While effecting a renewal of a Fire Policy issued by some other Company, it was observed that the name of the Insured in the original policy was different from the person who came to us for renewal of  the policy. On enquiry, he showed me an endorsement which read that “On request of the Insured, with effect from ___, this policy is transferred in the name of ____(The person who wanted to renew the policy).

This set me thinking on the aspect of Insurable Interest. This article seeks to examine the concept of Insurable Interest, how it appears to a layman and what it means to the Insurance Companies. Moreover, is change of  interest in the subject matter,  sufficient to transfer the policy in the name of the new interest.

Insurance is a contract between the Insurer and the Insured, wherein the Insurer, promises to indemnify the Insured in the event of a covered loss.  It is guided by the three basic principles of Utmost Good Faith, Insurable Interest and Indemnity seconded by the principles of Subrogation and Contribution.

When we speak of Insurable Interest, the aspect of financial evaluation comes to the fore.  However, financial evaluation of a ‘life’ has many parameters. Life cannot be conclusively evaluated financially.  After all ‘Money is not everything in Life’.  Thus Insurable interest needs to be examined through the eyes of a Life Insurer and that of a General Insurer separately.

What is insurable interest

For a Life Insurer, Insurable Interest means “The legal right to insure”.  For example, legally a person has unlimited interest on his/her own self and that of his/her spouse.  A father has insurable interest on his dependent children and parents.  The aspect of evaluating the financial loss where there is no strict financial relationship, is very difficult.  None can evaluate as to how one would be affected financially, if he/she loses a loved one.   The emotional loss is far greater than the financial loss.

In cases where financial evaluation is possible, insurable interest will follow such evaluation.  Like, a creditor has insurable interest on the life of his debtor to the extent of his outstanding debt, and an employer has insurable interest on the lives of his employees  to a limited extent.  Nonetheless, Life Insurers who cover the only certainty in life that is ‘death’, have their own norms of evaluating the aspect of Insurable Interest.

General Insurers follow strict financial evaluation, while deciding upon the aspect of Insurable Interest.  A person is stated to have insurable interest in a specified subject matter, if he stands to lose FINANCIALLY, in the event of loss or damage to that subject matter.  Insurable interest can arise due to ownership or as a bailee or custodian of the subject matter.  The latter will involve a contract, which specifies such terms.

When should insurable interest exist.

For Life Insurers, the contract being a long term contract, Insurable Interest is expected to exist at the time of underwriting and need not exist at the time of loss. For General Insurers, insurable interest is expected to exist both at the time of underwriting through the time of loss; except for Marine Insurance.

As per the Marine Insurance Act 1963, Insurable interest in Marine Insurance, should compulsorily exist at the time of loss.  Hence a person can avail of marine insurance, even if he does not have insurable interest at that time, but expects to acquire the same eventually.

Necessity and sufficiency of insurable interest.

Insurable Interest is one of the important aspects of Underwriting.  However, existence of insurable interest alone does not qualify one for a policy.  Insurable Interest is definitely necessary, but not sufficient for a person to obtain a policy.

The moral hazard or the character of the person is of paramount importance, to be considered before a policy contract is finalized.  The aspect of moral hazard is not defined legally.  It is the gut feeling of the Insurers coupled with common knowledge that assesses moral hazard.

The concept of Moral hazard, reiterates the principle of Utmost Good Faith which forms the foundation of any insurance contract.  A proposal form is designed by the Insurers, to take care of this aspect and the same is expected to be filled in by the proposers under oath, before finalization of an Insurance Contract.

Transferability of insurable interest.

In view of the above, can a policy be simply transferred on the request of the original insured to some other name?  If the interest in the subject matter is transferred by way of contract (usually a sale), can the insurance be transferred?  Let us examine how an insurance policy gets transferred in different branches of Insurance.

1. Life Insurance: There is no concept of transfer of life insurance.  If the policy is incepted in the name of ‘A’, it can never be transferred to anybody else.  At the most, a Life policy can be assigned in favor of another entity at the request of the insured, subject to consent of the insurer.  Assignment is transfer of rights under the policy to another, at the request of the original Insured.  However, the covered person remains the same.  It is only the proceeds which become payable to somebody else due to an agreed assignment.
2. General Insurance Motor Branch: Motor Third Party Insurance is compulsory as per MV Act 1988.  This is a social objective in our Country.  Hence when a vehicle changes hands (that is , sold), the TP Portion of the Insurance is automatically transferred to the new owner to take care of his liability.  However, as far as the Own Damage part of the policy is concerned, the policy has to be specifically transferred by way of endorsement within 14 days of official transfer at the RTO, in case of sale and within 90 days of death of the original insured, if the ownership changes due to death.    For this the new owner is expected to execute a proposal form, and pay the necessary transfer charges.  The No Claim Bonus which was allowed to the original insured is recovered from the new owner, which evidences the fact that the contract with the new owner is totally distinct..  In case of Motor, the old policy itself is transferred ONLY BECAUSE the TP portion has to continue till the end of the policy period and it is not feasible to have separate period of insurance for both these sections.  Hence it is permissible to transfer Motor Policies vide endorsements.
3. General Insurance Marine Branch: Marine Cargo policies are freely assignable provided, the terms of sale are conducive to such assignment. i.e. If the terms of sale are Cost Insurance Freight or Cost Insurance Paid To (CIF or CIP).  If the terms of sale are anything other than CIF or CIP, there is no possibility of assignment  of Marine Cargo Policies.  Thus Marine Cargo Policies cannot be transferred from one insured to another. In case of Marine Hull, it is again property (Vessel) that is being insured.  There is no legal act making any part of marine hull insurance Compulsory.  Hence in my opinion, whenever ownership changes, one should issue a new policy in the name of the new owner, after cancelling the old policy
4. General Insurance Property Insurance: There is no legal compulsion for any person in our Country to effect insurance of property.  For Insurable Interest to exist, a person should either be the owner or legal custodian of such property.  Different Insurers follow different practices whilst handling such transfers.  The example given at the beginning shows that an endorsement is passed transferring the policy to the new insured.

An Insurance Policy is a legal contract between the Insurer and the Insured.  Hence in my opinion, when a policy is issued in favor of ‘A’, it cannot be simply transferred to ‘B’ on request.  The contract between the Insurer and ‘B’ is a new contract altogether.

It is very essential to verify the moral hazard of the new owner.  I would expect ‘B’ to fill in a proposal form and qualify for the discounts, terms and conditions of the original Policy.  Hence the better way of dealing with transfer of property insurance is to cancel the old contract as per the cancellation clause, and issue a new policy covering the same subject matter to the new proposer ‘B’.

Lastly, whatever advancements the Insurance Industry may make, the basic principles should never be ignored.  Insurance is sharing of the losses of a few through contributions by many.  Let it be fair to all ; let us follow the basic principles strictly.

This article expresses the author’s personal opinion and is not prejudicial to any of the practices prevalent in the Insurance Industry today.

By: Gayathri Iyer, Research Associate/ Lecturer, National Insurance Academy, Pune, Published in The Insurance Times, September, 2011