This article has been written by Sneha Jaiswal currently pursuing BA LLB (Hons.) from Christ (Deemed to be University) Delhi NCR. This article examines the principle of insurable interest in the law of insurance. It also highlighted the nitty-gritty of the concept.
Due to the incidence and risk of expanded risks previously unknown to life, trade, and commerce, the necessity for insurance coverage is increasing today. Insurance is designed to protect a person against unforeseeable events that may be harmful to him. It assures him that he will not suffer any financial loss as a result of the occurrence of any unanticipated calamity affecting his life or possessions. Insurance is a contract in which one party guarantees to the other that he will not suffer loss, damage, or prejudice as a result of the occurrence of hazards defined to the particular objects that may be exposed to them in exchange for a sum, also known as premium, given to him, adequate to the risk. There must be some ambiguity as to whether the event will occur or not, or if the event is one that must occur at some point, there must be a doubt as to when it will occur.
Definition of insurable interest
The term “insurable interest” refers to a sort of investment that protects against financial loss. When the damage or loss of an item, event, or action will result in financial loss or other problem, a person or entity has an insurable interest in it. A person or entity with an insurable interest would purchase an insurance policy to cover the person, thing, or event in the issue. If something occurs to the asset, such as it being destroyed or lost, the insurance coverage would reduce the risk of losses.
Insurable interest is a condition for providing an insurance policy since it makes the entity or event legitimate, valid, and protected against malicious activities. People who are not at risk of losing money do not have an insurable interest. As a result, a person or corporation cannot buy insurance to protect themselves if they are not truly at risk of financial loss.
Understanding insurable interest
Insurance is a kind of risk pooling that protects policyholders against financial losses. Insurers have devised a variety of instruments to cover losses resulting from a variety of reasons, including automotive expenditures, health-care expenditures, lost income due to disability, death, and property damage.
Insurable interest refers to persons or institutions with a reasonable expectation of longevity or sustainability, assuming no unanticipated negative occurrences. This individual or entity’s insurable interest protects them against the possibility of a loss.
As an instance, homeowners and mortgage lenders both have an insurable interest in their properties. You can’t insure anything if you don’t have an insurable interest in it. Renters only have an insurable interest in their belongings, not in the building they live in. If you own something or would suffer financially if it was damaged or destroyed, you have an insurable interest in it.
Working principle of insurable interest
In this context, insurable interest has nothing to do with earning interest on a bank account or a fixed-income investment. Consider if you would lose money if someone or something in your life died, or whether you would lose money if a piece of property was destroyed. If you do, you may have an insurable interest in that person’s, group’s, or thing’s survival. And life and/or disability insurance, as well as property insurance, can safeguard that interest.
A typical requirement
Before providing a policy, all life insurance firms need the potential owner to demonstrate insurable interest.
Insurance contracts must include insurable interest to prevent people from profiting from the loss of something to which they have no connection. For example, if you see that your neighbour is a dangerous driver, you will not be able to purchase automobile insurance for their vehicle. You also can’t get life insurance for someone you don’t know.
Need of insurable interest in an insurance contract
It is not only essential for the insurance contract to be legitimate that the parties be competent to contract, that it is done with free consent, and that the transaction is legitimate, but it is also essential that the insured has an insurable interest in the subject matter of the insurance. If there is no insurable interest, the contract will be considered as a wager. Insurable interest, in basic terms, indicates that the insured or the policyholder must have a specific relationship with the subject matter of the insurance, whether it be life or property insurance. In marine and life insurance, the idea of insurable interest is particularly important.
The definition of insurable interest is evolving all the time. The most generally mentioned definition of insurable interest is that of Lawrence J, in Lucena v. Craufurd (1806), in which it was claimed that “A man is interested in a thing to whom advantage may arise or prejudice may happen, from the circumstances which may attend it…to be interested in the preservation of a thing is to be so circumstanced with respect to it as to have benefit from its existence, prejudice from its destruction”.
In general, a person has an insurable interest in anything if its loss or damage would cause him or her to incur a financial loss or some other form of harm. For example, if your automobile is involved in an accident, you’ll either have to pay to fix it before you can drive it again, or you’ll have to sell it for scrap and settle for a low price to replace it. Here, you have a good motive to insure your automobile since you have suffered a financial loss. If the event occurs while driving a car that you do not own, you are not liable for any financial losses. You do not need to insure such a vehicle. You are considered to have an insurable interest in the topic of insurance if you have a “reason.”
The interest must be enforced, according to the guiding principle. The mere prospect of obtaining it is insufficient. It has been claimed that a party has an interest in an event if he stands to benefit if it occurs and loses if it does not. However, the benefit or loss must be based on some legal right, whether contractual, proprietary, legal, or equitable, that may be enforced in a court of law. Although the insurable interest must be legally enforceable, it is not the only condition, no matter how important it is.
A husband who lives with his wife has an insurable interest in her property because he is entitled by law to share her bliss in it, and she, no doubt, has an insurable interest in his property because their rights and responsibilities are substantially reciprocal. A shareholder, on the same basis, has no insurable interest in the company’s assets. While the sole shareholder in a one-man company will suffer some loss if the company’s property is lost, he has no insurable interest in it even if he is in possession of it, because his possession is not coupled with any legal right to enjoy the use of property, and he is merely an unsecured creditor of the company in his capacity as a creditor.
The mere possibility of harm is insufficient, and one cannot insure something only because there is a potential of a secondary benefit if it is not lost. A shareholder, on the other hand, can insure his ‘individual’ share, in which he has an insurable interest, against loss incurred as a result of the company’s failure to complete an undertaking.
Thus, the assurance against the loss that he may incur as a result of an accident to a third party may affect personal accident insurance. To make such insurance legal, the assured must have an insurable interest in the safety of the individual in question, and this interest must be monetary. As a result, a son whose father is a pauper and reliant on him does not have a sufficient insurable interest to justify a personal accident insurance policy on his father.
Types of insurable interest
Insurable interest can be divided into two categories. There are two types of insurable interest: contractual and statutory. Contractual insurable interest refers to an insurable interest that is required by an insurance contract in order to affect the policy, whereas statutory insurable interest refers to an insurable interest that is prescribed by specific laws dealing with insurance.
The term “insurable interest” is not defined in either the British Life Assurance Act of 1774 or the Indian Insurance Act of 1938 . As seen in certain circumstances, interest in the subject matter of insurance is needed by law for the policy’s legality, whether by specific statutory law, such as the Marine Insurance Act, 1906 of UK or by Section 30 of the Indian Contract Act, 1872 which simply proclaims that all wagering contracts are void. This is the statutory shareholder or the interest required by law. If this agent is not present, the insurance is unlawful or unenforceable, and no agreement between the parties may be successful in removing this need. If the insurer does not raise the plea of interest in a contract action, the court may decline to enforce the contract at its own discretion.
Let’s look at a case law that explains the distinction between these two types of insurable interests. In Macaura v. Northern Assurance Company (1925), one Macaura insured the timber on his land against fire. He sold timber to a business in which he held the sole substantial shares. After the majority of the timber was destroyed by fire, he requested that he be compensated. The insurer was able to avoid complying with the requirement. The insured had no statutory interest in the firm’s assets, despite the fact that he would suffer loss if the firm lost its property, nor did he have any contractual interest under the policy because he couldn’t show interest at the time of the loss. Despite the fact that the insured had no statutory interest in the property, the policy was found to be not a wagering contract since, as the only shareholder, he had an interest or, to put it another way, an insurable interest in it.
Time or duration of insurable interest
The period during which the insurable interest must be present varies depending on the kind of insurance contract. The question is whether insurable interest should exist at the time of contract formation or should it also exist until the contract is discharged; however, as we have seen in life insurance, insurable interest is required at the time of policy formation but not thereafter, not even at the time of risk occurrence. As a result, it should be included in life insurance plans at the time of purchase. It is not required to exist at the time of the loss or even when the claim is filed under the policy. Contracts of life insurance are not strictly stating indemnity contracts.
In the case of fire insurance, it is necessary both at the start of the coverage and when the risk occurs. In certain ways, it may be claimed that insurable interest is demanded twice in fire insurance. Because it is considered as both a personal contract and an indemnity contract, the insurance interest is required at all times. Even the onus of proving that the fire was set on purpose is on the insurer, not the insured. The presence of insurable interest is required only at the moment of the loss in a maritime insurance contract.
Who has an insurable interest
The simplest explanation is that the property owner has an insurable interest in it.
But what about multi-owner properties
In proportion to their ownership, they have an insurable interest in the property. If two individuals both own 50% of a house, they each have an insurable interest in 50% of the property.
However, insurable interest is a little more complex than simple ownership. If you own a property and have a mortgage, you and your lender are sharing an insurable interest. Although mortgage lenders do not possess a physical share of the house, they do have a monetary interest in it. Only if the homeowner is unable to make their mortgage payments will the mortgage lender be able to take possession of the property and sell it to recoup their losses. As a result, if the house burned down, they’d be in a terrible situation. They would have no method of collecting if the homeowner stopped paying and there was no house to sell.
As a result, homeowners must always include their mortgage lender on their homeowner’s insurance policy. As a result, the lender’s investment is protected in some way. However, insurable interest is not limited to homeowners; tenants also have an insurable interest in their property.
Renters, on the other hand, do not have an insurable interest in their house. They don’t lose any money if the building they reside in is damaged since it belongs to their landlord. There is one exception, if a renter’s flat is destroyed, they will be responsible for additional fees for temporary housing while their apartment is being rebuilt or while they hunt for a new home. A renters insurance policy may be able to cover these additional living expenses. However, this does not imply that the property is in insurable interest.
Renters, on the other hand, only have an insurable interest in the contents of their rented property, such as their furniture, clothes, and gadgets. As a result, renters insurance plans do not cover the structure; the landlord must have their own house insurance policy.
It is required for the person who is privy to the contract to have an insurable interest in the life of the person for whom the policy is being taken in order to effect a life insurance contract. Although it is difficult to define precisely what constitutes an insurable interest in a life insurance contract, it is a well-established legal concept that a life insurance contract must have an insurable interest linked to it. Allowing someone who has no interest in another person’s life to take out an insurance policy in his or her name is against public policy. The Life Assurance Act of 1774 mandates insurable interest in England, whereas it is necessary as a matter of public policy in America and India.
Insurable interest and India
There is no clause in India’s Insurance Act of 1938 that clarifies what insurable interest is. In the lack of any formal explanation, courts look to English and American judgements that are consistent with the society’s prevalent social, economic, and religious currents. Thus, in India, in addition to a spouse, wife, or other inclose family, any individual having a legal right to maintain a person can purchase a life insurance policy on the latter’s life without proving insurable interest.
Relationships arising from contractual transactions are another type of tie that gain insurable interest for the purpose of obtaining life insurance. As a result, a creditor has an insurable interest in the debtor’s life to the extent of his interest, and if the debt is guaranteed by a surety, the guarantor’s life as well. In one of the cases in North Carolina, it was held that “it was decided that a business partner has no insurable interest in the life of the other partner except when the latter is personally owed to him and only to the amount of that indebtedness”, in the case of Powell v. Dewy (1998).
The world we live in is full of hazards and uncertainty. Individuals, families, businesses, buildings, and investments are all vulnerable to various dangers. These include the danger of losing one’s life, health, possessions, and property, among other things. While it is not always feasible to avoid unfavourable occurrences from occurring, the financial industry has devised solutions that safeguard individuals and organisations from such losses by providing financial resources to compensate them. Insurance is a financial instrument that lowers or eliminates the cost of a loss or the effect of a loss caused by various risks. Provides financial security throughout one’s life. An insurance policy relieves strain and worry brought on by unforeseen negative situations. It makes a significant contribution to living a stress-free existence.
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