What is Insurable Interest?
In an Insurance Contract, the term ‘Insurable interest‘ refers to the legal right to insure arising out of a financial relationship, recognized at law, between the insured and the subject matter. The person taking an insurance policy must have an insurable interest in the property or life insured.
A person is said to have an insurable interest in the property, if he is financially benefited by its existence and is prejudiced by its loss, destruction or non-existence. Similarly, a person taking a life policy must have an insurable interest in the life of the insured person.
The insured must positively stand benefited financially due to existence or continuous of life; preservation of the object insured or he must suffer a financial loss on the happening of an event against which he seeks insurance. For example, an employer has insurable interest in the lives of his employees, a banker has an insurable interest in the properties mortgaged to it against a loan.
Features or Essentials of Insurable interest
There are at least five features essential to insurable interest:
1. There must be some subject matter to insure such as property, life or life. In fire insurance the subject matter of insurance can be buildings, stock or machinery; under a liability policy, it can be a person’s legal liability for injury or damage; with a life policy, the subject matter of insurance is the life being assured; in marine insurance, it can be the ship, its cargo or the ship owners, legal liability to third parties for injury or damage.
2. The insured must have some legally recognized relationship with the subject matter insured.
3. The insured must be benefited by the safety of the subject matter and he should suffer if the subject matter is lost, damaged or destroyed.
4. The subject matter must be definite and should be recognized easily, and
5. The subject matter should be measured in terms of money.
Who has an insurable interest?
The following persons usually have an insurable interest on the subject matter of insurance:
1. A person has an unlimited insurable interest in his own life.
2. A husband has an insurable interest in the life of his wife and vice versa.
3. A creditor stands to lose money if a debtor dies before repaying the loan and therefore has insurable interest to the extent of the loan plus interest.
4. Business partners can insure each others’ lives upto the limit of their financial involvement, because they would stand to lose on the death of any one of them.
5. Where a principal has insurable interest, his agent can effect insurance on his behalf.
6. Administrators, executors and trustees holding these offices are responsible for the property under their charge and therefore have an insurable interest.
7. A mortgagee has an insurable interest in respect of any sum likely to become due under the contract of mortgage.
8. A bailee has insurable interest in the properties or articles bailed.
9. Owner of the ship has an insurable interest in his ship and freight as he is likely to suffer financial loss in case of an accident or loss of ship.