INSURANCE
167. Insurance Defined. Insurance is the name applied to a contract, by the terms of which one party, in consideration of a certain sum of money, agrees to protect another to a certain specified degree against injuries or losses arising from certain perils. The kinds of insurance are almost as numerous as the kinds of perils to which persons or property may be subjected. The nature of insurance contracts are such that legislatures of the states have the power to define what classes of persons may engage in the insurance business. Some states provide by statute that only incorporated companies shall transact the business of writing insurance policies, and that these companies shall be subject to stringent state supervision and inspection. States have the right to stipulate upon what terms foreign insurance companies shall have the right to transact business within their borders, and may exclude them from transacting business if they refuse to comply with such provisions. The United States Constitution provides that interstate commerce shall be under the control of United States Congress. The Supreme Court of the United States has decided that insurance business is not interstate commerce. Therefore the states may determine upon what terms insurance companies may transact business within their territory. Unincorporated companies as well as individuals may engage in the business of writing insurance, if it is not provided otherwise by statute.
168. Nature of Insurance Contract. An insurance policy is a contract requiring competent parties, mutuality, consideration and all the elements necessary to make any kind of a contract. An insurance contract is peculiar in that it binds the insurer to pay damages for losses or injuries arising out of uncertain perils or hazards. It is in the nature of a gambling transaction. A large number of persons pool a portion of their assets, in order to pay losses of a certain character likely to befall only a small portion of the persons entering into the pool. For example, if ten thousand persons pay one dollar each to establish a common fund to protect the members against losses from fire, they do so under the belief and expectation that but few of the number ever will sustain loss from the peril of fire. An insurance contract is so closely akin to a gambling contract that persons are not permitted to take insurance on property, or upon the lives of persons, unless they have an individual interest, which they should have a purpose or interest in protecting outside of a mere disposition to wager. This interest is called insurable interest and is discussed under a separate section. It is true that many kinds of life insurance policies protect against death, and that death is an event certain to occur to the insured, but the real purpose of the policy is to give protection against the uncertainty of the time of death. The uncertainty of the thing sought to be protected against is as great in life insurance as in any kind of insurance.
169. Parties to Insurance Contracts. Primarily there are only two parties to an insurance contract, the party to be paid for the loss, in case the event insured against occurs, who is called the insured, and the party, who for a consideration agrees to pay an amount certain, or to be determined upon the happening of the uncertain event. This party is called the insurer or underwriter. In many insurance contracts, a third party is interested. For example, A may insure his life in B Co., for the benefit of his wife, C. C may have nothing to do with the contract except being named as beneficiary thereunder. She pays nothing for this benefit. It is a contract made for her benefit. After she has been made beneficiary, A cannot change beneficiaries without the consent of C. In case of C's death, A may voluntarily name another beneficiary. If A is indebted to B, and B, considering A insolvent, desires to secure the debt by taking out a policy of insurance on A's life in the C company, he cannot take out such a policy without the consent of A. While a third person may be interested in an insurance contract, or his consent may be necessary before the contract can be made, there are primarily only two parties to the contract, the insured and the insurer.
170. Kinds of Insurance. Probably the first kind of insurance written was marine. The next kind was fire; this was followed by life insurance, and this in turn, by the many varieties of modern insurance covering almost all kinds of hazards imaginable. The following kinds of insurance are in common use: marine, fire, life, accident, tornado, graveyard, fraternal, fidelity, boiler, credit, guaranty title, plate glass, mutual benefit, employer's liability, hail, hurricane and health. No attempt is here made to discuss all the different kinds of insurance. An endeavor is made to discuss some of the fundamental legal principles connected with the most common kinds of insurance. These principles apply to all kinds of insurance.
171. Insurable Interest. Courts refuse to recognize the validity of insurance contracts, unless the party taking the insurance has a pecuniary interest, present or reasonably expected, in the life or property insured. Such an interest is known in law as an insurable interest. Insurable interest cannot be exactly defined. It depends upon the circumstances surrounding each particular case. Some things have been decided by the courts to constitute an insurable interest. Cases are continually arising, however, which present new features which must be decided upon their merits. Insurable interest can only be described, it cannot exactly be defined. It is sometimes said to be a money or pecuniary interest possessed, or reasonably expected, by the party entering into the insurance contract. A father may insure the life of his child, of his wife, or his servant under contract for a period of service. A party cannot, however, insure the life of a person with whom he is in no way connected by close blood relationship, or upon whom he does not depend for present or future support. Such a contract is regarded as a mere wager, which a sound public policy refuses to enforce, or even to recognize as valid. A person may insure a growing crop, and the life of animals owned by him. A mortgagee, mortgager or pledgee of property may insure the property. A creditor may insure the life of his debtor; a person may insure his property against robbery. In fact a person may insure the life of a person or any property belonging to him or to another, the loss of which will cause him a pecuniary loss.
In case of life insurance policies, if there is an insurable interest at the time the insurance contract is made, the policy is valid, even though the insurable interest afterwards ceases. Any relationship, either by blood or marriage, close enough to make it of pecuniary advantage to the party taking the insurance to have the insured continue to live, is regarded sufficient to constitute an insurable interest. It has been held that a brother has no insurable interest in the life of his brother, nor a granddaughter in the life of her grandfather, nor a son-in-law in the life of his mother-in-law. A parent, however, has an insurable interest in the life of his child or wife; or a granddaughter in the life of her grandfather if she depends upon him for her support. A person may insure his own life or property in favor of any one else. The question of insurable interest arises only in case one endeavors to insure the life of another, or the property of another in which one has only a slight interest.
172. Forms of Insurance Contract. The states generally provide by statute, that to be enforceable, contracts to answer for the debt, default or obligation of another, shall be in writing (See Statute of Frauds, chapter on Contracts.) The courts have decided that an insurance contract is not a contract to answer for the debt, default or obligation of another, but a direct contract by which the insurance company for a consideration agrees to pay its own debt in case of loss on the part of the insured. Insurance contracts need not be in writing. Oral contracts of insurance like other simple contracts are binding upon the parties thereto. For example, A, representing an insurance company, meets B, and agrees orally to insure B's house from twelve o'clock of a certain day, and accepts the premium for one year's insurance. The house burns the evening of the day after the insurance is to become effective. A's insurance company is bound by the oral contract of insurance. If A is not permitted by his company to make oral contracts of insurance, and A so tells B, or if B knows of this fact, the contract is not binding, since A acts without authority. If A meets B on Monday, and orally agrees to procure for him a written policy of insurance on B's house to take effect from Monday noon, and B's house burns Tuesday morning, A having failed to procure the written policy of insurance for B, the insurance company is not liable to B for the loss. B had a contract with A by the terms of which A promised to procure a policy of insurance for B. A did not orally promise to insure the house for B. B has an action for damages against A, but not an action on a contract of insurance against the company.