In Insurance, it is necessary to understand what is to be insured and whether it can actually be insured or not. To make matters easier, one point can be clearly stated at the outset and that is – “Only things with insurable interest can be insured”.
What Is Insurable Interest?
An individual has an insurable interest in something when any damage to it or loss thereof would make that individual endure a financial loss or some other kind of misfortune that has financial implications. Also, it is said to exist when the beneficiary or the recipient of benefits, has a financial tie to the insured person, object or thing.
Usually, ownership, direct relationship, or possession establishes insurable interest.
Is Insurance Contract Valid Without Insurable Interest?
In order to ensure that the contract of insurance is valid, 3 fundamental conditions need to be fulfilled. These are:
- Parties to the contract are competent to do so.
- It is made with lawful consideration and free consent.
- Insured should have an insurable interest on the subject matter under deliberation.
Hence, without the existence of insurable interest, there can be no legal insurance contract.
Types Of Insurable Interest
Basically, there are two types of insurable interest, these are:
- Contractual – this type of insurable interest exists when the contract requires its existence for effecting the policy.
- Statutory – this type of insurable interest exists when a particular statute dealing with insurance makes it a mandate.
Identifying Insurable Interest
- In Life Insurance – in life insurance, it is important that the person, privy to the contract, must have an insurable interest in the life of the individual, for whom the insurance is being taken. It is assumed that each and every individual has an interest in his or her own life. Similarly, in case of spouses, it is an accepted fact that husband has an insurable interest in the life of his wife and vice-versa. For this very reason, there is no insurable interest when people are in an intimate relationship which is not recognized by the law. Close on feet, in case of children, only if they are dependent then there is the existence of an insurable interest in the life of parents.
A creditor is said to have an insurable interest in the life of the debtor. For example, there are two partners in a firm and one has taken a personal loan from the other. In such a case, there is an existence of insurable interest but only to the extent of indebtedness. In simple words, the insurable interest exists only to the extent of the debt amount and when the debt is promised by a surety then on the life of the surety as well.
- In Goods Insurance – when it comes to goods or commodities the insurable interest is not just restricted to ownership. It can also arise due to possession or contract. A carrier or transporter has the legal liability to reimburse the bailor of goods for any loss or damage to them while in transit. Therefore, here the carrier has an insurable interest without any ownership of the actual goods. In the same manner, the warehouse owner has an insurable interest in the goods that are stored in his warehouse. Buyer has an insurable interest in the goods that have been identified. Similarly, a seller has an insurable interest in the goods so long as they maintain either a security interest or a title. Additionally, it is possible for both, buyers and sellers, to have it the same time.
- In Property Insurance – A property owner has an insurable interest in the property owned by him or her. This is because any loss to that property would result in a major financial loss to the policyholder. This interest does not exist on a neighboring property even if any loss or damage to it might bring down your own property’s market value. For this reason, you cannot take out insurance on your neighbor’s home. And neither can you do so on any other neighboring property be it commercial or historical.
The existence of insurable interest is mandatory to prevent people from making any profits from gambling or laying any bet. Had there been no insurable interest then it would have resulted in a gambling contract. Such contracts are against public interest. In all honesty, its existence prevents people from taking out a policy on life, property, and goods of others and then hoping for an early loss. The other fact is that the existence of this interest makes it possible to measure the amount of invested interest of the policyholder or the insured. Therefore, in the event of any loss, the payout will be in accordance.