Insurance can be a big expense for businesses or individuals. However, some may choose to insure everything (or everyone) that they can in order to protect themselves financially.
The main thing to remember if you are looking to purchase any type of insurance is a concept called “insurable interest”. What is it, and do you have it? Let’s find out.
Why Does Insurable Interest Matter?
The basic tenet of insurance is to “make whole”. For example: If you own a home or a building and you lose it in a fire, then insurance will pay to replace it. That will make you whole again – by replacing your building or home so that you once again have a place to work or live.
Of course, there are other things that factor into it (coinsurance, depreciation, etc) but the main idea of making a person or business whole again is that you’ve lost something you owned or had an insurable interest in.
What Can You Insure?
Just about anything can be insured by anyone. You can get life insurance on your spouse and children. You can insure your home, your business building, your personal and company vehicles.
You can purchase life insurance on someone other than a spouse or child. You can even insure buildings you don’t own. For example: let’s say you’ve run out of storage space in your house. Your next-door neighbor lets you store some of your belongings in his backyard shed. You decide that since your stuff is in the shed, you’re going to purchase insurance on the shed and the contents. The shed gets struck by lightning and burns down, with your things inside.
You have insurance on the shed so you’re expecting a big check. Instead, you only get a check for your belongings that were in the shed, and your claim to have the shed replaced is denied. Why? Insurable interest.
An Explanation of Insurable Interest
In the example above, the shed is owned by your neighbor. He has an insurable interest because he owns the building and would be financially affected by the loss of the building on his property (maybe he stores equipment for his business in it, or the lack of shed affects his property value).
Your insurable interest is in the items you had stored in the shed. Your policy provision for off-premises property (if there is one) would pay for the damaged items up to the limit on the policy. The insurance company may or may not be obligated to return premiums that you paid to insure the shed you don’t own.
Can You Purchase Insurance Without Insurable Interest?
In some cases, you probably can, though it isn’t recommended and may have consequences.
Insurance companies require you to have insurable interest in the person, place or thing that you are insuring in order to have a valid insurance contract. If you present yourself as having an insurable interest when you don’t then the insurance contract is not valid.
Invalidated insurance contracts may be cancelled, premiums refunded, and in some cases may result in criminal or civil charges depending on how far the insurance company is willing to go to prosecute the insured/applicant for breach of contract.
If you are unsure about your insurable interest in a person, place or thing, talk to your Hayes Broker. We are here to help.