How Principle of Insurable Interest Works
In the business of insurance the pertinent question that usually crops up into our mind is “Can anybody insure anything that he sees around?” To put it the other way round, who can insure and what? The answer relating to this pertinent question revolves around the Principle of insurable interest.
This principle asserts that only the person who has insurable interest -on a subject matter of insurance can insure that particular subject matter. It is not possible to effect a policy of insurance on a subject matter by somebody who has got no insurable interest on that subject matter. This insurable interest is virtually a legal right to insure.
It is the legal financial interest of a man on a property, the interest being such that by the safety of the subject matter he is benefited, by the loss, damage or destruction thereof he is prejudiced.
Actually, before the promulgation of certain Acts by English Parliament, it was not necessary to have insurable interest for the purpose of affecting a policy of insurance.
The notable Acts are The Marine Insurance Act, 1745, The Life Assurance Act, 1774 & the Gaming Act, 1845 that necessitated the presence of insurable interest.
Before that anybody could insure anybody’s life or property and the business of insurance became more of gaming and wagering.
The Marine Insurance Act, 1745 prohibited effecting policies of insurance on British ships or cargo without having insurable interest.
The Life Assurance Act, 1774 clearly provides that no insurance shall be allowed to be made by a person for his own benefit on the life of another unless the person effecting the policy of insurance shall have insurable interest on the life of that another. The Gaming Act, 1845 has made all contracts of gaming or wagering null and void.
Present day position, therefore, is this that insurable interest is necessary in every insurance contract. Insurable interest has best been defined by Macgillivray in the following way.
“Where the assured is so situated that the happening of the event on which the insurance money is to become payable would, as a proximate cause, involve the assured in the loss or diminution of any right recognized by law or in any legal liability, there is an insurable interest in the happening of that event to the extent of the possible loss or liability”. (Macgillivray on Insurance law).
Some provisions of law are considered below;
In the leading English case of LUCENA V. CRAUFURD (1806) it was said by the learned judge:
“A man is interested in a thing to whom advantage may arise or prejudice happen from the circumstances which may attend it; interest does not necessarily imply a right to the whole, or a part of a thing, nor necessarily and exclusively that which may be the subject of privation, but the having some relation to, or concern in the subject of the insurance, which relation or concern by the happening of the perils insured against may be so affected as to produce a damage, detriment, or prejudice to the person insuring ; and where a man is so circumstanced with respect to matters exposed to certain risks or dangers as to have a moral certainty of advantage or benefit, but for those risks or dangers, he may be said to be interested in the safety of the thing. 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. The property of a thing and the interest devisable from it may be very different; of the first, the price is generally the measure, but by interest in a thing every benefit or advantage arising out of or depending on such thing may be considered as being comprehended”. The students should try to realize how the concept of insurable interest was well grasped.
Section 5(2) of the Marine Insurance Act, 1906 (of the United Kingdom) lays down a clear concept of the principle of insurable interest when it says: “In particular a person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due arrival of insurable property, or may be prejudiced by its loss, or by damage thereto, or by the detention thereof, or may incur liability in respect thereof’.
The relevant provision of the Life Assurance Act, 1774 is as follows: “No insurance shall be made on the life or lives of any person or persons, or on any other event or events whatsoever, wherein the person or persons for whose use, benefit or on whose account such policy or Policies shall be made, shall have no interest, or by way of gaming or wagering”.
The situation that provoked the promulgation of the Life Assurance Act, 1774 by the British Parliament might be of interest to the students. Before the promulgation of this Act it was not necessary for an insured to have insurable interest on the subject matter of insurance.
Anybody could effect life insurance on any life, the result being that it became a common practice amongst the judges and jurors of the English judicial system to effect life policies on the lives of the suspected criminals brought for trial, where the maximum penalty could be death sentence.
Being motivated by policy money consideration, the judgment quite often used to be death sentence irrespective of the merit of the case, because only by giving death sentence they could realize policy moneys. The scandal went to such an extent that the Parliament had to enact the Life Assurance Act, 1774, prohibiting life insurance in the absence of insurable interest.
Insurable interest is a fundamental principle of insurance. It means that the person wishing to take out insurance must be legally entitled to insure the article, or the event, or the life. The happening of the event insured against, or death of the life insured must cause the policy holder financial loss.
Essentials of Insurable Interest
The following are the essentials of insurable interest;
There must be property, rights, interest, life, limb or potential liability devolving upon the insured capable of being covered by a policy of insurance.
Such property, right, life, limb, interest or liability must be the subject matter of insurance.
The insured must bear such relationship, recognized by law, to that subject-matter of insurance whereby he benefits by the safety of that subject-matter and is prejudiced by the loss, damage or destruction thereof.
When a person fulfills the above criteria or when a person has such a relationship with the subject matter, it is said that he has insurable interest and it is only then that he can insure.
One point is very clear from the above requirement and that is this that if the presence of such an insurable interest would not have been required and if anybody would have been allowed to effect a policy of insurance on anybody’s life or property in the absence thereof, then there would have been created intentional or deliberate losses solely for making gains without losing anything at all.
It is actually this principle, which is keeping the business of insurance absolutely free from gaming or wagering, or from creation of such a situation.
The subject of insurable interest will be further understood if we can create a distinction in between -“subject matter of insurance” and a subject-matter of insurance contract”. Subject- matter of insurance is nothing but the property that is being insured.
For example, it is life in life insurance, factory, machinery, stock, house, building etc. in fire insurance, ship, cargo etc, in marine insurance and so and so forth. But the subject-matter of insurance contract is indeed not the property as such but the insurable interest of a man in that property.
It was, therefore, rightfully commented by the judge in the leading case of Castellain V. Preston ( 1883 ) that in a fire policy it is not the bricks or materials or the house itself that a man insures, in fact it is the interest of the man in that house that he insures.
Examples of Insurable Interest
Insurable interest exists in the following cases;
Owners: Owners have got insurable interest to the extent of full value.
Part owners or joint owners: They have insurable interest to the extent of their part or financial interest.
Mortgagor/ Mortgagee: Mortgagor, being the owner of the property, has got insurable interest. Mortgagee, though not owner, has got insurable interest to the extent of the money advanced, plus interest and, an amount to cover up insurance premium.
Bailees: They have got insurable interest because of a potential liability being created if goods belonging to others get lost or damaged whilst in their custody.
Carriers: Like bailees, carriers have also got insurable interest in view of potential liability that might devolve on them for any mishap to the goods belonging to others, but whilst in their custody.
Administrators, Executors & Trustees: They have insurable interest in view of responsibility put on them by law.
Life: A person has got insurable interest in his own life. A husband has also got insurable interest in the life of his wife and vice-versa. No other relationship as such merits existence of insurable interest. However, insurable interest has been created up to £30 on the lives of parents, stepparents and grandparents, under the Industrial Assurance & Friendly Societies Act, 1948 & 1958 of U. K., for meeting funeral expenses.
Debtor and Creditor: A Debtor has insurable interest in his own life, but he has no insurable interest in the life of his Creditor. A Creditor on the other hand has insurable interest in his own life and he has also insurable interest in the life of his debtor to the extent of the loan, interest and something to cover up premium. This is because of the financial interest being created by advancing money.
Insurers: They have got insurable interest because of a potential liability undertaken from the insured under a policy, and this justifies taking out a reinsurance policy.
Liability: The creation of a potential liability justifies existence of insurable interest. The best examples are, third party motor insurance, public liability insurance, employer’s liability insurance etc.
It should be remembered that a person in the lawful possession of goods of another has got insurable interest so long he is responsible for the goods. Mere possession without responsibility does not carry any insurable interest. Similarly a person having illegal possession of goods has got no insurable interest, e.g., thieves.
One important point with regard to insurable interest is that it must be capable of being valued in terms of money. Sentimental value is no criteria.
When Insurable Interest Must Exist
The question as to when insurable interest must exist varies depending on the type of insurance. The position is as follows;
Marine: Insurable interest must exist at the time of claim although it need not exist at the time of effecting the policy. However, at the time of effecting the policy the insured must prove that he is going to acquire insurable interest soon. (Marine Insurance Act, 1906).
Fire: Insurable interest must exist both at the time of effecting the policy and at the time of claim.
Life: Insurable interest must exist at the time of effecting the policy and it may not exist at the time of claim. For example, if a creditor takes out a policy on the life of a debtor and subsequently the debtor pays back the loan, nevertheless, the creditor can continue the policy as per original terms and shall be entitled to sum assured either on death of the debtor or on maturity, even though at the time of claim there existed no insurable interest. (The rule was laid down in the English Case Dalby V. The India and London Life Assurance Co., 1854).
Accident: Like fire, insurable interest must exist both at the time of effecting the policy and at the time of claim.
It should be remembered that in the absence of insurable interest the contract should be void ab-initio.
Therefore, it is the duty of the underwriters to see the position of insurable interest at the time of issuance of the policy and similarly it is the duty of the Claims Manager to see the position of insurable interest at the time of settling a claim.