“Insurable Interest” Broader Than Ownership Interest

Summary: The following discussion examines the concept of insurable interest—that is, the right, claim, or title to a piece of property that allows a person to insure that property. Many times the person who alleges an insurable interest may not be the party that purchased coverage on the property. In any event, unless a person has a valid interest in the subject property, there can be no recovery.

This article contains general information on insurable interest and reviews how courts have viewed this concept in regard to specific classes of persons.

Topics covered:
Insurable interest—general concept
Heirs and insurable interest
Spouses and insurable interest
Partnerships and insurable interests
Lessors and lessees
Insurable interest and liability

Insurable Interest—General Concept

The concept of insurable interest in a property insurance contract is essential because it is the insured's interest in property, and not the property itself, that is protected. As a contract of indemnity, a property insurance policy promises to cover the interest of an insured against loss or damage from the destruction of that property. If the insured suffers no direct financial loss from the property's destruction, the insurer has the right to question or withhold payment. Without such an interest, the insurance policy would become a wager and against public policy.

Black's Law Dictionary (Sixth Edition) has this to say about the concept of an insurable interest:

Such a real and substantial interest in specific property as will prevent a contract to indemnify the person interested against its loss from being a mere wager policy. Such an interest as will make the loss of the property of pecuniary damage to the insured. A right, benefit, or advantage arising out of the property or dependent thereon, or any liability in respect thereof, or any relation thereto or concern therein, of such a nature that it might be so affected by the contemplated peril as to directly damnify the insured. Generally, an 'insurable interest' exists where insured derives pecuniary benefit or advantage by preservation and continued existence of property or would sustain pecuniary loss from its destruction.

Thus, an entity need not necessarily own or hold title to the property to claim an insurable interest in its loss or destruction. Under current property forms, an insured may have a partial or even contingent interest—that is, a use interest—in the property.  For example, the Section I conditions of the ISO Homeowners forms state, “Even if more than one person has an insurable interest in the property covered, we will not be liable in any one loss: 1. To an 'insured' for more than the amount of such 'insured's' interest at the time of loss; or 2. for more than the applicable limit of liability.” In ISO's Building and Personal Property Coverage form CP 00 10 10 12, condition E.4.d.states, “We will not pay you more than your financial interest in the Covered Property.” In the case of a tenant's improvements and betterments to real property, the interest lies in the use of the property, and not in the property itself. 

Property insurance contracts need not contain a description of the insurable interest of the insured. The interest may change while the policy is in force, without any change needed in the way the insurance is written, unless a variation in the amount of insurance or a change in the additional insured or loss payee is necessary. And although as a rule of thumb a party who is not named as insured, additional interest, or loss payee cannot recover under a policy, no matter what the interest might be, there are exceptions. In any event, the burden of proving that an insurable interest exists rests on the one claiming coverage.

The question arises as to when an insurable interest in property must exist. Is it when the insurance is obtained? When the loss is sustained? Or at both the policy's inception and at the time of the loss? Jurisdictions have expressed all these views. According to Couch on Insurance, Third Edition, if the contract is one of “strict indemnity and by its terms contemplates the insurance of interests not yet in being or yet to be acquired, it has been held sufficient in many cases that the insurable interest exists when the loss is sustained.” However, Couch adds that “description and timing of the existence of the insurable interest can be so intertwined that they must be considered together to determine whether there is an insurable interest that will be honored by the courts.” As we will see in the following instances,  there are few clear-cut answers.

Heirs and Insurable Interest

The following ISO Homeowners condition, applicable to sections I and II, explains how the insured's death will be handled:

G.Death

If any person named in the Declarations or the spouse, if a resident of the same household, dies, the following apply:

1.We insure the legal representative of the deceased but only with respect to the premises and property of the deceased covered under the policy at the time of death; and

2.”Insured” includes:

a.An “insured” who is a member of your household at the time of your death, but only while a resident of the “residence premises”; and

b.With respect to your property, the person having proper temporary custody of the property until appointment and qualification of a legal representative.”

The form therefore gives specific coverage to an agent or executor of the insured's estate, but note there is no mention as to coverage for any heirs to the property. Couch provides the following explanation:

An administrator of a decedent's estate is not by virtue of his or her position alone an agent for the heirs to insure the property for them or for their benefit [in other words, to obtain insurance in the administrator's name]. Accordingly, while the heirs may authorize the administrator to act as their agent in procuring insurance upon the property in the estate, an insurer is entitled to know whose property it insures, and, in the absence of proof that it knew that an administrator procuring insurance was acting as the agent of the heirs, it is not bound to the heirs on a policy issued to the administrator.

When heirs acquire property following the death of the owner, legal cases generally indicate the best practice is to write insurance in all names. In Independent Fire Ins. Co. v. Hagler, 434 So. 2d 277 (Ala. App. 1983), ownership of a house was divided between heirs of one deceased owner, Dave Coleman, and heirs of the other deceased owner, Willie Bell Coleman. Ms. Harris, an heir of Dave Coleman, lived in the dwelling and purchased insurance in her name. Other heirs of Dave Coleman contributed toward the premium.

The dwelling burned, and the insurer, upon learning of the other heirs, paid Ms. Harris for one half of the actual cash value (the interest of the Dave Coleman heirs) and returned the excess premium. The other heirs sued the insurer, and the trial court awarded an additional amount payable to the Dave Coleman heirs, and an amount payable to the Willie Bell Coleman heirs. But on appeal, the court found that there was no evidence that Ms. Harris had insured any interest other than her own and the other Dave Coleman heirs. In fact, the heirs of Willie Bell Coleman were not even aware of the policy until the fire loss. However, the court did point out that whether other joint owners should share in insurance money depended upon the particular facts of the case.

An Arkansas case involved a woman who died intestate (that is, without a will); her property therefore was vested in her heirs as a matter of law. Insurance was written on her house with “The Estate of Ethel Brewer” as named insured. Other heirs transferred their rights to the woman's son and his wife (the Brewers). Shortly thereafter, the dwelling burned. The insurer declined to pay the Brewers on the basis of a lack of insurable interest. The trial court ruled in favor of the Brewers. On appeal the court disagreed with the insurer's contention that “it is not enough to have an insurable interest in property unless the person or persons having such interest also are specifically named as insureds.” Because the insurer had not provided the insurance contract to indicate that any error had been made, the court affirmed the decision of the trial court. A dissenting judge, however, made a valid point that it was possible that there were outstanding debts against the estate which insurance proceeds might be used to settle, and unless this matter was resolved, the Brewers were not entitled to the insurance proceeds.             

State laws, however, can dictate another outcome. In Michigan Fire and Marine Ins. Co. v. Magee, 218 S.W.2d 151 (Mo. App. 1949) an insured widow had only a dower and homestead interest in a dwelling. The balance of the ownership interest was with the children of the deceased. The widow insured the dwelling in her name, and when the dwelling burned the insurer said it was liable only for the dower interest. This was contested based on Missouri's valued policy laws, and the court ordered payment in the full amount of the policy.

Finally, although it is generally accepted that heirs have an insurable interest (Long v. Federated Mutual Insurance Co., 431 F. Supp. 473 [W.D. Tenn. 1976]) in property, a person living in the expectation of inheriting property is held not to have an insurable interest (Hunter v. State Farm Fire & Casualty Co., 577 So. 2d 908 [Ala. 1991]).

Life tenants, while not heirs, may have an insurable interest in property. This situation often occurs when the spouse who holds title to property bequeaths it to his or her heirs (such as children of another marriage) but grants a life tenancy to the surviving spouse. This allows that spouse to continue to inhabit the property for the remainder of his or her life. Generally, the life tenant can insure the property in his or her own name, particularly if the life tenant is paying the premium. Absent an agreement between the life tenant and any remaindermen (that is, those entitled to the estate following the life tenant's death) to the contrary, the property insurance will be held to be for the benefit of the life tenant. In the case of Estate of Murrell v. Quin, 454 So. 2d 437 (Miss. 1984), the remaindermen sued for the fire policy proceeds. The husband had been left a life tenancy by his wife in the family home; upon his death the home was to go to children of the wife's first marriage. The husband purchased insurance in his name and paid the premium. The court ruled that the life tenant had an insurable interest in the property and was entitled to the proceeds. If the children had wanted to insure their interest in the property, they could have done so. 

Spouses and Insurable Interest

Generally, if title to a married couple's dwelling is in the name of only the husband or the wife, the other spouse has what is considered a beneficial interest in the property, in that, if it is destroyed, a disadvantage is suffered. Even after the couple is no longer married, it does not necessarily follow that an ex-spouse will have no insurable interest. The interest may be limited, but nonetheless there is an interest. For example, when a divorce decree awarded title to the marital home to the husband, subject to the balance due on the note secured by mortgage which he was ordered to pay, the wife's insurable interest in the home was limited to the amount due the mortgagee (Johnson v. Allstate Insurance Co., 870 P.2d 792 [Okla. Ct. App. 1993]).  And in the case of Motorists Mutual Insurance Co. v. Richmond, 676 S.W. 2d 478 (Ky. Ct. App. 1984), the wife deeded her interest in the marital home to her husband when she moved out a year before his death. Following the husband's death, the wife moved back into the marital home with the two children of the marriage, who had inherited the house. The wife obtained insurance in her name. When the house was damaged by fire, the insurer paid for her personal property, but declined to make payment for the house, citing lack of insurable interest. The court determined she in fact had a substantial insurable interest in the home, since both before and after the death of the husband she had spent considerable money in maintaining and improving the residence. She was also natural guardian for the children of the marriage and, as such, entitled to “use and dominion” over the premises. Although the children were co-owners, they were minors at the time the policy was applied for, and so could not contract on their own behalf. Therefore, the insurer had an obligation to pay the remaining damages.

But where a former wife quitclaimed her interest in the marital home prior to its destruction by fire, she was not entitled to any proceeds, even though the former husband owed her money and she was a named insured at the time of the loss. The court stated that the time for repayment of the debt had not expired and that the debt had not been secured by the marital residence. Insurance proceeds, stated the court, were payable to an insured person only if that person had an insurable interest both at the time of entering into the contract and at the time of the loss (Morgan v. American Security, 522 So. 2d 454 [Fla. App. 1988]).

It is important to remember that one spouse may have an insurable interest in property, but if that property is intentionally destroyed by the other spouse, an insurable interest will not override, for example, homeowners preclusions of coverage for all insureds. Of course, state laws are the final word in this eventuality. See, for example, State Farm Auto. Ins. Co. v. Raymer, 977 P.2d 706 (Alas. 1999), where the wife had a beneficial interest in her husband's truck, even though she was not a title holder and the truck might have been acquired prior to the marriage, and therefore not considered property of the marriage. The court agreed with a lower court's findings that the wife had an insurable interest; the only question remaining was the extent of that interest.   

Sometimes a policy is written in the name of one spouse, when in fact it is the other spouse that holds title to the property. In the case of AXA Global Risks (UK) Ltd. v. Pierre, 2001 Westlaw 1825853, No. 00–388–CIV (S.D. Fla. Nov. 8, 2001) the insured reported that his vessel had been stolen. Upon investigation, the insurer learned that title to the vessel was held by the insured's wife. The insurer filed for declaratory judgment to void the maritime insurance policy. The husband and wife filed suit for breach of the policy and sought recovery for the stated value of the vessel. In ruling on the husband's insurable interest, the court noted “it is well-established that a 'right of property in a thing is not always indispensable to an insurable interest.'…In short, one need not hold the title to something to have an insurable interest in it. Rather, the relevant inquiry in determining whether an individual has an insurable interest in something is whether the individual would be injured by its loss or benefited from its preservation.” In this case, the husband's pecuniary interest was that he used the boat for fishing, thus providing food.

Partnerships and Insurable Interests

The entities in a business partnership each have an insurable interest in the assets of the organization. If property belonging to the partnership is insured in the name of one partner without any stipulation that the insurance is to benefit the organization or copartner, the insurance is presumed to cover only the interest of the insured. But in State Auto and Cas. Underwriters v. Johnson, 766 S.W.2d 113 (Mo. Ct. App. 1989) it was held that awarding all the insurance proceeds to one partner in whose name the insurance was written would unjustly enrich that partner. The other partner had an equal interest in the destroyed property because it was partnership property that was destroyed.

However, if the insured property belongs to the partnership and the premium is paid out of partnership funds, and if the unnamed partner agrees the other partner can take out insurance in his own name, then the partner is entitled to insurance proceeds but is deemed to be holding them for the benefit of the partnership (Georgia Farm Bureau Mut. Ins. Co. v. Mikell, 191 S.E.2d 557 [Ga. App. 1972]).

But generally, insurance is a personal contract, and, absent any indication on the application or policy to the contrary, the insurance will be for the benefit of the party making the contract. Two physicians entered into a partnership, one paying the other $3,000 for one-half interest in his medical practice and his property and equipment. The first physician asked the second about fire insurance, and the second replied he thought there was $5,000 or $6,000 insurance. But when all the property was destroyed by fire, the court held the first physician was not entitled to half the proceeds. The court said that insurance policies were personal contracts, and pertained to the person or party to the contract, and they did not attach to the property being insured.

Lessors and Lessees

Both a lessor and a lessee may have an insurable interest in leased property—the lessor by virtue of ownership and the lessee by virtue of making use of the property. It is possible, therefore, for both parties to obtain insurance on the same piece of property. If insurance is obtained jointly by both lessor and lessee, each is entitled to a proportionate amount depending upon the interest of each in the property. Recovery for the lessee is generally limited to the value of the unexpired portion of the lease because the lessee's interest lies in the right to occupy the property. The general rule (although factual distinctions may dictate otherwise) is that the proceeds of a policy taken out by one party for the benefit of another may be claimed by the other party, if there has been such an agreement between the parties.

Couch on Insurance (Third Edition) states that “as a general rule the lessee maintains an insurable interest in the lease property, especially where:

·     He has covenanted to return it in good order at the end of the term.

·     He has orally agreed to keep the premises insured.

·     He has made substantial improvements to the leased premises in accordance with the lease agreement.

·     He has an option to purchase.”

Note that a lessee with an option to buy has the right to insurance proceeds, which may be the entire face amount of the policy. (See G.M. Battery & Boat Co. v. L.K.N. Corp., 747 S.W.2d 624 [Mo. 1988].) Even if the insured does not exercise the option to purchase until after a loss, he is still entitled to full proceeds and not just the value of the use of the premises and any improvements made thereto (Kelly v. Iowa Valley Mut. Ins. Ass'n, 332 N.W.2d 330 [Iowa 1983]).

Automobiles are a kind of property that may be leased. Usually, a loss payee endorsement is added indicating that payment for a loss will be made for the benefit of the loss payee. But when such an arrangement is made between individual parties, the situation may need to be carefully addressed, as a case involving a leased tow truck indicates. The Henrys entered into a lease with Alexander to lease a tow truck with an option to buy it. The lease required the Henrys to purchase insurance and to designate Alexander as attorney-in-fact to make claims, receive payment, and execute any and all documents with regard to the insurance. The truck was stolen, and the Henrys submitted a claim. Citing lack of insurable interest, the insurers declined the loss. Alexander, as attorney-in-fact, sued the insurers. The trial court granted summary judgment in favor of the insurers, and the outcome was appealed. The appellate court reviewed the insurance policy, noting that it did not indicate that it was an owners policy, and that the Henrys did not hold themselves out as owners. Further, a representative of the insurers stated that the only difference for a leased vehicle was that a loss payee endorsement would have been attached. The court held that the Henrys did have an insurable interest because the lease required them to carry insurance on the tow truck. Because rights had been assigned to the attorney-in-fact, he had the right to sue the insurers for recovery. This case is Alexander v. Ennia Ins. Co. (U.K.), Ltd., 771 S.W.2d 917 (Mo. Ct. App. 1989).     

Sometimes it appears that there is not only a lack of ownership but also a lack of any kind of insurable interest that would allow recovery in event of a loss. For example, in Beatty v. USAA Cas. Ins. Co., 954 S.W.2d 250 (Ark. 1997), the insured brought action against an insurer to recover payment for an auto that had been given to her daughter. The girl's father, who lived in another state, gave the car to his daughter but retained title. The court held this was a valid inter vivos gift, that is, not a gift made in contemplation of death. The court stated that transfer of title did not have to occur to make the gift valid. And, as natural guardian of her daughter, the mother as insured had an insurable interest in the car.

In a situation in which it seemed that insurable interest was even less evident than in the case just mentioned, the court nonetheless found in favor of the insured. The named insured sold a car that he had owned (and listed on his auto policy) to his adult son. He retained control of the vehicle while his son was working in Mexico, continuing to make premium payments. A little after a year after the sale, the car was stolen from in front of the insured's residence. The insurer denied the claim due to lack of insurable interest. The insured brought suit, and the insurer sought declaratory judgment that the named insured was not entitled to receive the proceeds. But the court held that the car remained the insured's covered auto while it was listed on his policy and he retained exclusive possession and control. The insured only needed to show an insurable interest, not ownership. There were issues of material fact that precluded summary judgment on coverage and an insurable interest, so the case was remanded for further fact-finding. This case is Valdez v. Colonial County Mut. Ins. Co., 994 S.W. 2d 910 (Ct. App. Tex. 1999).  

In property, a purchaser under contract has an equitable title only but is treated as the owner. Thus, loss falls upon the purchaser, not the seller, although less any purchase money still owing. Even when there may be impediments to obtaining a clear title an insurable interest may be established. In Cooke v. Firemen's Ins. Co. of Newark, N.J., 291 A.2d 24 (N.J. Super. 1972), the Cookes offered $1,000 to Rosenberg for his interest in property owned by Rosenberg's deceased mother. Payment was accepted; the Cookes took possession, made repairs, and paid an outstanding water bill. They also took out fire insurance. Rosenberg's sister lodged a caveat against the probating of the will, so when a fire destroyed the property, the title problems were unresolved. The insurer declined to settle the entire loss, offering only the amount the Cookes had expended in repairs plus the $1,000. The court found that as equitable owners in possession of the property, unless evidence was produced that the Cookes would never obtain the title, they could recover the full amount of the policy. 

An informal agreement to tender title, however, may not be sufficient to establish an insurable interest. In Lloyd v. Foremost Ins. Co., 478 So. 2d 1152 (Fla. Dist. Ct. App. 1985), Lloyd's sister purchased a mobile home in her name for the purpose of selling it to her brother, Lloyd. The final payment was made to the sister, but she refused to turn over the title. A few months later, fire destroyed the mobile home and the insurer paid the sister. Lloyd brought action against the insurer. However, his complaint was dismissed because even though the sister may not have been entitled to the insurance proceeds, it did not follow that the insurer had a duty to pay Lloyd instead. His name had never appeared on the policy, even as a loss payee. The court gently suggested that Lloyd's action was better taken against his sister.

An extremely complex case involved the question of whether money spent to repair water damage to a building the insured not only did not own, but that was the subject of a title dispute, established an insurable interest. A husband and wife partnership owned three business entities: Techniarts Video International, Inc. (TVII), Technical Land, Inc., and Techniarts Engineering (Techniarts). The three entities occupied a building owned by Kalorama Road Associates, with whom they had a business relationship—a former skating rink that was being developed into a movie-TV studio facility. Techniarts received a Marshal's Deed to the property following suit against the Kalorama, who had declared bankruptcy. The husband and wife obtained a court order substituting Technical Land, Inc. as the owner. Shortly thereafter, a creditor of Kalorama filed an action against Technical Land, questioning the validity of the deed. When Technical Land also filed bankruptcy, the action was transferred to bankruptcy court. Meanwhile, TVII negotiated a use agreement with the Kalorama trustee. In exchange for use of the building, TVII agreed to be responsible for maintenance and insurance.

Technical Land's deed was declared invalid, but Technical Land continued to occupy the building with permission of TVII under the use agreement until the use agreement expired.

In the period prior to the deed's being declared invalid, Technical Land obtained property insurance on the building. Technical Land suffered two water damage losses, both of which the insurer denied based on lack of insurable interest. The trial court agreed with the insurer. But the appellate court held that a valid insurable interest could occur when economic loss to the tenant was closely tied to the uniqueness of the property. A licensee “could have an insurable interest in a motion picture studio which it operated and from which it allegedly derived profits, if the building was unique and economic loss was tied to the unique traits.” Thus saying, the appellate court reversed and remanded the case back to the trial court for further review of the facts. The case is Technical Land, Inc. v. Firemen's Ins. Co. of Washington, D.C., 756 A.2d 439 (D.C. Ct. App. 2000).

Insurable Interest and Liability

Insurable interest is a concept that applies to liability insurance as well as property insurance. In this instance, insurable interest exists when the occurrence of an insured event will result in legal liability and thus the possibility of economic loss. Couch states that “insurable interest is to be found in the interest that the insured has in the safety of persons, or the freedom from damage to property, which might give rise to suits against him or her in the case of their injury or destruction. This interest does not depend upon the insured's legal or equitable interest in property, but solely upon whether he or she may be charged at law or in equity with the liability against which the insurance is procured.”

Thus, in Stephens v. Conyers Apostolic Church, 532 S.E. 2d 728 (Ga. App. 2000), the court ruled that it was perfectly reasonable that the minister of the church would insure a church-owned vehicle on his own personal auto policy since he was “the Church agent with primary custody of the vehicle.”

Another case making the point that in liability insurance the insurable interest does not necessarily entail an interest in property is Country Mut. Ins. Co. v. Matney, 25 S.W.3d 651 (W. D. Miss. App. 2000). The insured transferred ownership of a car to his daughter, who did not live with him. The car was still on the father's policy when the daughter gave permission to another person to drive the auto. He crossed the center line and hit an oncoming vehicle, injuring three people. The father's insurer declined to cover the loss, stating that transferal of ownership precluded coverage. The court disagreed, stating that the policy did not make ownership of the auto a precondition to coverage. The court added that “the risk insured against is based not on the ownership of the property but on the loss and injury caused by its use for which the insured might be liable” (citing Hall v. Weston, 323 S.W.2d 673 (Mo. 1959)).