The term insurable interest is included in the Glossary of Car Insurance Terms and Terminology. It is important to give more attention to this term and provide insight to the importance of an insurable interest in the context of car insurance policies and claims.
What is an insurable interest?
- It is a basic requirement for all types of insurance that the person who buys a policy must have an insurable interest in the subject of the insurance.
- Insurable interest is one of the foundations of insurance because, in its absence, insurance would be no different from gambling and (even if legal) would not constitute a binding agreement.
- To the insurance company, an insurable interest is the basic reason for issuing a legal insurance cover, whilst – to an insured (or beneficiary) it gives the legal right to enforce an insurance claim.
- An insurable interest means that the policy holder (or the beneficiary) must stand to suffer a direct, measurable financial loss if the event (against which the insurance cover was bought) does occur.
- To insure a private vehicle, you would have to own it and suffer a financial loss if it was damaged.
- A finance company may have an insurable interest in a vehicle if they helped pay for the purchase.
The dilemma of insurable interest in accident claims
Whether the insured has an insurable interest might not always be as clear as crystal… The Ombudsman for short term insurance has confirmed that there has been an increase in the number of complaints which arise from the declinature of motor claims due to the alleged lack of insurable interest.
Problem often arise from the insurance of motor vehicles, which are not owned by the Insured and where there is no direct financial loss to the insured person. A number of complaints arise because of a lack of understanding and the insured person sees no problem when insuring the motor vehicle of a child under his policy for convenience sake.
On the car insurance blog we have received comments from a visitor which provides insight to how the absence of an insurable interest is often regarded as the reason to reject a claim. We would like to quote the facts disclosed by the visitor:
“I bought the vehicle from the dealer and received finance through ABSA VF. At some point I contacted ABSA VF informing them that I am struggling to keep up with instalments and accordingly requested advice regarding giving the vehicle back to ABSA VF with the understanding that the instalments would cease. I was told that even if I handed the vehicle back to ABSA VF I would still be liable to pay whatever was outstanding on the vehicle. This was not a feasible option to me as I was already struggling with instalments.
During the same time a colleague at work wanted to buy a car but could not get finance from the banks. She was aware that I wanted to “off-load” the vehicle and offered to take the vehicle off my hands. We agreed that I would hand the vehicle over to her on the following terms:
1. She pays a deposit of R 10,000;
2. She continues paying the instalments to ABSA VF starting on the 30th April 2009 and ending on the 30th October 2011;
3. She continues paying the insurance for the vehicle;
4. The vehicle will remain registered in my name and she takes full ownership only when all the remaining instalments were paid / settled.
On the 17th April 2009 I contacted my insurance broker and informed them that MRS. and MR X would be driving the car and requested that they change the insurance policy by adding them as drivers to the policy schedule. My broker informed the underwriters accordingly and on the 20th April 2009 informed me that the request was approved by the underwriters.
On the 24th April 2009 my broker emailed me a copy of the new policy schedule noting additional drivers added.
Once this was done MRS. X and I formally concluded our agreement by signing a contract for the provisional sale of the vehicle from me to her.
From my perspective at the time off the loss:
1. The vehicle was still covered by insurer;
2. All insurance payments were up to date;
3. Insurer was informed of the additional drivers;
4. The policy schedule was amended by adding the additional drivers to the policy schedule.
Would the insurer be correct in rejecting this claim?”
We would like to consider such a scenario by providing insight to how a Court of Law and the Office of the Ombud might approach this scenario.
What does the Law say about insurable interest?
There is a saying “Always look after the facts…and the law will look after itself…” The good news for the insured client is that the law will indeed look after the facts of each scenario. Our courts will not merely dismiss the accident claim of a consumer who have paid his monthly insurance premiums only to be told later that there was no insurable interest and therefore no legitimate insurance claim.
We would like to refer to legal authority on insurable interest:
In the matter of Phillips versus General Accident Insurance Company (S.A.) Ltd 1983 (4) SA 652W the following appears at 659
“I am of the view that the author places too much emphasis on the insurable interest, and loses sight of what the real inquiry is, namely whether the contract, having regard to all the surrounding circumstances and especially the intention of the parties, amounts to a betting or wagering agreement. If there is any doubt, the benefit should in my view be given to the insured, having regard to the fact that normally the company has throughout the period of insurance accepted the insurance premiums and that such a defence is really a technical one”.
It is apparent from this judgement that there would be a bias towards or in favour of the consumer where such consumer has been accepted as a client by the insurer and his insurance premiums have been paid as stipulated in the contract. Insurable interest will not be a technicality to be used in rejecting claims, and more attention to the presence or absence of such insurable interest should be given at the time of concluding the agreement! There should be a greater onus on the side of the insurance company to establish that the consumer actually has an insurable interest in the property before accepting him as a client!
The Ombudsman and insurable interest
Further recognition of the bias towards consumer protection can be found in the decisions and remarks made by the Ombudsman for Short Term Insurance. The Ombudsman has remarked that it will not arbitrarily accept a declinature of insurance claims merely on allegations of the absence of an insurable interest.
We would like to quote the Ombudsman as follows:
Provided it is clear that there is no element of a wager, and no other defence for example misrepresentation or non-disclosure of material facts do not apply, the approach which will be adopted by this office is as follows:
- If the details of the true owner are disclosed to the Insurer or its representatives, then the claim should be accepted without any reservations.
- If the details of the true owner are not disclosed, then subject to certain facts, the Insurer will be approached to settle the claim (some of the facts are):
- that no ulterior motive is evident in arrangement of the Insurance on this basis
- that the Insurer would have accepted the insurance of the true owner on similar terms and conditions which do not differ to any great degree to those arranged
- that the insured person is prepared to sign over all the rights to the proceeds of the claim to the true owner.
- that the insured person suffers a financial loss if the vehicle be lost or damaged.
The Ombudsman has also confirmed that in terms of their jurisdiction, they are entitled to make a ruling that is to be based on the law and equity. At the risk of stating the obvious, a persistent and narrow view of insurable interest would be inconsistent with equity.
Advice to the car insurance client
We need to recognize that few car insurance policyholders are legal experts. There should always be a need to protect these consumers from bad financial advice or their poor understanding of legal jargon!
We would like to provide a few guidelines to assist these consumers:
- Try to gain an understanding of the terms and terminology in your insurance policy.
- If uncertain, ask! Request to gain clarification in writing to ensure that you are fully covered for what you believe should be covered!
- Do not be afraid to gain confirmation from a third party.
- Pay special attention to your disclosures of material facts such as regular drivers, risk area, usage of the vehicle etc.
- Keep all policy documents, addendums or any changes to the policy contract in a safe place along with any correspondence between you, your broker or insurance company.
Rest assured, if you believe you have been honest and you have a legitimate claim you can lodge a complaint with the Ombudsman for Short Term Insurance. Their mission states … “To resolve short-term insurance complaints, fairly, efficiently and impartially”