The following is the first part of a two part article. The second part will appear in the December 2013 issue of TLC Magazine. - Editor
YOUR PERSONAL INSURANCE – WHO IS INSURED?
Insurable interest—how far will it stretch?
Insurance practitioners know that although an event under a property insurance policy is covered, that does not necessarily mean that a claimant will be paid. Two additional considerations stand out when determining the legitimacy of a claim:
1. the claimant must be an insured under the policy; and
2. the insured must have an insurable interest.
For the most part, when consumers buy insurance policies they do not stop to ask if they have an insurable interest because the whole process is a common and natural part of contemporary living. When most people do think of insurable interest it is usually in terms of property ownership. Unquestionably, there is an insurable interest in the house or the automobile that is owned.
Legal interests - Behind every insurable interest is a legal interest with property rights being just one type. Consequently, without a legal interest, a claimant cannot prevail in enforcing an insurance contract though named as an insured for a covered event. Legal interests have their origins in common law. However, statutory law and/or new case law may expand or restrict the definition of insurable interest.
Principle of indemnity - Insurable interest is so closely tied to legal interest because our society attempts to prevent certain unacceptable behavior which is against public policy. And to do so it must adhere, as nearly as possible, to the principle of indemnity which states that a person should not profit from an insured event but should simply be made whole again.
Insuring something, or someone, where no potential for loss exists, becomes nothing more than gambling. Insuring over and above, or in the absence of an actual potential for loss, leads to moral hazard. An incentive to profit may lead an insured to promote a loss. While the pursuit of profit works well in the American economy it would collapse the insurance industry.
Timing - Insurable interest can change with the passing of time. Knowing when an interest must exist to make a policy enforceable is critical, and that will depend on whether the subject is life insurance or property (and casualty) insurance.
With regard to life insurance, the beneficiary must have an insurable interest in the life of the insured at the time the application is made. It is irrelevant whether an insurable interest still exists when death occurs and a claim is made. Besides, under most circumstances, the beneficiary can be changed to match underlying interest changes.
Not so with property (and casualty) insurance. What determines contractual enforcement here is the insurable interest that exists at the time of loss. Payment for a property loss to someone without an insurable interest could easily be abused and would violate the principle of indemnity. Can you imagine a homeowner sharing the settlement on a fire loss with a mortgagee that never got deleted from the policy following satisfaction of the debt?
Property rights - Property that is owned can be described as a "bundle of rights" that has economic value. Certainly, one of these rights is the preservation of the property. The right of preservation equates to an insurable interest. Stated another way, an insurable interest is derived from legal property rights when the value of the property can be diminished by loss.
Having introduced property rights as the most obvious legal interest forming the basis of an insurable interest, it is appropriate to continue the discussion with additional legal theories that make an insurance contract enforceable. But first, it should be noted that ownership interests do not always exist without some complications. Very frequently, multiple insurable interests apply to the same property.
Contract rights - Secured debts proceed from contracts which give a mortgagee or lien holder an insurable interest in property to the extent of the debt. Note that this interest is concurrent with the owner's interest.
A use interest in property is implied in a lease of premises as in an apartment, office or store. In addition, the lease may obligate the tenant to preserve the property under specified circumstances, some possibly beyond the control of the tenant, extending the interest to the full value of the property.
A contract of primary insurance gives a ceding insurer an insurable interest with which to enforce a reinsurance contract.
A contract of sale produces an enforceable legal interest. Sometimes the contract results in both buyer and seller having an insurable interest in the property for a temporary period of time. A buyer's equitable title to real estate, created by an agreement on the price and other terms of sale, gives the buyer an insurable interest for the full value of the property. This coincides with the seller's interest which does not expire until the deed is delivered to the buyer.
Similar conditions occur with the sale and delivery of personal property. Rules of title in the Uniform Commercial Code address the identification of insurable interests under these circumstances. Once again, both buyer and seller may each have a legitimate interest in the property at the same time.
Tort liability - A tort is a wrongful act. Under a liability policy, an insured must have an insurable interest which is equated to legal liability to the injured third party bringing the action. This requisite is stated in the insuring agreement without actual reference to insurable interest. A liability claim is, of itself, sufficient proof that an insurable interest exists.
Insurable interest in property policies likewise can be triggered by tort liability, liability for a wrongful act. The operation of law creates liabilities for people who damage the property of others while it is in their care, custody and control.
A bailor is a person who entrusts goods to another person, a bailee. When a person takes clothes to a cleaners he/she is the bailor, the laundry is the bailee. When the standard of care is breached by the bailee, the resultant legal culpability (responsibility) creates an insurable liability interest payable to the bailor, the person entrusting goods to the bailee.
Common carriers, garages, dry cleaners and other bailees, as well as estate executors and tenants are familiar examples of persons or entities that have a potential liability for nonowned property.
New York courts generally apply the pecuniary (money, financial) interest test to the facts of a particular case. Under this test, the insured must have a relationship to the subject matter of the insurance such that some pecuniary benefit or advantage will be derived from its preservation and the insured will suffer pecuniary loss from its destruction.
Complexity - It has been my objective to show that an insurable interest may encompass more than the mere ownership of property. In order to determine insurable interest in damaged property it will be necessary to look at a number of legal theories and a variety of case law in the jurisdiction where a claim is made.
Facing the owner-who-is-not-the-named-insured dilemma
The fact that the New York Department of Motor Vehicles (DMV) allows vehicles to be registered in a name(s) other than the owner's(s') has created myriad problems for everyone involved in the purchase of auto insurance. Evaluating risk and determining liability has become a high stakes shell game.
DMV insists that the named insured on auto policies match the registrant's name. Often, the motivation behind registering a vehicle in a name other than the owner is to evade disclosure of detrimental information about some operators (owners) of the vehicle. When such fraud occurs, New York Insurance Law allows an insurer to cancel the policy with just 20 days' notice.
However, let's assume that all pertinent underwriting information has been accurately represented to the insurer. Owners wishing to retain control of a vehicle, while seeking to distance themselves from its insurance experience, often allow the principal operator to register and insure the vehicle independently. Usually, such an operator is youthful and lacks the resources to insure the vehicle for more than statutory limits. This situation begs two questions:
- Will the registrant's personal auto policy (PAP) protect the owner without an additional insured endorsement?
- Will the owner's PAP provide any coverage for this vehicle?
Whether the registrant's PAP covers physical damage losses depends on the legal interest which the registrant has in the auto. As for liability losses, it is necessary to focus on the PAP's definition of an "insured" in Part A—Liability Coverage. Any resident "family member" would clearly be an insured under Item B.1 of the insuring agreement. But if the owner is not a resident "family member," then the insuring agreement grants protection to anyone held legally liable for the actions of an insured. Such legal liability is frequently derived from the law of agency (e.g., an employer acting through an employee).
However, a statute also may create liability. In New York State, the Vehicle and Traffic Law imputes liability to the owner for use of the vehicle by any permissive operator. This liability created by statute is sufficient to trigger protection for the owner under the registrant's PAP, even when the owner is not a resident "family member."
Suppose the registrant is uninsured or lacks adequate limits to cover a judgment awarded an injured party. Will the owner's PAP respond to this claim? The answer is no. Liability exclusion B.2 precludes coverage for any vehicle owned and not scheduled on a policy naming the owner as insured.
Conclusion - It is recommended that any vehicle in a name other than the owner should have at least the limits on the registrant's PAP that are consistent with what the owner is accustomed to. Otherwise, a written release from the owner is advisable.
Spliting Auto Policies – Divorce or Seperation
In cases of divorce or separation, policy "split" requests will ordinarily be honored, unless:
- the departing spouse did not previously have a driver's license; or
- the company was preparing to cancel or nonrenew because of the driving record of the departing spouse.
Requests by divorced or separated spouses for "split" automobile liability policies must be honored since the persons insured by the company remain the same under two policies as under one. If prior to a request for a split policy one of the spouses was not a licensed driver, coverage need not be provided to that spouse under a "split" since that spouse was not insured as a driver under the original policy. However, if the spouse has a valid driver's license at the time of the request and the company was insuring such spouse as a risk under the family policy, coverage under a split policy must be afforded to such spouse.
Except as noted above in the "no driver's license" situation, policies will be "split" upon request if both parties are protected.
Regardless of the fact that one spouse signed the application for coverage and/or one spouse is named in the declaration, both spouses under a family policy are named insureds under such policy and each is protected by the policy provisions. In order to avoid discrimination vis-à-vis other persons taking out new policies on the same day, "split" policies will be issued at the company's then current rates.
Your Professional Insurance Agent …
We want you to know about the insurance you’re buying.
Alan Plafker
- President of Member Brokerage Service LLC, A Melrose Credit Union Service Organization
- Licensed Insurance Broker
- President and Member of the Board of Directors, PIANY, Professional Insurance Agents Association of New York
- Active Member of CIBGNY, Council of Insurance Brokers of Greater New York
- Treasurer, New York Independent Livery Driver Benefit Fund Board of Directors
His agency insures thousands of policies for Taxi Limousine Commission insurance as well as many policies for all types of personal and commercial insurance. He can be reached in his Briarwood, Queens office at 718-523-1300 X1082, or www.MemberBrokerage.com.
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