An insurance concept that often gets misunderstood, despite underpinning every insurance policy, is insurable interest.
While it might sound technical, Willem Coetzee, CEO of Zenith, says the principle itself is quite simple.
“Simply put, you can only insure something if its loss or damage would cause you a financial setback,” Coetzee explains.
“So, if you do not stand to suffer financial loss directly from loss of or damage to an insured item, insurance will not cover such loss or damage. The lack of insurable interest, in essence, invalidates any expectation of indemnification. This requirement, Coetzee says, distinguishes insurance contracts from gambling, ensuring that policies are used to mitigate genuine risks rather than to speculate for unjustified profit.”
“Without insurable interest in property under a non-life insurance contract at the time of physical loss or damage, the cover is unenforceable.”
In the context of non-life insurance – which offers cover for motor vehicles and property, and legal liability– insurable interest typically arises through ownership or legal responsibility. For example, a person who owns a car or a house will have insurable interest in that asset, as they would suffer a financial loss if it were damaged in some capacity or destroyed.
Where things can become a little more complicated, says Coetzee, is in cases involving trust and corporate structures, layered ownership, or assumptions regarding financial interest. “At Zenith, where we serve high-net-worth individuals and families, we observe how complex asset ownership through trusts, companies, and co-ownership often creates uncertainty about insurable interest.”
For example, Family Trust A owns 45% of a holding company, which fully owns a subsidiary that owns a motor vehicle. If a trust beneficiary insures a vehicle of the subsidiary company in their own name, they will lack insurable interest. “Without a legal obligation towards the company owning the vehicle, the remote connection between the trust beneficiary and the vehicle does not constitute insurable interest and cover under the policy will not be enforceable” explains Coetzee.
To avoid this outcome, the entity that owns the property or has a legal obligation to insure the property should take out the insurance. “At Zenith, we accommodate complex ownership structures if the details are declared to us prior to insuring property so that cover can be structured to the unique needs of policyholders,” Coetzee says.
Another common mistake relating to insurable interest is attempting to insure furniture or other assets in a rented property. “Unless your lease agreement specifically states that you’re responsible for the landlord’s belongings, you don’t have an insurable interest in insuring those items,” Coetzee explains. “In that case, the landlord should be the one insuring these items. So, if you are contractually liable for any damage to the furniture or fittings in your rented home, make sure your policy covers this and that it’s clearly backed by a legal agreement.”
Then there is the issue of joint ownership, where two business partners may jointly own a vehicle, but only one is listed on the insurance policy. “In such cases the vehicle is deemed to be owned in a partnership and the partners can insure it jointly or in either of their names,” Coetzee notes.
One of the lesser-known requirements is that insurable interest must exist at the time of the insured event.
“If a policyholder sells an asset to a buyer, the buyer must pay the purchase price, and the policyholder must place the buyer in possession of the property in terms of the contract. The policyholder will retain insurable interest even after having received payment, but only up to the time of transferring possession. Should the policyholder have transferred possession of the property, but payment has not been received, the policyholder will retain insurable interest until having been paid,” Coetzee explains.
Problems arising from a lack of insurable interest are easily avoidable. “First and foremost, you should always disclose any ownership structures, joint ownerships, usage rights, contractual liabilities or third-party interests clearly and upfront, not after the fact,” says Coetzee. “An experienced adviser who understands your financial structure will then be able to identify any potential gaps to ensure you are properly covered,” he concludes.