The Principle of Insurable interest and it’s application on insurance contract
The principle of insurable interest is also a very fundamental principle and is one that has to be put on consideration when about to enter into an insurance contract.
Well before I begin to dive deep into this principle, I would just want to give a definition of the principle, the principle of means the legal right to insure, this could arise out of a financial relationship recognized under the law between the insured and the subject matter of insurance.
The existence of an insurable interest is a very essential ingredient of any insurance contract, hence it makes it an important and fundamental principle of insurance.
In a more simpler terms, this principle simply means the right to insure, in this principle, the policy holder must have a pecuniary or monetary interest in the property which he has insured.
It is worth noting that the subject matter of insurance can be of any property or an event that may have result in a loss of a legal right or creation of a legal liability.
Hence one can insure both his property which can be deemed tangible and non-tangible things, therefore we can say the essentials of insurable interest includes:
- There has to be some property, right, interest, liability or anything that has potential liability that is capable of being insured. That is to say there must be something that’s worth insuring before an insurance contract can be signed.
- Another essential of insurable interest to note is that while it’s agreeable that there has to be a property that is capable of being insured, that property should be the subject matter of insurance and it’s there that the company can bank on when trying to sign an insurance contract.
- Now while the property must be made the subject matter, there must be a form of cordially relationship between the subject matter and the insured. that is the insured must stand in a relationship with the subject matter of insurance whereby he benefits from it’s safety, well being or freedom from liability and would be prejudiced by the loss of the subject matter.
Let’s take for instance Mr. John wants to Insure his luxury car, now the principle of insurable interest would stipulate that the luxury car belongs to Mr John and he derives some sort of satisfaction from riding that sports car which is to his comfort.
- The relationship between the Insured and the subject matter of insurance must be recognizable by law, let’s say for example a man who runs a pimp shop cannot go to insure the business because the business is not recognizable by law.
So the key point to take home here would be the subject matter, for example the subject matter of insurance under a fire policy can be a building, stock, machinery.
While the subject matter under a liability policy can be a person’s legal liability for injury or damage, while in a marine policy the subject matter would be a ship.
Another key point to note is that any damage to the property must result in financial loss to the policy holder, only then can we say that insurable interest is said to exist.
However in as much as insurable interest is fundamental to an insurance contracts, they’re a number of ways in which insurable interest may arise or be limited and they includes:
- By Common law: Under Common law, insurable interest is automatically created by “Ownership” rights, because it’s similar to the common law of “duty of care” that one owes to the other may give rise to a liability which can also be insurable.
A very good example of this would be the owner of a tractor who depends on it for his agricultural operations would stand to lose financially of the tractor meets with an accident, as his business will come to a standstill.
Thus the owner has am insurable interest in the assets when insurance is purchased on it.
- By Contract: Sometimes insurable interest can also be created by contractual obligations. Let’s say for example, a lease agreement between a landlord and a tenant may make the tenant responsible for the maintenance or repair of the building.
this contract places the tenant in a legally recognized relationship to the building and as such it gives him insurable interest.
- By Statute: Although this isn’t really common but sometimes an act of parliament may create insurable interest either by granting a benefit or by imposing a duty.
Application of Insurable Interest
Now there has to be some scenario where an insurable interest can be applied and as such there are majorly three main categories to the application of insurable interest and they’re:
- Life
- Property
- Liability
Property: Insurable interest normally arises out of ownership where the insured is the owner of the subject matter of insurance, such as a car or a house.
Read more: conceptual clarification in simple terms
Sometimes there are some other financial relationship that may give rise to insurable interest although they do not involve full ownership, some of them includes:
- Part of joint ventures: wherein the join owner is treated as a trustees for the other owner of the subject matter of insurance.
- Mortgage: here the insurable interest that arise under a mortgage sale usually arise for the purchase form the Ownership of an assets and for the financial institutions as a creditor.
- Executive and trustees: Insurable interest also arises out of the legal responsibility that’s vested in them for the property kept in their charge.
- Agents: In the case of an agent, where the principal has insurable interest, his agent can effect insurance on his behalf.
Liability: Now the concept of liability insurance is very different from property and life Insurance, in this insurance it’s not possible to predetermine the extent of the insurable interest because there is no way of knowing how often one may incur liability and in such case what would be the monetary value of such liability.
Read more: The Indemnity Principle in Insurance
In other words, this implies that insurance interest is liability insurance is without monetary unit, but in practice it is possible to make a realistic judgement as to the maximum liability that may be incurred.
Hence it can be said that a person has insurable interest to the extent of any potential liability which may be incurred by way of damages and other cost.
Life: In some insurance articles, they tend to place this as the number one but I decided to make it the third one, why this is so is because every individual has unlimited insurable interest on his or her life. In life insurance context, insurance interest is deemed to exist in the case of certain relationship based on sentiment.
For example in the case of a husband and wife or a parent and child) this interest can also be deemed to exist when the member of a family are in business together and as such under the circumstances, it’s is not the family ties which enable the interest but the extent of financial involvement that creates insurable interest.
In this case, the business partner can insure each other lives because they stand to lose in the event of the death of any of them.
