Jeffrey, you’re always finding interesting examples for our insurance blogs. What’s one of the more epic examples of ‘insurable interest’?
I was reading about the first rescue mission in space that was insured. The space shuttle Endeavour was dispatched to rescue an intel satellite which had dropped out of orbit. So the insurance market came up with a policy to insure against that failing. Obviously satellites cost hundreds of millions of dollars, and you can’t just leave it because it’s like a runaway train, so you have to rescue it. In order to insure that mission, someone had to have a financial interest in the mission succeeding. We’re constantly coming up with new policies and new wording but there must always be an ‘insurable interest’.
What are the most obvious examples of how it’s applied?
Let’s say you and I are good friends. Can I insure your life? No. I may like you but we have no financial interest in each other. My wife and I have a financial interest in each other. I can insure her life. She can insure my life, and she does. I insured my children when they were younger but now my son is 43 and my daughter is 41, we have no financial interest in each other. I can’t insure my son’s life and he can’t insure mine. Now, let’s say I have a will. My wife is the first beneficiary, then my kids. You could say my children have a financial interest in me as the beneficiaries of my will. Do you agree?
Well you shouldn’t agree because I could change my will. I could fall out with my son. We could have an argument. But let’s say my boss thinks I’m a key man here. I run the company. I make a profit. Can he insure my life?
I’d say you’re like a piece of valuable equipment, and he should be able to.
And he can. He can take out a ‘key man’ insurance on me. He has to tell me. He has to say, “By the way Jeff, we’re insuring your life, so it doesn’t matter if you die – we’ve got you covered”.
Insurance is so weird.
I’ve been married to my wife for over 50 years. I’ve got policies on her life, she’s got policies on mine. But if I then decide to get divorced, can my wife continue the policy on my life when we’re officially divorced?
I would say she no longer has any interest, and therefore no.
You’d be wrong. Life insurance exists at the time you take out the contract. I could have 20 wives and each one of those 20 wives could continue to have a policy on me as long as they keep paying the premiums.
Is this based on the fact the insurance companies are never going to know about these changes in life?
It’s more the fact that over time the industry has accepted that life is unpredictable. So with life insurance, you only need to prove you have an insurable interest once. For example, say I have a life insurance policy on my own life and I join the army. Even though my circumstances have changed, I get to keep my policy. I still have an insurable interest in my own life.
Marine insurance is the other extreme. Say you’re bringing a cargo of rubber to Cambodia and you buy the rubber in the UK. Now, you haven’t paid for it yet. You may be paying on delivery. You can sell it while it’s in transit and then the new owner can insure it. But here’s the difference with Marine Insurance: the new owner only has to prove ownership of it at the time of loss. Marine Insurance is famous for that because traditionally it’s a long voyage, and it can take months.
How about general insurance? Let’s use fire insurance as an example.
Say you own the building and you sell it, and the next day the building burns down. Has the new owner bought fire insurance? Probably not. Does the original owner still have a policy? Definitely not. So we don’t pay the claim. Many people, when they buy a house, think of insurance last of all. You could have a house, it burns down and you’re not insured. It’s your fault. The same applies to all general insurance.
That must have caused so much heartbreak.
Thousands upon thousands of millions of dollars. That’s why people often hate the insurance industry.
I imagine people are often so excited about the purchase that it’s going to be at least a few days before they bother to consider insurance.
That’s because people don’t understand these basic principles. It’s the reason I get paranoid about people delaying. If you have the money, just get the policy.
When was the first time this became recognised as a basic principle of insurance?
It was in the UK which had the most written life insurance policies. In the UK there were too many people who were insuring sick-looking actors, politicians and other famous people. It’s not right that you should benefit from someone dying if you don’t know them. It’s a gamble, it’s not a policy. Around 1778 the Life Insurance Act stopped it. The rest of the world adopted that principle. Now we all recognise it as a rule: you have to have a financial interest in the object, person or thing. There have been stacks of laws on it. It doesn’t matter which country it is: Namibia, the US, Albania…every country in the world applies this basic rule of insurance. It’s the number one rule.
Jeffrey James Whittaker is the CEO of People and Partners Insurance PLC, Phnom Penh, Cambodia. He is also Vice Chairman of the Insurance Association of Cambodia (IAC) and Chairman of their Education and P.R Committee. He is an experienced and frequent lecturer in insurance matters.