Although there are several essential elements of a valid insurance contract, the most essential element is that the insured must have an insurable interest.
Insurable interest can be defined as the legal right to insure arising out of the financial relationship between the insured and the subject matter of insurance.
In other words, insurable interest means that the insurer must have a particular relationship with the subject matter of the insurance.
It refers to the interest that the insured has in the subject matter and is recognized by the law.
We can say a person has an insurable interest in the subject matter of an insurance contract if a loss or damage to the subject matter will cause the person to suffer a financial loss or some other loss.
Essential Features of Insurance Interest
1. Subject matter: For an insurable interest to exist, there must be some property, right, interest, or life capable of being insured.
For property insurance, the subject matter is the property that may get damaged upon the occurrence of an event, while for life insurance, it is the human life assured.
2. Financial interest: Another essential feature of insurable interest is that the insurer must have a financial interest in the subject matter.
By financial interest, we mean that he would benefit financially from the safety of the subject matter and would be prejudiced by the loss, damage, and destruction of the subject matter.
3. Legal recognized: This means that there should be a legally recognized relationship between the insured and the subject matter of the insurance.
Without any legally recognized between the insured and the subject matter, the insurance contract would certainly be rendered null and void.
Why is insurable interest Necessary?
Insurable interest is necessary due to the following reasons:
1. To prevent Gambling: Insurable interest is necessary to prevent gambling.
For example, if there is no insurable interest, a person can insure the property of another person and hope for an early loss.
However, with the presence of insurable loss, such a thing is not possible.
2. To guard against moral hazard: Moral hazard is dishonest behavior of the insured that can increase the probability of a loss.
For example, a dishonest person may take life insurance on the life of another person and deliberately kill the person since he did not have an insurable interest.
However, since all insurance contracts must follow the principle of insurable interest, such dishonest tendencies are reduced.
3. Measures the amount of the insured loss: In some specific types of insurance, the insurable interest measures the amount of the insured loss.
For example, in property insurance, the measure of the covering is the insurable interest on the insured.
So, the amount you get compensated for a property loss in property insurance is contingent on the extent of the insurable interest at the time of the loss. because
This is because insurance companies will not pay the insured more than his insurable interest on the property.
When Should Insurable Interest Begin To Exist?
The time when the insurable interest must be present varies with the specific type of insurance policy.
1. In marine insurance, the insured is not mandated to have an insurable interest at the inception of the insurance contract.
However, he must have an insurable interest at the time of loss, otherwise, he loses his claim.
2. For a life insurance contract, insurable interest is only required at the inception of the policy and not at the time of the claim or loss.
3. In property insurance, insurable interest must exist at the time of the contract and at the time of loss.
Dangers of taking an insurance policy without Insurable interest
If an insurance policy is taken without insurable interest, it means the insurance contract is unenforceable. That is, it cannot be enforced by law.
However, if the insurance policy is life insurance taken out as a gamble on someone's life, thsuchuca h policy would be rendered void and illegal, which means it has no legal validity and cannot be enforced in a court of law.
So, we can conclude that any contract of insurance on the life of any other person, or any other event whatsoever without insurable interest by the insured is null and void.
Examples of Insurable Interest
The following have been proven to have an insurable interest.
- The holder of a good title has an unqualified interest in that property.
- A creditor has insurable interest on his debtor to the extent of the debt.
- A partner in the business has an insurable interest in the life of a co-partner or co-partners.
- Spouses have an insurable interest in each other life to an unlimited amount.
Case study on Insurable Interest
To better understand the principle of insurable interest, Lets us take an example.
Question
John recently sold his 5 months car to James, and he no longer owns, drives, or looks after the car.
He forgot to cancel his motor insurance and has just learned that James damaged the car beyond repair in a motor accident.
If he claims his motor policy, what can he expect to receive from the insurance company?
Answer
John will not get anything from the insurance company. In motor insurance, the insurer is expected to have an insurable interest both at the inception of the policy and at the time of the loss.
However, in this case, John only had an insurable interest at the beginning of the policy but did not have an insurable interest at the time of the loss because he had sold the car and was no longer looking after the car.
Therefore, John will receive no compensation on the motor insurance policy