PRINCIPLES OF INSURABLE INTEREST

INTRODUCTION

The practice of insurance is guided by six basic principles in addition to the basic contractual requirements discussed previously.

These basic principles i.e. insurable interest, utmost good faith, proximate cause, indemnity, subrogation and contribution were established and later many of them have been upheld by the courts with the strength of the law behind them, these principles have now become the foundation stones of modern insurance practice .

A person cannot gain an understanding of the practice of insurance without first understanding these basic principles or doctrines.

Therefore, starting from this unit, we shall deal with the principles of insurable interest, utmost good faith, proximate cause, indemnity, subrogation and contribution.

Insurable Interest

The term “Insurable Interest” refers to financial or pecuniary involvement capable of being insured. Hence it eliminates emotional attachment to property. Therefore the owner of a motor car may wish to decorate and fancy it as much as he does his home, but in practical business setting the car should be valued no more than its market value.

 Insurable Interest Defined

Insurable interest can be simply defined as the legal right to insure arising out of a financial relationship, recognized at law between the insured and the subject matter of insurance.

A contract of insurance is only valid in law if the insured has an insurable interest, that is, if he or she has a legally recognized financial relationship with the subject matter of the insurance and stands to lose out if that subject matter is damaged.

There are three keys in the definition of insurable interest:

1.  A legal relationship: The insurable must be recognized in law and must be based on same legal relationship. 
2. Financial loss: The insured must suffer financially if the property, liability or event involved is damaged from the occurrence of the insured event. 
3. There must be some property, rights, interest, life, limb or potential liability capable of being insured and must be the subject matter of insurance. 

Subject Matter of the Insurance

The subject matter of insurance can be any form of property or an event that may result in a loss of a legal right or creation of a legal liability. For example, under a fire and special perils policy. The subject matter can be buildings, machinery/plants, office furniture/fittings and stock-in- trade.

Under a public, it is the insured’s legal liability for injuring or damage to property. For life assurance policy, it is the life being assured. In the   case of marine insurance it can be the ship, the cargo or the ship owner’s legal liability to third parties for injury or damages.

Timing of Insurable Interest

In some types of insurance, insurable interest must exist at the time of purchase of the policy and in others insurable interest need not exist but must exist at the time of loss.



The Marine Insurance Act 1906 Section6 states that the assured must be interested in the subject matter insured at the time of the loss though he need not be interested when the insurance is effected. This follows the customs of maritime trading because cargo may change ownership while in transit.

In life Assurance, insurable interest is required at the inception. The case of Dalby V. The India and London Life Assurance Company (1854) set down the principle that the need only be valued at inception and as there is no requirement for insurable interest at the time of claim.

For other insurances because they are contract of indemnity require the insured to have suffered a loss before there is liability, insurable interest must exist at the time of loss.

The Gaming Act 1845 requires insurable interest at inception, since contracts without it would be wagers. Before this Act, it had been held in property contract that there had to be insurable interest at inception (Sadler’s Co. V. Badcock (1743)).

 Examples of Insurable Interest

It is not only sufficient for you to be able to define the principle of insurable interest but you must be able to understand its application to the everyday transaction of insurance. Therefore, we will look at the application of the principles of insurable interest to three of the more common forms of insurance i.e. life assurance, property and liability insurances.

Life Assurance

There is unlimited insurable interest in one’s own life and as such one can effect a policy for any sum assured. However, the cost of policy limits a person’s ability to insure his or her own life. Also, spouses have an interest in each other’s lives. In this way wives can affect policies on the lives of their husbands and vice versa.

A blood relationship does not automatically provide an insurable interest except in certain limited cases of industrial life insurance not so common nowadays.

A creditor has insurable interest on the life of a debtor but only to the extent of the indebtedness. A surety on the life of his principal, in case the latter should die and leave him liable for his debts.

Partners can insure each other’s lives up to the limit of the loss that they would incur if any of them should die.

Non-Life Insurance

The existence of insurance interest is less difficult to demonstrate on non-life insurances, because it normally arises either out of ownership is. property insurance or out of legal liabilities incurred to third parties. In liability insurance, there is an unlimited insurable interest against potential liability damages to third parties. The interests are determined by precedent and by the courts and no maximum value can be placed on them.

In property insurances, the insured has an insurable interest only to the extent of his legally enforceable financial interest. It has been established in law that the following are allowable interests:

1. An owner has an interest to the full extent of his ownership. Husbands and wives have a full insurable interest in each other’s property. A part or joint owner has an interest in the full value of the property, not just up to the extent of his ownership. 
2.  Executors and trustees have an interest in the property for which they have a legal responsibility. 
3.  A bailer can insure up to the value of the goods he holds. 
4.  A mortgagee has an interest to the extent of his loan. 

 CONCLUSION

Insurable interest is the first principle of insurance. The contract of insurance is only valid when there is an insurable interest. It is therefore necessary for you to understand this principle before proceeding to the other principles.

SUMMARY

Insurable interest is the legal right to insure out of a financial relationship recognized at law between the insured and the subject matter of insurance. The subject matter of insurance can be property or an event which might result in a loss of a legal right or the creation of a legal liability.

In some classes of insurance, insurable interest must exist at the time of purchase of the insurance and in others insurable interest is not necessary at the inception but must exist at the time of loss.

In Life Assurance, a person has unlimited insurable interest in his or her life. Husband and wife also have insurable interest on each other’s life. In Non-Life Insurance, an owner of a property has insurable interest in that property up to the extent of his legally enforceable financial interest. Also, husbands and wives have a full insurable interest in each other’s property.