The principle of insurable interest is one of the essential elements of insurance. It can be defined as the substantial emotional, financial, or pecuniary interest in the subject matter of the insurance contract. It means the party stands to gain something from its existence or he will suffer a loss from its damage.
In an insurance contract, the party must have an insurable interest in the property, goods or life insured. It occurs due to the ownership, possession, or through a direct relationship with the life or object insured. Insurable interest must exist if the proposer and insured are two independent entities.
Essentials of an Insurable Interest
- The existence of the life (person), property exposed to loss, damage or a potential liability
- Such life, property, or liability must be the subject matter of insurance.
- The party must bear a legal relationship with the subject matter – a common logic will determine whether the proposer would suffer a loss or not.
- In life insurance, lack of insurable interest causes a moral hazard, and underwriters need to ensure the existence of insurance interest up to consideration only. Only one has an unlimited insurable interest in self-life but has a limited interest in the life of other people.
When an Insurable Interest Must Exist in Insurance?
- In Life Insurance: Insurable interest must exist at the time of purchasing the insurance policy.
- In Marine Insurance: Insurable interest must exist at the time of loss.
- In Property and other Insurance: Insurable interest must exist at the time of purchasing the insurance policy as well as at the time of loss.
Who Will Have an Insurable Interest?
In Life Insurance
Life insured: Every person has an insurable interest in his own life.
Family members: Spouse have an insurable interest in each other. Parents have an insurable interest on their children but children do not have an insurable interest on parents. There is no insurable interest between siblings.
Employer: The employer will incur a financial loss in case of the death of the insured; hence the employer has an insurable interest in the life of the employee. The death claim will be used for recovering the monetary loss arising out of the employee’s absence.
Creditor: The creditor can only avail after taking the consent of the insured debtor and the sum assured will be given to the extent of the debt.
In Marine Insurance
The insurable interest depends upon the nature of the sales contract.
For example, Mr. Ram sends the goods to Mr. Rajveer on a CIF basis which means the insurance has to be arranged by Mr. Ram. Therefore, Mr. Ram will have an insurable interest in the goods. If during transit, any loss occurs then Mr. Ram will be compensated for the loss.
In Property and other Insurance:
Property/ Goods’ owner: The ownership in the property/ good creates the insurable interest in that property/good.
The tenant, bailee, and financier can also have an insurable interest in the property.
Example: Mr. Aman is an owner of a flat. He has bought a fire insurance policy for the flat. Later he sold the flat to Mr. Bhanu. Thereafter, a fire took place in the flat.
Mr. Bhanu will not get compensation from the insurer as he did not purchase the policy. Also, according to the principle, Mr. Aman no longer has an insurable interest in the property (flat).
If you facing any problem related to insurance, then you must contact your insurance company with your complaint. If you need help with your insurance complaint, you can approach Insurance Samadhan.*
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