Jim said, "What the **** is Insurable Interest?!"

As an aviation insurance broker I'm often asked this question. I use a number of examples to describe this all-important insurance concept. Here are three.

1. Suppose you like your neighbor's house a great deal, so much so that you put a $100,000 fire policy on it. Two weeks later the house burns down.

� ��The carrier's adjuster asks the following questions:

�� Do you have an ownership interest in that house? You answer, "No".
�� Do you have a lease that gives you care, custody and control of the house and makes you responsible for the house? You answer, "No".

Start to see the problem?

2. Mr. Smith puts some earnest money down on a home and prematurely purchases a homeowners policy. The house burns down prior to the closing date. Mr. Smith's homeowner's policy will not pay because he did not suffer a financial loss---he still doesn't own the home.

3. Fred buys a car from a private owner. He writes a check, obtains a bill of sale, and then has a fender-bender on the way home. He was smart enough to call his agent and have the car added to his insurance policy prior to driving away with it. The claims adjuster runs a title search on the car. He learns the seller was not the registered owner---the car had been stolen. Fred had purchased a stolen vehicle! He did not legally own the car. The bill of sale was worthless, as was the insurance. Fred had no insurable interest in the vehicle, hence no coverage.

In all these cases the adjuster would say, "Sorry, the Named Insured listed on the policy has no legal ownership in the insured property. There is no insurable interest. Therefore we have no reason to pay your claim." Ownership or lease agreements are the typical methods one can use to establish an insurable interest in property.

Now let's apply the concept of Insurable Interest to Jim's L13 hard landing:

�� Was Jim the Named Insured on the policy? Yes.
�� Was the aircraft registered to Jim? No.
�� Had Jim tried to register the aircraft? No---he never got around to it.
�� Did Jim have a bill of sale from the registered owner? No---he had one from someone else.

It would appear the insurance carrier is on safe ground in denying the loss. Jim could not establish legal insurable interest. As far as the carrier was concerned Jim had no legal financial loss. Claim denied.

Recently a Canadian citizen contacted us to arrange insurance on a United States registered glider he was buying. He wanted to maintain the U. S. registration. We asked how he could do that and were told that he was going to have a U. S. citizen register it in their name for him. We had to advise him we could not offer him coverage as he would have no legal insurable interest in the glider and the policy would be worthless. We suggested he have the owner contact us for a quote, also pointing out the coverage would protect the legal owner and may not extend to him.

Frequently, we hear from pilots who want to put hull and liability insurance on an aircraft they are borrowing. They explain, "The aircraft owner doesn't carry insurance. The only way he'll lend me his aircraft is if I put insurance on it." We explain that the insurance policy would be worthless, as they have no insurable interest in the borrowed aircraft.

What they need is a non-owned aircraft liability policy, also known as Renter Pilot Liability Insurance. Such a policy provides protection from suits wherein another party may allege he has negligently caused them bodily injury or property damage while operating a rented or borrowed aircraft. Further, we suggested that the owner would be best protected with his own hull and liability policy that would approve the aircraft borrower as a permissive user pilot. The aircraft owner could expect no protection from the borrowing pilot's non-owned aircraft liability policy.

Insurance companies, believe it or not, don't invent ways to deny coverage right after a loss. Reasons are spelled out in the insurance contract. The concept of insurable interest is nothing new---it's been in existence for more than a hundred years. It applies to nearly all forms of insurance including auto, home, business and aviation.

If you look for the term Insurable Interest in your insurance policy don't expect to find it---it's a concept around which the policy is designed. It is also a legal term that courts have defined. The policy will contain definitions of such terms as Named Insured or You. It will have terms, conditions and exclusions that deal with ownership and changes in ownership.

What can be done to ensure that your insurance company recognizes your insurable interest in your aircraft at the time of the loss? Here are some common sense answers.

1. When buying the aircraft look at the current registration. See if the current registered owner and the seller are one in the same. If not, find out why.
2. Be sure the person you're dealing with has a legal right to sell the aircraft.
3. Prior to purchase, obtain a title search. The AOPA (800-654-4700) does this for a small fee.
4. Acquire a bill of sale.
5. Register the aircraft in the legal entity being set up to own the aircraft. (e.g. an individual, partnership, corporation, or trust).
6. Take out an insurance policy in the name of the legal owner (typically the name on the registration).
7. If taking care, custody or control of the aircraft by virtue of a lease agreement, set up the insurance policy in the name of the entity taking the aircraft into its possession. Be sure the entity leasing out the aircraft has the legal right to do so. Be sure to describe the lease, and what you are trying to accomplish with it, to the agent or insurer. This way, the agent and insurer can be sure the policy provides the protection desired.
8. If ownership changes (by taking on a partner, adding a lienholder, etc.) be sure to notify your insurance company of the change. Insurance companies have the right to know how the exposure to loss may have changed by a shift in ownership. This right is spelled out in most policies.

Insurance is purchased so we can transfer our risk of financial loss to an insurance company. But insurance carriers won't allow 100% of the exposure to loss to be transferred---they can?t collect enough premiums for that. They will only take a portion of the Named Insured's risk, and only provided there is an insurable interest.

Insurance companies, as well as insurance brokers want to see their clients paid for legitimate losses. They don't want the adverse public relations that accompany a denial---it's bad business. The insurance consumer has to be sure the policy is set up correctly for coverage to apply. After all, the broker and insurance company are only responding to the information supplied them by the client. Be sure to tell them to create an insurance policy in the name of the entity that has the insurable interest in the property being insured to avoid those nasty words, "Claim Denied. No Insurable Interest."

Soaring Magazine
November 2001