The concept of insurable interest has been in place for a few hundred years. The requirement is that only a person with an interest in the property or life insured can take out the insurance policy. It was developed for public policy reasons to avoid persons from gambling on property and lives of others where they have no interest.
Under Section 64B of the Insurance Ordinance Cap. 41 (IO), insurable interest is required for life insurance, otherwise, the life insurance contract is void. This will be an issue for insurance companies issuing the policy and policyholders, as well as any financier who may have taken a collateral assignment of the policy.
A person has unlimited insurable interest in his or her own life, and the life of his or her spouse. Section 64A of the IO provides that the parents or guardian of a minor also have insurable interest in the life of the minor.
Outside these relationships, there is no presumption of insurable interest. A person must prove insurable interest by showing that he or she suffers pecuniary loss upon death of the life insured. For instance, the policyholder may financially rely on the life insured and will therefore suffer pecuniary loss if the life insured passes away.
Natural love and affection are not sufficient. For instance, grandparents do not have insurable interest in the life of a grandchild by relationship alone. Likewise, siblings do not have insurable interest and will need to show financial dependence and loss.
If a company is taking out a life insurance policy over the life of a director or senior manager (known as “key-man” policies), the company will need to show that this is a “key person” – and there will be disruption to the business if the director or senior manager passes away.
There are particular issues with trusts as the policy is taken out by the trustee, but the trustee does not suffer any financial loss upon the death of the settlor or trust beneficiary. It may be difficult for the trust to prove insurable interest in the life of the settlor or trust beneficiary.
When facing issues relating to insurable interests, insurers, policyholders and financiers may wish to explore a number of options, such as:
- Can the policy be taken out by the life insured and assigned to another person? Insurable interest only needs to be established at policy inception. However, in doing so, if the policy is taken out for the purpose of benefiting someone with no insurable interest, it may not satisfy the insurable interest requirement.
- Can the insurer accept a declaration of insurable interest? Will the declaration be effective if there is clearly no insurable interest?
A financier taking a collateral assignment of the policy should also consider the implications of insurable interest, as this may affect the collateral.