Today, I want to turn to the Harper Test, which states that a captive must comply with the following three factors:
(1) whether the arrangement involves the existence of an “insurance risk”;
(2) whether there was both risk shifting and risk distribution; and
(3) whether the arrangement was for “insurance” in its commonly accepted sense.
I've already discussed the idea of risk shifting and risk distribution. For the next few posts, I want to focus on factors 1 and 3, starting with one, that the arrangement involves the existence of an "insurance risk."
Legally, insurance risk has three factors: an insurable interest, risk shifting and risk distribution and risk of loss. The following excerpts are from my doctoral dissertation and discuss insurable interest and risk of loss:
The historical
roots of this policy [insurable interest] date back to England when maritime insurance was
sold to an insured whether or not he had a personal or financial interest in
the ship or cargo. This sales practice “caused many pernicious practices,
whereby great numbers of ships with their cargoes, [were] either … fraudulently
lost or destroyed.”[1] The second root of the insurable interest
doctrine is judicial policy to prevent using insurance for gambling or
wagering.[2] During the 1800s, people purchased life
insurance on famous elderly persons as a way to speculate on the time of their
death.[3] This practice displaces the primary purpose
of insurance -- to protect the purchaser against unforeseen losses that
directly impact his personal or financial interests.[4] The third root of the insurable interest doctrine
is the prevention of waste[5] by
preventing non-essential insurance policies (such as those previously
mentioned) from being written.
A person has an
insurable interest in property “when he or she will derive a pecuniary benefit
or advantage from its preservation or will suffer a pecuniary loss or damage
from its destruction, termination or injury by the happening of the event
insured against.”[6] The interest can exist in law or equity[7]
and can be found in a legal interest that is slight,[8]
contingent or beneficial.[9] In fact, outright ownership or title of
ownership is not relevant to the inquiry.[10] Obviously, courts construe the interest very
liberally.[11] The amount of insurance purchased cannot be
disproportionate to the insurable interest or the court will rule the insurance
policy is a wagering contract and therefore void against public policy.[12]
...
The primary
purpose of an insurance contract is to transfer risk, which is an unforeseen
and uncertain event that is a “disadvantage to the party insured.”[1] The insured can’t prevent the risk from
occurring;[2] it
must be accidental[3] or “fortuitous,” also defined as
‘…an event which so far as the
parties to the contract are aware, is dependent on chance. It must be beyond the power of any human
being to bring the event to pass; it may be within the control of third
persons; it may even be a past event, such as the loss of a vessel, provided
that the fact is unknown to the parties.’[4]
Fortuitous
should not be confused with natural degradation or depreciation – which is
foreseeable but whose timing may be unpredictable.
In contrast, a fortuitous event is unforeseen and its timing is unknown,
thereby impacting the insured when he is less prepared to mitigate the damages.[5] The unknown or unforeseen element of the
fortuity definition is best explained by the three primary fortuity-related
defenses insurers offer to challenge an insured’s claim, the first of which is
the “known loss” defense, where an insurer will argue the loss had “already
occurred or [the insured should have known] the loss already occurred at the
time the policy was written.”[6] The second fortuity related loss defense is
the “known risk” defense, where the insured knew the probability of loss was so
high as to warrant some type of advance preparation or attempt to avoid the
event on the part of the insured.[7] “Loss in progress” is the third defense,
which the insurer will argue when the loss was preceding at the time the
insured purchased the insurance contract.[8] The one common element to all of these
defenses is actual or legally impugned knowledge on the part of the insured of
the risk actually occurring or having a statistically significant possibility
of occurring when he purchases the policy.
[1] 1A Couch
on Insurance Section 17.7
[2] Id
[3] Appleman, Section 1.05[2][a]
[4] Appleman, section 1.05[2][b]
[5] Id
[6] Id
[7] Id
[8] Id
[1] Robert
H. Jerry II, New Appleman on Insurance
Law Library Edition, © 2009 Matthew Bender and Co. Section 1.05
[2] 44 Am.
Jur. 2d Insurance Section 934
[3] Appleman, Section 1.05
[4] Id
[5] Id
[6] 44
C.J.S. Insurance Section 318
[7] Id
[8] Id
[9] 44 Am.
Jur. 2d Insurance Section 932
[10] Id
[11] 44 C.J.S. Insurance Section 319
[12] 3 Couch
on Ins. Section 41:2
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