Does anyone with experience in the insurance industry have any insight on the principle of “insurable interest”? It came up in class the other night, and a number of the other students didn’t agree with the idea – the professor didn’t attempt to explain why it’s a general requirement, only that it is a general requirement for an insurance contract.
The conundrum is highlighted by a specific example: Joe has a life insurance policy that will pay $1M in the event of his premature demise. He has designated his girlfriend as the sole beneficiary of the policy. However, his girlfriend does not have any insurable interest in Joe – the policy may be void. Now, Joe may have designated a charitable organization as the beneficiary, without any problems. The charitable donation certainly has no insurable interest in Joe – if it has any interest whatsoever. Yet, the latter scenario is OK, and the former is generally not.
As far as I can speculate, the primary reason is to avoid over-exposure, which is to say, no insurer wants to write more than one policy for any particular risk – indeed any insurer that routinely did so would find itself in financial distress. But we don’t need an insurable interest requirement to prevent overexposure, only a strict underwriting policy of “one policy per risk.” The insurable interest requirement, then, is a derivative of this fiduciary requirement, and it exists because common law evolved in such a manner that we understand that a certain party may now have (or in the future acquire) a claim of dependence on the insured party/ so the purpose of the insurable interest requirement is to prevent another party from preventing the exercise of that claim. I think this is pure poppycock, and not even applicable in most circumstances*
However plausible, the above does not explain why Joe’s girlfriend and Joe’s favorite charity may not be co-beneficiaries. Nor does it explain why Joe’s girlfriend and Joe’s favorite charity may not be primary beneficiaries on two separate policies written by two separate insurers. Nor does it explain how a charitable beneficiary can have any interest even approaching “insurable” in an individual.
So my question is: what is the practical application of the ‘insurable interest’ requirement? I certainly understand how it might be used as an underwriting tool – but I don’t understand why it’s an across-the-board requirement. It seems like it might be profitable to offer policies without a traditionally “insurable interest,” doesn’t it?
If you’ve got specific knowledge regarding my inquiry, please post a comment or send me mail.
*E.g., The moment the party with the alleged right to dependence decides to exercise that right, the existing policy would be voided and premiums returned to the payor. A new policy could then be written to secure the insurable interest. All of this, however, presupposes that it’s proper to allow usurping claims of dependence. If, after all, I’ve promised a brother, a friend, a girflriend, a charity – that in the event of my death, they will benefit – who is anyone else to intervene in that matter? But that’s a digression I’d rather not examine today. (back)