Insurable Interest
Insurable interest refers to a financial interest or stake in the value of the property or an individual upon which a policy is purchased to safeguard against loss in case of occurrence of a particular event. The entity with insurable interest stands to lose if the damage or loss happens on the individual or property on which they have an insurable interest. Institutions or individuals purchase insurance policies to mitigate against such losses. Insurance policies cannot be bought by entities that do not have an insurable interest in the subject. For an insurance policy to be offered, the body must prove that they will suffer financial loss in case the event upon which they are purchasing an insurance cover occurs. Insurable interest in life insurance is based on an entity suffering economic losses or any other disruption if the person dies. Therefore, an individual undoubtedly has an insurable interest in his or her own life.
Do any of the following parties have an insurable interest in Jim or his property? If an interest exists, explain the extent of the interest.
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All the three entities, Barnacle Company, Suburban Bank and Land Shark Fishing Company, have an insurable interest on Jim's fishing boat, Jim's life or both. Jim's creditor, Suburb Bank, has an insurable interest in his life. It is acknowledged that a creditor has an insurable interest in the life of the debtor (Sferdian, 2014, p. 921). Suburb Bank's insurance interest on Jim's life originates from the fact that Jim owes the bank $700,000 plus also the interest accrued from the loan that he took from the bank to buy his fishing boat. If Jim dies, the bank will lose money owed to them by Jim. For the period that Jim keeps servicing his loan, the bank will still maintain insurable interest on him. However, the interest is limited to the period that he owes the bank money. The insurable interest ceases to exist as soon as Jim completes paying his loan.
Barnacle Company lease their docks for Jim to keep his boat hence they have an insurable interest on his boat. The interest exists because the Company will be held liable for any loss that occurs to Jim's boat while it's parked at the Company's docks. The company, therefore, has insurable interest because of their liability if a loss occurs while the boat is at their docks (Levin et al., 2016, p. 675). Damage to the boat may occur at the docks due to accidents or bad weather. Hence Barnacle Company will be forced to pay for damages and repairs to the boat. Even worse Jim's boat may be irreparably damaged while at the company's docks. Here the company will have to reimburse Jim the full value of his boat. If the boat gets stolen, Barnacle will be responsible for the loss. Hence Barnacle's insurable interest in Jim's property is from a loss that may occur due to damage or theft that may occur when the boat is at the docks. However, the interest is only limited to the period when the boat is at the dock.
Additionally, Barnacle has an insurable interest in Jim. If an accident occurs in the company's dock while Jim is there leading to harm, injury or death, the company will be liable. Accidents at the dock happen due to collisions between vessels, fires or undesirable weather. Injuries that may be sustained by Jim while at the dock will be medically covered by Barnacle. Hence, the wellbeing of Jim while at the dock makes the company have an insurable interest in him. Similar to his boat, the interest is only existent when he is at the company's dock.
Landshark Fishing Company's contract with Jim makes them hold insurable interest on Jim and his boat. Landshark's interest on the boat is due to it being used to ferry the company's crabs from one port to another. The company will incur financial losses in case events lead to the boat failing to deliver crabs to their destination. Such events range from accidents and piracy to oil spillages and theft. If the boat is hijacked at sea while loaded with the company's cargo, the company will be forced to pay the ransom to avoid losses that may occur due to the crabs going bad. Accidents are also a motivation for the company to hold insurable interest on the boat. If the boat capsizes with the company's crabs, Landshark will incur financial losses from such an accident. If theft occurs when the boat is carrying the crabs, the company also stands to lose its cargo. All these possibilities provide enough proof that the company has insurable liability on Jim's boat. The company is also set to benefit if the boat is in good working condition and delivers the crabs on time. However, the insurable interest of Landshark on Jim's boat is limited to Jim's contract with the company. Hence, the interest only holds to when the boat is delivering the crabs ports or returning to collect the crabs. The company is not liable for events outside the company's contract with Jim.
Jim's life is also of interest to Landshark Fishing Company. The Company benefits from Jim's well-being since he can deliver the crabs on time thus boosting the company's operations and revenues. However, if Jim is injured or dies due to accidents while working for the company, the medical cost will be covered by the company. The company will also be held liable for Jim's death either due to an accident or piracy while working for the company. Just as the company's interest on the boat is limited to the period during deliveries, Jim's life too is of insurable interest to the company at the time of him working for the company.
If Jim did not own the boat but operated it on behalf of the Landshark Fishing, would he have an insurable interest in the boat?
Jim's insurable interest on the boat is not limited to him owning the boat. He would have an insurable interest on the boat if Landshark Fishing Company was in possession of the boat. An individual retains an insurable interest in property he or she benefits financially from that property (Marker, 2013). The basis for his insurable interest on the boat is that the benefits economically from it. The boat earns revenue for the company thus enabling the company to reward Jim for his work. If Jim had no ownership of the boat, but it becomes grounded, the organization will not earn revenues hence Jim will not be enumerated. Additionally, if Jim manages the boat on behalf of the firm but instead causes the boat to be damaged, he will be required to incur the cost of repairs. Thus, Jim holds insurable interest on the boat even though he lack the ownership of the boat.
Risk Management
Explain the advantages and disadvantages of a partial retention program to the Balut Corporation.
Partial retention plan in risk financing explains an organization's policy to retain part of the risk due to the occurrence of an event leading to loss and transferring the remainder of the risk to an insurer (Irmi.com, 2017). The organization becomes responsible for any excess costs due to losses that occur above whatever is insured. The partial retention plan may be beneficial to Balut Corporation if the losses that the company incurs due to collisions are less than the amount paid as allowances by the insurer as stated in the premiums. As a result, the company will save the extra amount. Insurers hold some amount of money as cover against losses that corporation cover for particular events. With the partial retention plan, Balut is likely to notice increased cash flow since the money that would ordinarily be held by the insurer will now be available. Additionally, the company will cut expenses because they will be able to negotiate for lower premiums. A critical aspect of the partial retention plan is to reduce losses. Hence, should Balut adopt the program, it will be able to cut down on its losses due to collisions significantly.
Comparatively, the partial retention plan has its demerits. Implementation of the partial retention program requires careful analysis and near accurate forecasting before the plan is rolled out. However, the unpredictability of most events implies that it’s almost impossible to predict the costs accurately. Thus underestimation of the risks may occur resulting in unavailability of funds to cater for the loss if it occurs. Such an underestimation will adversely affect the operation of the corporations. Overestimation of the risk is also undesirable since excess money will be held for dealing with the speculated risk instead of the money being used in other productive activities. The company may also retain losses that are higher than what they may have paid for premiums if they had purchased an insurance policy.
Identify the factors that Balut Corporation should consider before it adopts a partial retention program for collision losses for company trucks
Balut Corporation needs to consider various factors before deciding to implement the partial retention program. The losses that the company will retain should be a key consideration. These losses should not exceed the expenses that they would incur if they decide to purchase an insurance policy for the risk. Additional costs on the implementation of the plan should also not be very high. Such additional costs include taxation and administrative expenses. Forecasts also need to be made on the frequency of collision losses and the severity of the losses. Finally, the maximum possible collision losses need to be compared with the maximum possible, likely collision losses. After considering all the factors, the management can make an informed decision on the implementation of the partial retention program.
References
Irmi.com. (2017). P artial retention - Insurance glossary/ IRMI.com . Retrieved on 4 January 2018, from https://www.irmi.com/online/insurance-glossary/terms/p/partial-retention.aspx.
Levin, J. M., Lewis, W. R., Phillips, C. M., Camp, J. A., Corcoran, K. M., Crawford, A. B., & Jannuzzi, M. A. (2016). Recent developments in property insurance coverage litigation. Tort Trial & Insurance Practice Law Journal, 51(2) , 667-698.
Marker, S. (2013). One can have an insurable interest in property without having a legal interest in the property. Property Insurance Coverage Law Blog | Merlin Law Group . Retrieved on 4 January 2018, from https://www.propertyinsurancecoveragelaw.com/2013/07/articles/insurance/one-can-have-an-insurable-interest-in-property-without-having-a-legal-interest-in-the-property/.
Sferdian, I. (2014). The risk of default and credit insurance. From Person to Society , 921-1033.
