Insurable Interest at The Time of Need and Application
Insurable interest: Basically, when a businessman says that he has an interest in a particular business or venture, what exactly is he talking about? He is only saying that he has some shares in the venture. This implies he has contributed financially to the business.
In discussing insurable interest, it will be pertinent to first differentiate the subject matter of insurance and the contract of insurance.
The property to be insured or person is referred to as the subject matter of insurance. This subject matter of insurance absorbs every physical subject, a person, financial right or liability, etc.
However, the financial compensation promised by the insurer is what is called the subject matter. This indicates that the things insured are the subject matter of insurance while the payments which the insurer promise to make in the outcome of loss is the subject matter of the contract.
What is the insurable interest definition?
Insurable interest is defined as the willingness or action undertaken by someone to purchase insurance for an individual or property as a safe guide against a future occurrence of unexpected loss or damages. In other words, insurable interest is the legal right to insure.
This definition is important because a person cannot have a binding insurance contract without being in possession of an insurable interest. It is the possession of insurable interest that distinguishes an insurance contract from gambling or wagering transactions.
History of Insurable Interest:
In the early sixteenth and seventeenth centuries of Britain, it was common for wager or gambling agreements to be legally enforceable.
Insurance contracts, however, were regarded to be in a different category as it was thought to be against public policy to enforce such contracts in the absence of insurable interest.
During the late seventeenth and early eighteenth centuries, this common law position become relaxed resulting in insurance policies without an insurable interest being issued and enforced.
In order to quell this situation and clarification of other aspects concerning this principle, legislation was enacted at various times.
This enactment includes the following.
A. The 1745 Act of marine insurance: The earliest types of insurance were almost exclusively concerned with marine and life insurance. This is why the legislation outlines this basic principle of insurance starting with the main classes.
The marine insurance act, of 1745 rendered illegal insurance on British ships and goods laden or to be laden on the unless insurable interest existed.
B. The Life Assurance Act. 1775: This act is mostly referred to as the gambling act. Its major objective was to avert total scandals of gambling policies that often affected the life of notorious criminals or military men.
The following important point arises from the act.
i. The Act. was limited to live assurance but specifically excluded reference to insurance of ships. goods merchandise.
ii. The Act. provided that the amount to be recovered under the assurance should not exceed the amount of insurable interest in the life or lives assured.
iii. Policies that affected the life of a person in whom the policyholder had no insurable interest, or by way of wagering, were illegal.
C. The marine insurance Act. 1788: Not until 1788 insurance contracts on goods, other than those on or for ships, could still be effected without insurable interest.
The marine assurance Act. 1788 was enacted to remedy the position by rendering illegal insurance without insurable interest on any ship or any goods, merchandise, effects, or other property.
D. The gambling Act. of 1845: The gambling Act, of 1845, rendered all wagering and gaming contracts void. Since any insurance contract arranged without insurable interest is nothing more than a wager, such contracts became completely useless and unenforceable.
E. Marine Insurance Act, 1906: This was a codifying statute consolidating virtually the whole law relating to marine insurance. Thus, it repealed the earlier Acts, of 1745 and 1788.
How Insurable Interest Arises:
Insurable interest comes up in the following settings
1. Insurance of the person: Every individual has an unlimited insurable interest in himself. In life and personal accident insurance, the person insured is usually the policyholder himself, so the question of insurable interest does not present any problem.
Legally, there is no limit to the amount of life assurance or personal accident that affects one’s life.
2. Insurance of other people: It is legal sometimes for a person to insure another in the following cases.
i. Husband and wife: Husband and wife are regarded as one and have one mutual unlimited interest in each other.
In addition to the common law provision, a wife is given specific statutory ability in England to assure her husband under the married women’s Property Act. 1882.
ii. Creditor and debtors: A creditor would lose if his debtor dies without paying the debt. Consequently, he has the right to assure the life of the debtor, but only to the extent of the loan at the time of effecting the insurance.
iii. Partners: Partners have an insurable interest in each other for when a partner dies his death could cause financial loss to the surviving partners. Therefore, they can ensure the life of each other.
3. Insurable property: Insurable interest arises in the property as follows, ownership, agent, mortgage, and Trustees.
Agents: An agent is a second party to a contract who works on behalf of his principal. He provides the principal possesses an insurable interest, an agent may affect insurance on his behalf. This legally is reckoned to be the position where a householder affects a policy that extends to cover the belongings of members of his family.
Mortgages: A mortgage has an insurable interest as the owner of the property, the mortgage has such an interest to the extent of the loan given.
Trustees: These are all persons entrusted with the estate and affairs of others. They have the right to ensure a property for which they are responsible. Where they acquire responsibility for goods by the operation of a will or by law, any existing insurance on the property is usually automatically extended to cover their interest.
Ownership: Full ownership confers an absolute right to insurable interest, However, in part or joint ownership, the insurable interest is strictly limited to financial involvements. A part-owner may insure the property for its full value. In doing so he is deemed to be acting as the agent of the other co-owner.
4. Insurance of Right of Interest: An employer undoubtedly has a financial involvement in the dishonesty of his staff; which will support his affecting a fidelity guarantee insurance. A shopkeeper has an obvious interest in defaults on the parts of credit customers which will enable him also to affect credit insurance.
5. Insurance of Liability: There is no difficulty in establishing insurable interest in liability insurance. Any person has an insurable interest in any potential liability he may incur. The following issues can arise,
i. Criminal Acts: the civil consequences of a criminal act can be insured against. A good example is a claim of damages from victims of a road accident where the motorist is being charged with dangerous driving. But it is not possible to ensure against any fines imposed, nor is it possible for a crime, e.g a murderer collecting the proceeds of a life policy on the life of his victims.
ii. Liability of others: An insured can affect a policy that extends to protect the interest of another, such as a private car policy that allows others to use the vehicle and be covered by the insurance.
When Insurable Interest must Exist:
A. General Insurance: for other classes of insurance other than marine and life assurance, insurable interest must exist both at the inception of the contract as well as at the time of loss.
B. Life assurance: insurable interest must exist at the inception of the contract but need not exist at the time of the loss. this was established in daily v. Indian and London life insurance company
C. Marine Insurance: Insurable interest must exist at the time of loss and need not o exist at inception. Marine Insurance Act, 1961 states that “The insured must be interested in the subject matter insured at the time of the loss though he needs not to be interested when the insurer is affected.
We have given a detailed meaning of insurable interest as the willingness or action undertaken by someone to purchase insurance for an individual or property as a safe guide against a future occurrence of unexpected loss or damages. In other words, insurable interest is the legal right to insure.
We also briefly talked more about the history of insurable interest In the early sixteenth and seventeenth centuries of Britain, it was common for wager or gambling agreements to be legally enforceable.
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