The first chapter of my Insurance Law textbook from law school was about the history of insurance. It set the stage for the next chapter on the insurable interest, one of the fundamental principles in insurance law. The term “insurable interest” is actually quite self-explanatory. In order to obtain insurance on something, one must have some interest in that thing that could be covered by insurance. Requiring an insurable interest is one way of negating moral hazard. Wikipedia currently defines “moral hazard” as occurring when, “a party insulated from risk behaves differently than it would behave if it were fully exposed to the risk.” To use a cliché, moral hazard could be phrased as having everything to gain and nothing to lose.
Recently, in the case of Standard Morgan Partners, Ltd. v. Union Ins. Co., CIV.A. H-09-4145, 2011 WL 1806499 (S.D. Tex. May 11, 2011), the defendant insurance company claimed that the plaintiff corporation had no insurable interest in property that had been damaged by Hurricane Ike. The court looked to Texas law, specifically the case of Jones v. Texas Pacific Indem. Co., 853 S.W.2d 791, 794 (Tex.App.-Dallas 1993, no writ), to explain insurable interest in this way:
A party must have an insurable interest in the insured property to recover under an insurance policy. It is not necessary that the party own the property to have an insurable interest. “[A]n insurable interest exists when the [insured] derives pecuniary benefit or advantage by the preservation and continued existence of the property or would sustain pecuniary loss from its destruction.” [Citations omitted]. If a claimant cannot suffer any pecuniary loss or derive any benefit from the property, he has no insurable interest. [Citation omitted].
The facts in the Standard Morgan Partners case showed that the plaintiff corporation was the parent company of the entity that held a deed of trust for the damaged property. The court looked to additional Texas law to determine if this relationship qualified as an insurable interest:
In Thompson v. Trinity Universal Ins. Co., 708 S.W.2d 45 (Tex.Civ.App.-Tyler 1986, writ ref’d n.r.e.), a building owned by a corporation was destroyed by fire. The sole owner of the corporation had obtained an insurance policy on the property in her name, and not on behalf of the corporation. The court found an insurable interest because, as “sole owner of the corporation, obviously Thompson suffered a pecuniary loss from the destruction of the building and had an insurable interest in it.” Id. at 48. Likewise, in St. Paul Lloyd’s Ins. Co. v. Fong Chun Huang, 808 S.W.2d 524 (Tex.App.-Houston, 1991, writ den.), the court found that a corporate shareholder possessed a legally insurable interest in a building owned by the corporation, but that the insurable interest was necessarily limited to the extent of the shareholder’s interest in the corporation.
The court found that the plaintiff corporation’s ownership of the entity that held a deed of trust for the damaged property provided an insurable interest and denied the insurance company’s motion for summary judgment on that basis. Although the court denied summary judgment on the insurable interest, the court granted summary judgment in favor of the insurer on the “other insurance” clause in the insurance policy.
Generally, an insurable interest is required to collect on an insurance policy in most jurisdictions, but what constitutes an insurable interest may vary by jurisdiction, so be sure to consult competent legal counsel to help evaluate your insurable interests.