Is it Legal to Insure Something You Don't Own?

Adequate insurance is especially important for your most valuable property. Your home, car and valuables would be difficult, if not impossible, to replace if you were left to pay the full cost on your own. In some cases it's necessary to buy insurance for property you don't even own. However, in other cases insuring something you don't own an illegal form of fraud.

An automobile represents a significant portion of your wealth. Because accidents, theft and acts of nature can all reduce your vehicle to scrap metal, you need car insurance. But many drivers choose to acquire cars by financing them, making monthly payments for a number of years until they become outright owners. During the time you pay off an auto loan, the bank that lent you the money is a partial owner. Likewise, when you lease from a dealer the leasing company retains some right of ownership. As you make payments you build more equity in your vehicle by owning a larger percentage of it. But regardless of how much you own, you will need insurance to meet state requirements and protect yourself financially. You can also purchase temporary insurance to cover a vehicle that you borrow or rent but never own.

If you have a mortgage, homeowners insurance for your home functions similarly to auto insurance for a vehicle that you don't yet own. Regardless of your equity in the home, you're responsible for paying back your loan. Most lenders require mortgage borrowers to obtain homeowners insurance and keep it in effect until they finish paying off their loans. Lenders can also require homeowners to purchase private mortgage insurance, which usually applies to loans made with low down payments. Until the borrower builds up enough equity, usually around 20 percent, she must pay for insurance that protects the lender in the event of a default. Homeowners insurance with a mortgage and private mortgage insurance qualify as insuring something you don't own legally and responsibly.

In other cases, insuring something you don't own qualifies as insurance fraud. Insurance fraud is broadly defined as trying to receive payments that you are not entitled to. For example, if you have a homeowners insurance policy and attempt to add coverage for expensive jewelry that doesn't exist, you are committing insurance fraud because you would be able to make an inflated claim in the event of a fire that destroys your home and its contents. A similar case of insurance fraud would be insuring a non-existant car and then reporting it stolen to collect a payment from the insurance company. To avoid fraud, insurance companies usually require documentation of your property such as VIN from a car or appraisal reports for jewelry and other valuables.

A general rule of thumb for knowing whether you should insure something you don't own is the definition of insurance fraud; if you aren't entitled to a benefit, you shouldn't pursue an insurance policy or make a claim. However, when you're financially liable for property that you don't own, you're probably entitled to purchase insurance for it. Insurance agents can explain exactly what you can and can't insure, since fraud coats insurers who pay out fraudulent claims and can make them legally liable as well. Your state's insurance department is another source of information on insurance fraud and how to avoid it.