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Teague-Strebeck Motors Inc. v. Chrysler Insurance Co.3/8/1999
The insurable-interest doctrine and the principle of indemnity share the objectives of "avoiding inducements to wagering, avoiding inducements to destruction of insured property, and avoiding net gain to an insured through receipt of insurance proceeds that exceed the loss suffered by the claimant." Keeton & Widiss, supra, § 3.4(b)(1), at 173.
{28} The concern about gambling arises from the recognition that almost any gamble could be recast as an insurance contract. To illustrate by an extreme example, in eighteenth-century England insurance policies apparently were sold on the lives of those on trial for capital crimes; the policies amounted to bets that the accused would be convicted and executed. See Jerry, supra, § 40, at 234. The insurable-interest doctrine provides a means to prevent such evasion of gambling laws.
{29} The second rationale-avoiding inducements to destruction of insured property-recognizes the problem of "moral hazard." If one's financial well-being would be enhanced by the loss of property rather than its preservation, there would be a temptation to destroy the property or, at least, to fail to take reasonable precautions to protect the property. This moral hazard arises whenever one can obtain insurance coverage on property for more than the property is worth to the insured. Given current societal attitudes toward gambling, the moral-hazard concern appears to be the stronger peg on which to hang the insurable-interest doctrine today.
{30} From the objectives of the insurable-interest doctrine, two Conclusions follow. First, the concern about moral hazard tells us that whether the insured had an insurable interest in property should be determined as of the date of the loss to the property. At the time of the loss, did the insured have an incentive to destroy the property or be lax in its care? The insured's incentive at some other time is irrelevant to the loss that actually occurred. Accordingly, New Mexico's insurable-interest statute speaks of "an insurable interest in the things insured as at the time of the loss." Section 59A-18-6(A); see Fulwiler v. Traders & Gen. Ins. Co., 59 N.M. 366, 374, 285 P.2d 140, 146 (1955) (interest "must be determined by the facts at the time of loss"). This is also the rule favored by commentators and most other jurisdictions. See Jerry, supra, § 44 ; Keeton & Widiss, supra, §§ 3.3(b)(2), (3).
{31} It should be noted that this rule renders immaterial any post-fire validation of the Purchase Agreement or Management Agreement in this case. Even if the bankruptcy court could retroactively validate the contracts between Mills-Strebeck and Tucumcari Chevrolet-Geo ab initio, the moral hazard must be evaluated in light of what was known at the time of the loss, when there had been no such validation.
{32} The second Conclusion that follows from the objectives of the insurable-interest doctrine is that the test for deciding whether the insured has an insurable interest should be the insured's factual expectations, not the technicalities of legal interests. Speaking roughly, if the insured faces a real risk of loss, Section 59A-18-6 should not bar coverage of the loss. Insurance coverage in such a circumstance is not a true wager, and moral hazard arises only if coverage is excessive (an issue that we defer discussing until the next section of the opinion). Thus, New Mexico has adopted the following formulation by the United States Supreme Court:
"It is well settled that any person has an insurable interest in property, by the existence of which he will gain an advantage, or by the destruction of which he will suffer a loss, whether he has or has not any title in, or lien upon, or p
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