of indemnification. This requirement distinguishes insurance contracts from gambling. It ensures that policies mitigate genuine risks rather than create speculation for unjustified profit.
If a person lacks insurable interest in property under a non-life insurance contract at the time of physical loss or damage, the cover becomes unenforceable.
In non-life insurance, which offers cover for motor vehicles, property and legal liability, insurable interest usually arises through ownership or legal responsibility. For example, if I own a car or a house, I have an insurable interest in that asset. I would suffer a financial loss if it were damaged or destroyed.
Complex ownership cases
Things become more complicated in cases involving trusts, corporate structures, or layered ownership. When we serve high-net-worth individuals and families, I often observe how complex asset ownership through trusts, companies and co-ownership creates uncertainty about insurable interest.
For example, imagine Family Trust A owns 45 percent of a holding company. That company fully owns a subsidiary, and the subsidiary owns a motor vehicle.
If a trust beneficiary insures that vehicle in their own name, they lack insurable interest. The beneficiary has no legal obligation toward the company that owns the vehicle. Therefore, the remote connection between the trust beneficiary and the vehicle does not create insurable interest. The cover under the policy then becomes unenforceable.
To avoid this outcome, the entity that owns the property or has a legal obligation to insure it should take out the insurance. We accommodate complex ownership structures when the details are declared to us before insuring the property. This transparency allows us to structure coverage that meets the unique needs of each policyholder.
Insuring assets in a rented property
Another common mistake related to insurable interest occurs when someone tries to insure furniture or other assets in a rented property. Unless a lease agreement specifically states that you are responsible for the landlord’s belongings, you do not have insurable interest in those items.
In that case, the landlord should insure them. If you are contractually liable for any damage to the furniture or fittings in your rented home, make sure your policy covers this. Also, ensure that it is supported by a legal agreement.
Joint ownership adds another layer of complexity. Two business partners may jointly own a vehicle, but only one may be listed on the insurance policy. In such cases, the vehicle is deemed to be owned in a partnership. The partners can insure it jointly or in either of their names.
Avoiding costly mistakes
One lesser-known requirement is that insurable interest must exist at the time of the insured event. For instance, if I sell an asset to a buyer, the buyer must pay the purchase price. I must also place the buyer in possession of the property according to the contract.
I will retain insurable interest even after receiving payment, but only until I transfer possession. If I have transferred possession but have not yet been paid, I retain insurable interest until payment is made.
Problems that arise from a lack of insurable interest are easy to avoid. I always advise that you disclose any ownership structures, joint ownerships, usage rights, contractual liabilities or third-party interests clearly and up front. As a result, an experienced adviser who understands your financial structure can identify potential gaps and ensure you are properly covered.
