Insurance Law

DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY VISAKHAPATNAM, A.P., INDIA

Insurable Interest

Insurance Law

Lanka Venkat,

201129.

ContentsInsurable Interest......................................................................................................................................1

Insurance Law...........................................................................................................................................1

Hypothesis...................................................................................................................................................5

Research Question.......................................................................................................................................5

Historical Background:.................................................................................................................................5

Research Methodology................................................................................................................................5

Introduction.................................................................................................................................................5

Understanding the significance of insurable interest..................................................................................6

A. Avoiding gambling...............................................................................................................................6

B. Guarding against moral hazard............................................................................................................6

C. Controlling the sum insured................................................................................................................6

Studying the application of insurable interest.........................................................................................6

A. Insurable interest in life assurance..................................................................................................6

B. Insurable interest in property insurance.........................................................................................7

C. Insurable interest in liability insurance............................................................................................7

When does insurable interest begin to exist?.............................................................................................7

Understanding the common features of insurable interest....................................................................8

A. Insurer's insurable interest..............................................................................................................8

B. Insurable interest being enforceable at law....................................................................................8

C. Insurable interest in possession......................................................................................................8

D. Financial valuation...........................................................................................................................8

E. Assignment of insurable interest.....................................................................................................9

Principles of Insurable Interest....................................................................................................................9

Creation of insurable interest....................................................................................................................10

Wager and insurance.............................................................................................................................11

Types of insurable interest....................................................................................................................12

Time or duration of insurable interest...................................................................................................13

Insurable interest in life insurance contract..........................................................................................13

Few example of relationship which have insurable interest in the life of other................................14

Marine insurance contract and insurable interest.................................................................................15

Few instances which shows insurable interest of following person in marine insurance policy........15

Fire insurance and insurable interest....................................................................................................15

Few example of peoples those can have insurable interest in any insured property by fire.............15

Conclusion.................................................................................................................................................16

Bibliography:.............................................................................................................................................18

HypothesisInsurable interest is the one of the necessary condition important to create a legally binding valid

insurance contract and without insurable interest the insurance contract will be void and will be

seen as a contract of wager which is void as under Section 30 of Indian Contract Act 1872 .

Research QuestionCan there be any valid insurance agreement without insurable interest?

Historical Background:The development of the concept of insurable interest as a prerequisite for the purchase of

insurance distanced the insurance business from gambling, thereby enhancing the industry's

reputation and leading to greater acceptance of the insurance industry. The United Kingdom was

a leader in that trend by passing legislation that prohibited insurance contracts if no insurable

interest could be proven, notably the Life Assurance Act 1774 which renders such contracts

illegal, and the Marine Insurance Act 1906, s.4 which renders such contracts void1.

Research MethodologyThis project is basically non empirical or doctrinal research based. Sources are mainly books,

magazine, journals and web based.

1 www.claimshelp.co.nz/insurable-interest.

IntroductionInsurable interest exists when an insured person derives a financial or other kind of benefit

from the continuous existence of the insured object (or in the context of living persons, their

continued survival). A person has an insurable interest in something when loss-of or damage-to

that thing would cause the person to suffer a financial loss or other kind of loss.

Typically, insurable interest is established by ownership, possession, or direct relationship. For

example, people have insurable interests in their own homes and vehicles, but not in their

neighbors' homes and vehicles, and certainly not those of strangers.

Understanding the meaning of insurable interest the legal right to insure arising out of a financial

relationship, recognized at law, between the insured and the subject matter of insurance.

An insurable interest refers to the interest which the applicant has in the subject matter of the

insurance and is recognized by laws. The subject matter of the insurance refers to either to the

property of the insured and related interests associated therewith, or to the life and body of the

insured, which is the object of the insurance.

Understanding the significance of insurable interest

A. Avoiding gamblingIn any insurance contract, the insured must have insurable interest to the subject matter of

insurance. The law imposes the insurable interest on both parties (insurer and insured) to a

certain subject matter of insurance in order to avoid gambling.

B. Guarding against moral hazardMoral hazard is a kind of artificial hazard. It concerns the human aspects that may influence the

outcome. If a person who has no insurable interest to the subject matter of insurance can obtain

the indemnity from the insurer, he may intentionally make some artificial hazard.

C. Controlling the sum insuredThe proposer's insurable interest to the subject matter of insurance is limited to the maximum

sum insured. Any claim exceeding the sum insured is null and void and will be refused by

insurers.

Studying the application of insurable interest

A. Insurable interest in life assuranceThe applicant has insurable interests over himself or herself, his spouse, his children and his

parents. Other family members or close relatives, apart from the above mentioned, who have

relations of fostering, supporting and maintaining with the applicant exist insurable interest.

In Great Britain, parents cannot insure the children's lives, nor children can insure their parents'

life. In addition, certain people can insure the life of another person to whom they bear a

relationship, recognized at law, to the extent of a possible financial loss2.

B. Insurable interest in property insuranceIn property insurance, insurable interest often arises out of ownership where the insured is the

owner of the subject matter of insurance. Therefore the house-owner can insure his house. A

shopkeeper can insure his stock.

Another example is that mortgages, which are most common in the area of house purchase,

involve the bank (mortgagee) and purchaser (mortgagor). Both of them have insurable interest.

For example, if a house purchaser buys a house worthy of 6,00,000 rupees he pays his first sum

accounting for 40 percent of the total amount. The insurable interest for the bank is 360,000

rupees. Therefore the sum insured should be 360,000 plus the interest about 5% on yearly basis.

2 http://bm.gduf.edu.cn/

C. Insurable interest in liability insuranceIn liability insurance, a person has insurable interest to the extent of any potential legal liability

he may incur by way of damages and other costs. Liability to pay damages is based largely on

legal precedents. This means that whether a case is settled in or out of court, the damages

awarded against the insured will be calculated according to similar claims settled by the court in

the past.

When does insurable interest begin to exist?In marine insurance, the insured must be interested in the subject matter insured at the time of

loss, though he need not be interested when the insurance policy is issued by the insured. This is

particularly important in cargo insurance where the person holding the policy at the time the

cargo is lost need only show his interest at that time, not when the voyage commenced. This

follows from the customs of maritime trading that cargo may change ownership while it is in

transit.

Life insurance is different from marine insurance. Insurable interest in life insurance is only

required at inception. There is no requirement for insurable interest at the time of a claim. The

interest need only be valued at the beginning and so there is no requirement for insurable interest

at the time of a claim.

Understanding the common features of insurable interest

A. Insurer's insurable interestInsurance companies have insurable interest in their liability to pay claims to insureds. This

interest gives them the right to seek reinsurance. The company seeking to reinsure a risk is called

ceding company, or direct-underwriting company. The company accepting the risk is called

reinsurer.

The purpose for the insurance companies to buy reinsurance is to satisfy the statuted

requirements, to spread risks arising from uncertainty regarding future claims experience, to

obtain increased capacity, to finance new business, to improve financial efficiency, particularly

in respect of insurance company taxation and to take advantage of wider range of services

provided by the reinsurer.

B. Insurable interest being enforceable at law.If a policy is taken out without insurable interest, it means the insurance is unenforceable. If it is

a life insurance policy taken out as a gamble on someone's life, such policy would be void and

illegal.

C. Insurable interest in possessionLawful possession of property normally has insurable interest if that possession is accompanied

by responsibility. For example, if you have purchased a house or a car with your own money, the

house or the car is your property that is recognized at law. So you have insurable interest to the

house or to the car.

D. Financial valuationWith regard to other policies on the life of another, certain interests are capable of financial

valuation. For example, the creditor's interest on the life of a debtor is the amount of the debts,

plus interest and insurance premium. In other cases, for example, an employer in employee's life,

the interest must be in a reasonable sense capable of financial valuation in money. In Hong Kong

, the sum insured of an employee in employer's liability insurance may be one million HK

dollars.

E. Assignment of insurable interestAny assignment or transfer of that policy from one person to another may change underwriting

considerations, as the new holder of the policy may not have the same insurable interest.

Assignment of policy referring to transfer of rights can be carried out. But in the case of personal

contracts, it requires the consent of the insurer.

In general, assignment of personal contracts will only be valid with the consent of the insurers.

Therefore policies covering property and liability are not freely assignable.

Principles of Insurable Interest The Insured must have insurable interest in the subject matter of Insurance.

In the life insurance it is refers to life insurance.

In Marine Insurance it is enough if the insurable interest exists only at the time of

occurrence of loss.

In fire and general insurance it must be present at the time of taking policy and at the time

of the occurrence of loss.

The owner of the policy is said to have insurable interest as long as he is the owner of it.

It is applicable to all contracts of insurance.

The principle of insurable interest states that the person getting insured must have insurable

interest in the object of insurance. A person has an insurable interest when the physical existence

of the insured object gives him some gain but its nonexistence will give him a loss. In simple

words, the insured person must suffer some financial loss by the damage of the insured object3.

For example : The owner of a taxicab has insurable interest in the taxicab because he is getting

income from it. But, if he sells it, he will not have an insurable interest left in that taxicab.

From above example, we can conclude that, ownership plays a very crucial role in evaluating

insurable interest. Every person has an insurable interest in his own life. A merchant has

insurable interest in his business of trading. Similarly, a creditor has insurable interest in his

debtor. Insurable interest means an interest which can be or is protected by a contract of

insurance.

In the case of Brahma Dutt v. LIC one Mukhtar4 Singh a petty school teacher on salary of Rs 20

took a policy for Rs 35,000 on his life making false statements in the proposal and nominated a

stranger Brahma Dutt for the policy. The nominee paid the first two quarterly premiums by

which time the life insured died. The nominee intimated the insured's death and claimed the sum

assured. It was found on evidence that Brahma Dutt had taken the policy without any insurable

interest in the life of the deceased for his own benefit and that therefore it was void being a

wagering agreement.

Supreme court in case of Suraj Mal Ram Niwas Oil Mills (Private) Limited v United India

Insurance Company Limited and another5  held that the objection of the insurer about the non-

disclosure of dispatch of each and every consignment, as pointed by the second surveyor, learned

counsel submitted that the said condition has to be understood in the context of the fundamental

condition that the insurance cover was intended to secure only the "insurable interest" of the

3 https://www.nls.ac.in/4 www.lawnotes.in › Home › Indian Law › Supreme Court of India5 www.supremecourtcases.com

appellant in the dispatches. It was urged that the appellant had declared only those consignments

in which they had an "insurable interest" as in relation to dispatches which had not been

declared, the consignees had desired that their consignments should be dispatched without an

insurance cover.

In all such cases, the purchasers took the risk of loss to their goods, and hence the appellant had

no "insurable interest" in them, unlike in the consignment in question for which due declaration

was made. Reference was made to the decisions of this Court in New India Assurance Co. Ltd v.

G.N. Sainani,  and New India Assurance Company Limited v. Hira Lal Ramesh Chand & Ors 6 ,

wherein it was held that "insurable interest" over a property is "such interest as shall make the

loss of the property to cause pecuniary damage to the assured and under this case it will make a

damage to the interest of the insured.

Creation of insurable interestThere are number of ways in which insurable interest will arise or can be created. Few main

ways are -;

By Contract -In some contracts a person will agree to be liable for something, which he or she

would not ordinarily be liable for. A landlord is normally liable for the maintenance of property

he owns rather than the tenants. A lease may, however, make the tenant responsible for the

maintenance, repair etc. of the building. Such a contract places the tenant in legally recognized

relationship to the building. This gives him an insurable interest, which would not be present if

the contract had not been entered into so these kinds of special contractual relationships give

arise to the insurable interest on something on which otherwise one does not have any kind of

insurable interest.

By Common Law - Where the essential elements of insurable interest are automatically present,

the same can be described as having arisen at common law. The most straight forward example

is ownership. One can own a house, and there is therefore entitlement to insure it equally the

common law duty of care which one owes to the other, may give rise to a liability which again is

insurable. Like the use or driving of a motor vehicle in a public place is sufficient insurable

interest for the purpose of effecting insurance in the favour of the third party .

6 supremecourtofindia.nic.in

By Statute - Some time an act of parliament will create an insurable interest either by granting

some benefit or imposing a duty. While the statute may create insurable interest where none

would otherwise exist. There can be some statutes which can restrict liability and thereby also

restrict insurable interest.

Wager and insuranceIn a contract of wager all the parties does not have any interest in happening of the event other

than the sum or stake him will win or lose. This is what marks the difference between a wagering

agreement and a contract of insurance because every contract of insurance requires for its

validity the insurable interest.

Insurance affected without insurable interest is no more than a wagering agreement and therefore

void . "Insurable interest" means the risk of lose to which the assured is likely to be exposed by

the happening of the event assured against. In a wager on the other hand neither party is running

any risk of loss except that which is created by the agreement between two or more than two

parties.

We all also know that wagering is illegal in India and against to the norms of society or in short

wagering is against public policy and distinction between a insurance and a wager is this a

insurance is properly speaking a contract to indemnify the insured in respect of some interest

which he has against perils which he contemplates it will be liable to.

In case of Alamani v. Positive Govt Security Life Insurance Co7  the plaintiffs husband took a

policy of insurance on the life of Mehbub Bi, the wife of a clerk working under him and about a

week later got the policy assigned in the favour  of the plaintiff, Mehbub Bi died a month later

and the plaintiff as assignee claimed the sum assured and in this case court find that there was no

insurable interest present in this case and hence this insurance contract held to be contract of

wager and held to be void.

Types of insurable interestThere are basically two types of insurable interest (1) Contractual (2) Statutory

As we have seen in some cases that interest in the subject matter of insurance is required by law

itself for the validity of the policy, whether by express statutory law as in the Marine Insurance

7 www.consumercases.in

Act 1906 or as by section 30 of the Indian Contract Act  which merely declares that all

contracts by way of wager is void. This is the interest required by statue or the statutory

shareholder. If this agent is absent, the insurance is illegal or void and no agreement between the

parties dispensing with this requirement can be effective . In an action upon such a contract if the

insurer does not raise the plea of want of interest nevertheless   the court of its own motion

may refuse to enforce the contract.

Courts however, lean in favour of the existence of a valid interest as far as possible, so as to

render the contract enforceable . It has also been held in some cases that there is nothing illegal

about the insurer paying on policy without interest as the objection or want of insurable interest

is purely technical and has no real merit as between the insurer and the insured.

Let's take a case law in detail that will clear the picture of the difference between these two kinds

of insurable interest in the case of Macaura v. Northern Assurance Company8 one macaura

insured timber in his estate against fire. He sold timber to a company of which he was the sole

substantial shareholder. Thereafter most of the timber was destroyed by fire and he demanded

that he should be indemnified.

The insurer succeeded in refusing to comply with the demand. The insured had no statutory

interest in the assets of the company though too he would suffer loss on the company losing its

property, nor he had any contractual interest under the policy because he could not prove interest

at the time of the loss. Though the insured had no statutory interest the policy was held to be not

a wagering contract because even being the sole shareholder he had a interest or better call

insurable interest in the property.

Time or duration of insurable interestThe time when the insurable interest must be present varies with the nature of the insurance

contracts. The question is whether insurable interest should exist at the time when the contract is

formed or should it also continue to exist until it is discharged but as we have seen in life

insurance the presence of insurable interest is necessary at the commencement of the policy

although it is not necessary afterwards, not even at the time of occurrence of risk.

8 www.the-laws.com/Encyclopedia

So it should be there in life policies at the time of taking the policy it need not exist at the time

when the lose take place or even when the claim is made under the policy. Life insurance

contracts are not strictly speaking contracts of indemnity.

In fire insurance it's required both at the commencement of the policy and at the time when the

risk occurs. In a sense, therefore it may be said that insurable interest is doubly insisted upon in

fire insurance. The insurance interest is necessary at both the times because it is treated as a

personal contract and also a contract of indemnity. And even the onus that the fire was

intentional is on the insure not on insured.

In a marine insurance contract the presence of insurable interest is necessary only at the time of

the loss. It is immaterial whether he has or does not have any insurable interest at the time when

the marine insurance policy was taken.

Insurable interest in life insurance contractAs we all know life insurance contract is not a contract of indemnity and a person affecting a

policy must have an insurable interest in the life to be assured .In the life insurance policy

persons having relationship by marriage (example, husband and wife), blood (example, father

and son) or adoption (example, adopted son and his mother), have been recognized as  having

insurable interest.

Few example of relationship which have insurable interest in the life of other1. Child has the insurable interest in life of parents and vice versa even the illegitimate

child.

2. Wife have a insurable interest in the life of husband and vice versa

3. Debtor have a insurable interest of the life of creditor and vice versa

4. Master have a insurable interest in the life of servant and vice versa

5. A company have a insurable interest in the life of manager or director or partners or other

employees and vice versa

6. Husband or wife have a insurable interest in the life of father-in- law or mother in law

and vice versa

7. Insurable interest in the life of grandparents and vice versa

8. Insurable interest of one person on his own life

Insurable interest in India need not be confined to a pecuniary interest. Sentimental interest or an

interest based on close family relationship may constitute a sufficient insurable interest. The

closeness of relationship operates as a protection to the life of the insured and does not place him

in the danger of being murdered . But when a person seeks insurance on his own life, the

question of insurable interest is immaterial.

There can also be no element of wagering, for whatever gain May accrue, will be by his death

and that is no gain. No man will gamble on his own life to gain a pyrrhic victory. And if

somebody commits suicide to get the benefit of claim for his beneficiary or relatives his claim

will not be entertained.

Marine insurance contract and insurable interestInsurable interest is a special requirement of the marine insurance contract and any valid contract

of marine insurance can be entered onto by person only if he has insurable interest in the marine

adventure.

And what is important for insurable interest is that (1) there should be a physical object which is

exposed to the marine perils and (2) the assured must have some legally recognized relationship

with that object in consequences of which he benefits by its preservation and is prejudiced by its

loss or damage.

Few instances which shows insurable interest of following person in marine insurance policy

The insurer under a contract of marine insurance has a insurable interest in his risk which

he mar reinsure .

The lender of money on bottomry or respondentia has a insurable interest in respect of

loan .

The masters of the crew of a ship have insurable interest in their wages.

So these example made the clear picture of insurable interest in marine insurance contract.

Fire insurance and insurable interestIn case of fire insurance those have insurable interest in fire insurance that will have damage or

loss if the insured property will have damage or loss due to fire.

Few example of peoples those can have insurable interest in any insured property by fire.1. Owner of the property , joint owner, sole owner, or a farm owning the property

2. Lessor and lessee both have insurable interest on any property

3. The vendor or the purchaser both have the right

4. The mortgagor and mortgagee

5. Trustees are legal owners and beneficiaries the beneficial owner of the trust property and

each can insure it.

6. Bailees such as carriers, pawnbrokers or warehouse men are responsible for the safety of

the property entrusted in them and so can insure it.

ConclusionTo be legally enforceable, all insurance contracts must be supported by an insurable interest.

Insurance contracts must be supported by an insurable interest for the following reasons. Purpose

of Insurable Interest.

To prevent gambling: insurable interest is necessary to prevent gambling. If insurable interest is

not required, the contract would be gambling contract and would be against public interest. For

example you can insure the property of another and hope for an early loss. You can similarly

insure the life of another person and hope for an early death. These contracts would be gambling

contracts and would be against public interest and public policy and so need to be checked and

stopped.

To reduce moral hazard: insurable interest reduces moral hazard. If insurable interest is not

required, a dishonest person could purchase a property's insurance belonging to someone else

and then deliberately cause a loss to receive the proceeds; but if the insured stands to lose

financially nothing is gained by causing the loss.

Thus moral hazard is reduced. In life insurance, insurable interest requirement reduces the

incentive to murder the insured for the purpose of collecting policy claim or anyone can set fire

his home to claim the fire insurance claim or one can kill any third person insured by him.

To measure the amount of the insured's loss in property insured Finally in property insurance

insurable interest measures the amount of the insured's loss. Most of the property insurance is

contracts of indemnity and the measure of recovery is the insurable interest of the insured. In the

event of loss, payment cannot exceed the amount of one's insurable interest as the principle of

indemnity shall apply.

The object of insurance in such a case is to indemnity the assured to the extent of the commercial

value of the thing lost It follows that unless the assured has a pecuniary interest in the thing

insured, no question of loss or indemnity shall arise. A person cannot therefore, insure a thing,

the loss of which cannot cause him any financial loss. A policy of insurance therefore is void if

the insured has no such pecuniary interest in the subject matter of insurance. Any person who

would suffer from the destruction of loss of a thing has insurable interest in that thing.

So after going through the project we find that there can be not valid insurance contract without

insurable interest and hence the hypothesis is proved and we can say that insurable interest is

essential for making any insurance agreement a legally binding insurance contract.

Bibliography: www.businessdictionary.com/definition/insurable-interest.html

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