Unit 3 Db: Serving Whose Interests In Insurance Risk 080645
Unit 3 Db Serving Whose Interestsfin401 Insurance Risk Managemen
Describe the nature and purposes of the principle of insurable interest.
Do you agree or disagree with AIG’s denial of the claim? Why or why not?
Paper For Above instruction
The principle of insurable interest is a fundamental concept in insurance law that requires the policyholder to have a sufficient interest in the insured subject matter to ensure that the policy is not used for profit or wagering purposes. This principle aims to prevent moral hazard and moral peril, which can arise if individuals stand to gain financially from the occurrence of the insured event. Insurable interest is essential in establishing the validity and enforceability of an insurance contract, ensuring that the insured has a tangible stake in the preservation of the insured item or life, thus discouraging fraudulent claims and moral hazards.
The purposes of insurable interest include protecting the insurer from speculative risks, maintaining public confidence in the insurance industry, and ensuring that insurance acts as a device for risk management rather than profit. It also aligns the interests of the insured with the preservation of the insured’s property or life, thereby reducing the likelihood of moral hazard where the insured might intentionally cause or allow a loss to occur for financial gain.
Regarding the case of AIG denying Jim’s claim on James’s life insurance policy, the legality and ethical considerations revolve around the concept of insurable interest at the time the policy was issued. In this scenario, Jim had taken out a life insurance policy on James’s life four years before James’s death, making premiums payments to keep the policy active. However, AIG denied the claim based on the lack of insurable interest because Jim was not a dependent or had no economic interest in James’s life, and the sole beneficiary was Jim.
According to insurance law, insurable interest must exist at the time of policy issuance and at the time of loss. Since Jim and James were close friends and business partners, one could argue that Jim’s interest in James’s life was rooted in their partnership, especially given that James’s death could materially affect the business’s stability. However, the fact that Jim was not a dependent, beneficiary, or someone with a financial stake at the time of James’s death complicates the matter.
Based on legal principles, I tend to agree with AIG’s decision to deny the claim because Jim's insurable interest in James's life appears to be minimal and not rooted in dependency or pecuniary interest at the time of the insured event. Insurable interest traditionally requires a relationship that would cause a financial loss or some form of dependency upon the insured's life—such as family members or business partners with an economic stake (Cheng & Zeng, 2020). Since Jim’s interest was not established as such, the claim lacks foundational validity under the law.
Furthermore, the concern is that paying out on such a policy without genuine insurable interest could encourage moral hazard. Individuals might purchase insurance policies on others with whom they do not have a legitimate relationship, just to profit from their death, which undermines the purpose of insurable interest in maintaining the integrity of insurance markets (Mills, 2018). Therefore, the denial by AIG aligns with the legal requirements and protections designed to prevent insurance abuse, and I agree with their decision based on these grounds.
In conclusion, the principle of insurable interest ensures that insurance serves its primary purpose of risk mitigation rather than enabling speculative or fraudulent gains. The denial of the claim by AIG in this case appears justified because Jim lacked a sufficient insurable interest in James's life at the time of the insured’s death, thereby protecting the integrity of the insurance contract and the industry as a whole.
References
Cheng, M., & Zeng, L. (2020). Principles of Insurance Law. Journal of Insurance & Legal Studies, 45(2), 154-168.
Mills, P. (2018). Insurance Law and Legal Principles. Oxford University Press.