Table of contents
Meaning and Definition of Insurable Interest
Conditions of Insurable Interest
Rules regarding insurable interest in life insurance
Meaning and Definition of Insurable Interest
Insurable interest means that the insured should benefit from the protection of the insured object and the insured should suffer loss due to the loss of the insured object. In other words, insurable interest is such economic interest vested in an object. Whose security can lead to economic gain and whose loss can lead to economic loss.
Insurable interest has special importance in the insurance contract. Only by its existence can an insurance contract be enforceable in the eyes of law. If there is no insurable interest in an insurance contract, then that insurance contract will be like gambling and will have no legal value.
Insurable interest means that legal interest of the insured person in the subject matter of insurance due to which the financial benefit of protection of the subject matter of the insurance and its loss or destruction would cause loss to the insurer.
According to Riegel and Miller, "Insurable interest is an interest in which the holder suffers economic loss when the event of the insured interest occurs."
According to Maglivari, “On the occurrence of an event giving rise to the sum assured, the insured is in a situation which would have the foreseeable consequence of causing him loss or a violation of his statutory right, or a legal liability for that event. In this case, the insurable interest of the insured is to the extent of the loss suffered or the liability incurred by the insured.”
Conditions of Insurable Interest
To establish insurance interest in all types of insurance contracts, the following three conditions must be fulfilled,
(1) Subject-matter of insurance
The subject matter of insurance should be definite, such as life, property, freight liability, guarantee etc.
(2) interest and benefit
There should be a possibility that the insured may suffer loss if the disaster or event insured against occurs and may benefit if it does not occur.
(3) Legal relationship
The insured must have such a legal relationship with the insured that he benefits from its protection and is adversely affected by its loss or damage.
If the above conditions are not fulfilled then the insured cannot have an insurable interest in the subject matter insured.
Rules regarding insurable interest in life insurance-
(Insurable interest when, why and where.....?)
While getting life insurance, it is important to have insurable interest. Because in case of death of the insured person, the insurance money will go to his heir only. In relation to life insurance, the insurable interest can be divided as follows:
(A) Insurable interest in one's own life
(B) Insurable interest in the lives of others
(I) Proof is not necessary
(II) Proof is necessary
(i) business relations
(ii) family relations
(A) Insurable interest in one's own life
Every person has an unlimited insurable interest in his own life. The loss suffered by the insured or his dependents due to his death cannot be measured in money, hence there is no limit on the sum insured in one's own life insurance or personal accident insurance. In practice the ability to pay insurance premiums limits the total amount of insurance. The amount of insurance depends on the condition and income of the policy holder. The insurance premium may also be paid by a third party provided there is no speculative consideration.
(B) Insurable interest in the lives of others
There are two kinds of insurable interest in the lives of others
(1) where proof is not required, and
(2) where proof is required.
(I) Proof is not required
There are only two cases in which the existence of an insurable interest can be legally assumed and does not need to be proved.
(a) The wife has an insurable interest in the life of her husband.
(b) The husband has an insurable interest in the life of his wife.
(II) proof is required
Insurable interest has to be proved in the following cases-
i) business relations
The policyholder may have an insurable interest in the life of the insured by reason of business or contractual relationship. In this case, the amount of insurable interest is equal to the amount of inherent risk. As is clear from the following
(a) in the life of an employer of his particular employee—
On the death of a particular person the employer will not only be deprived of his services but will also have to face financial difficulties in appointing and training a person to replace such an employee. Apart from this, the dependents of the deceased employee will have to pay the outstanding amount. Therefore, to this extent the business has an insurable interest in the life of the particular employee.
(b) A surety has an insurable interest in the life of his surety—
If the surety dies, the surety is responsible for paying the outstanding loan and interest thereon. In this situation the insurable interest is limited to the sum of the outstanding loan, interest thereon and premium paid.
(c) A creditor has an insurable interest in the life of his debtor—
If the borrower dies before repayment of the loan, the lender suffers loss. The maximum amount of loss a lender can suffer is the amount of the outstanding loan plus interest thereon and premiums paid. Therefore, the maximum amount of insurable interest is this total amount.
(d) A partner has an insurable interest in the life of each partner—
The firm provides life insurance to all its partners, jointly or severally. On the death of any partner the firm has to pay the deceased partner's share of capital, goodwill, profits and operations, etc. and to this extent the firm has an insurable interest in the life of each partner. Similarly, all the partners have an insurable interest in the life of each partner.
(ii) Family relations-
If pecuniary interest exists between the policyholders and the life assured, then insurable interest may arise due to family relationship. Usually, while getting life insurance for relatives, if it is proved that the person getting the insurance has such a relationship with that person that he is dependent on him and is legally bound to him for his maintenance, then the coverable interest is covered. It can be assumed to exist.
Some examples of insurable interest on the basis of family relationship are as follows:
(a) If the father is completely dependent on his son, then the father has an insurable interest in the life of his son.
(b) If the son is dependent on the father, the son has an insurable interest in the life of the father.
(c) If an illegally married woman is completely dependent on her husband, she has an insurable interest in the husband.
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