The doctrine of Insurable Interest: Meaning and Case laws

In this article, we will discuss what’s insurable interest and matters incidental thereto.

The most significant principle when it comes to the enforceability of insurance contracts is the principle of insurable interest. It is the interest in the subject matter of the insurance.

This concept was developed later to distinguish insurance contracts from wagering contracts or speculative contracts. The doctrine of Insurable interest states that a person must have some interest in the subject matter of the insurance. This development in the law prevents people from randomly buying insurance and speculating on the risks involved.

Meaning of insurable interest

An insurable interest is an interest of such a nature that the possessor would be financially injured by the occurrence of the event insured against if not indemnified or compensated by the insurance.

In property insurance, insurable interest is any financial interest based upon some legal right in the preservation of the property. In life insurance, an insurable interest is any reasonable, expectation of financial loss arising from the death of the person whose life is assured.

Insurable interest could also be a relation between the insured and the event insured against, so that the occurrence of the event would result in substantial loss or injury of some kind to the insured.

According to Rodda, “an interest of such a nature that the occurrence of the event insured against would cause financial loss to the insured.”

The most commonly quoted definition of insurable interest is that of Lawrence J., in Lucena v. Craufurd,’ in which it was held that, “A man is interested in a thing to whom advantage may arise or prejudice may happen from the circumstances which may attend it and whom it imported that its condition as to the safety and other quality should continue, to be interested in the preservation of a thing, is to be so circumstanced with respect to it as to have benefited from its existence, prejudice from its destruction”

Who can bring action?

Any person can be said to have an insurable interest in the subject matter of the insurance where he has such a relation or connection with or concern in such property that he:

1. Will derieve pecuniary benefit or advantage from its preservation or,
2. Will suffer pecuniary loss or damage from its destruction, termination or injury by the happening of the event insured against.

Insurable interest example

A insured the life of B by paying a regular premium to the insurance company. The relation between them is that of an employer and employee. A being the employer of B has a substantial interest in the life of B and B’s death could financially affect A. Therefore, in this case, A has an insurable interest in B.

Prakash insures his vehicle and then sells it to another person. The vehicle is stolen after sale. Prakash’s claim of insurance will not stand as he has no insurable interest in the vehicle anymore. In other words, the loss of vehicle has nothing to do with any financial or pecuniary loss in the hands of Prakash as he already sold the vehicle and was paid for it. His insurable interest ceased to exist the moment he sold the vehicle.

Nature of Insurable Interest

Reading several decided case laws the following nature emerge out:

1. The interest must be lawful that is, it must not be illegal or something that is opposed by public policy.
2. Simple love and affection cannot be held to be insurable interest. There must be something pecuniary or more than sentimental.
3. The interest must be capabe of expression in terms of money i.e must be pecuniary.
4. It should not be limited to absolute ownership of property. In fact, it had nothing to do with ownership of property to be insured.

Presence of Insurable Interest

We now know what insurable interest means but suppose a person had insurable interest at the time of entering into the contract but ceased thereafter. Willl the claim for insurance succeed?

The presence of insurable interest differs in different types of insurance contract:

1. Life Insurance: The Insurable interest must be present at the time of taking the policy and not necessarily thereafter. For example: A, husband of Z takes out a life insurance of his wife. But after divorce his wife dies. A will still succeed in claim. One of the reasons being that the insurable interest existed at the time of taking the policy irrespective of it being in existence at the time of claim.
2. Fire insurance: In fire insurances the insurable interest must exist at all times. That is both at the time of taking the policy and at the time of claim. In other words, the interest in the property must exist throughout the duration. For example: A insures his house against fire and thereafter sells it to some person. With the sale of his property his insurable interest ceases to exist and he will not succeed in his claim anytime thereafter.
3. Marine and all miscellaneous: In all these insurance the interest must exist at the time of taking the policy. As regard to the marine inurance policy section 7 and 8 of the Marine Insurance Act, 1963 explains it all.

Liability of insurer without Insurable insurance

Insurable interest is the sine qua non for the valid insurance and without it there cannot be a contract of insurance. In case the insurable interest is absent and the insurance is still sold to the insurer and claim may fail but the compensation may arise depending on the circumstances of the case.

For example in the case of Liberty National Life Insurance Co. V. Welden, the nurse bought three policies of life insurance of the child from three different companies without the knowledge of the parents. The child was later poisoned to death. The nurse was prosecuted for murder and the insurance companies were made to compensate because they sod insurance to persons who had no insurable interest in the subject leading to such a sitaution.

Case laws

Griffiths v. Fleming is a well-known case on this topic. Griffiths and his wife signed a proposal form for a £500 joint life insurance policy on their lives, and they both contributed to the premium. The wife committed suicide, and the husband was entitled to the insurance payout. The insurer claimed that at the time the policy was taken up, the husband had no life insurance on his wife.

Vaughan Williams, LJ held: “The husband has an interest in his wife’s life which ought to presumed and that it is unnecessary to go, into the evidence to show any pecuniary interest of the husband…”

Macaure v. Northern Insurance Company is a nice example of this. In this example, one Macaura purchased fire insurance for the timber on his property. He sold the timber to a business in which he held the majority of the stock. Following that, the majority of the timber was lost by fire, and he asked that he be compensated. The insurance was successful in resisting the demand. The insured lacked statutory interest since, as a shareholder, he had no insurable interest in the business’s assets, even though he would suffer loss if the firm lost its property, and he lacked contractual interest because he could never and prove interest at the moment of loss.

Despite the fact that the insured had no statutory interest in the insurance, it was determined that it was not a wagering contract. “There was never a gaming contract, but this was an indemnification contract in which the assured must ever and prove interest at the time of the loss. This is a separate piece of insurance law from the Gaming Act, albeit the result of failing to prove interest is the same: the policy is unenforceable by uninterested assureds “Lord Sumner remarked. Because a shareholder has no insurable interest in the company’s assets, the contract will be void.