What is “Insurable Interest”?
Pretend you have a rich uncle. Now pretend that you’re worried he might not include you in his will. Can you take out a life insurance policy on your uncle “just in case?” What if your friend, who owes you a million dollars, wins the lottery? Can you take out a policy on your friend’s life in that case? Here’s a more practical example. You own a restaurant, but you have a lease. Can you take out an insurance policy on the property? What if you own the restaurant property but have a bank loan on it?
The question in each of these examples is whether you have an insurable interest recognized by law. The basic rule is that, to be insurable, you must have a “pecuniary” (monetary) interest in the life or property and that you will suffer a direct and immediate loss as a result of the death or damage.
In the first case, you may wish that your rich uncle would leave you his fortune, but it’s only a wish. Your uncle doesn’t have to name you in his will. By law, your wish for an inheritance doesn’t amount to a recognized interest. You won’t suffer a loss if Uncle Joe changes his mind. Allowing you to insure him under those circumstances would simply be gambling by another name.
What about your friend who owes you a debt? In this case, you at least have a claim against your friend, but is it enough? The law will again say no. You may have a claim on your friend’s property, but not on your friend’s life. The result would be different if the person were your spouse, for example, who has an obligation to support the family.
What about the restaurant, whether owned or leased? Now you’re on solid ground. You’ve invested time and money in growing the business. Damage or loss of the property would cause direct pecuniary harm because of your investment, and because you may not be able to continue to operate while repairs are in progress. The conditions of coverage will probably depend on the terms of your lease or loan. If you lease the building, the landlord may be covered for loss or damage to the structure. In that case, you may need separate coverage for the improvements you’ve made and for the interruption to the business while repairs are underway.
What if you took out a loan to establish the restaurant? In that case, your loan agreement will usually require you to name the lender as an additional insured as part of the security for the loan. The lender may receive the insurance proceeds and have discretion to pay them out depending on whether or not the loan is current. But if you’re counting on business income to pay the monthly loan amount, that could be a problem. You may again want to consider business interruption coverage while repairs are under way.
Something else to consider is exactly who is named as insurable. If you have a change in corporate name or structure, you will want to be sure that the policy follows the change. If you change the name of the company, or change from an LLC to a corporation, or even if you change the state where the corporation is domiciled, make sure your coverage follows.
The Rick Callaway Team at Pacific Diversified has been insuring businesses like yours for over 30 years. We have the focus, passion, and commitment to make sure your needs are met. We go the extra mile for you each and every day.