An insurable interest is an economic stake in an event for which an insurance policy is purchased to mitigate risk of loss. An insurable interest is a basic requirement for an insurance company to issue an insurance policy. Entities not subject to financial loss from an event do not have an insurable interest and cannot purchase an insurance policy to cover that event. Insurable interest is what makes an insurance contract legal and valid, and protects against intentionally harmful acts.
Insurable interest is present when an individual gets a financial or other type of benefit that is based upon the continuous existence of the insured (person taken the insurance policy). Therefore, a person has an insurable interest in something or someone when that loss of the insured would cause the person to suffer a financial or other type of hardship or loss.
To an insurance company, an insurable interest is the basic reason for issuing a legal insurance cover, to an insured (or beneficiary) it gives the legal right to enforce an insurance claim.
According to legal precedents:
Insurable interest is one of the foundations of insurance because, in its absence, insurance would be no different from gambling and (even if legal) would not constitute a binding agreement.
A policy that does not constitute insurable interest is considered to be void, as well as illegal. This is because the policy would be considered a wager, and could possibly even lead to intentional destruction or harm.
The word ‘wager’ literally means ‘a bet’ something stated to be lost or won on the result of a doubtful issue, and, therefore, wagering agreements are nothing but ordinary betting agreements.
Section 30 of the Indian Contract Act talks about wagering agreements, which reads as “agreements by way of wager are void”.
As per Section 30 in The Indian Contract Act, 1872
‘30. Agreements by way of wager, void.— Agreements by way of wager are void; and no suit shall be brought for recovering anything alleged to be won on any wager, or entrusted to any person to abide the result of any game or other uncertain event on which any wager is made. —Agreements by way of wager are void; and no suit shall be brought for recovering anything alleged to be won on any wager, or entrusted to any person to abide the result of any game or other uncertain event on which any wager is made.
An insurance contract is an arrangement in which one party, the insurer, accepts significant insurance risk from another party, the policyholder, to compensate the policyholder if a specific uncertain future event impacts the policyholder.
In case of contract of wager all the parties does not have any interest in happening of the event other than the sum or stake that will win or lose. This is what marks the difference between a wagering agreement and a contract of insurance because every contract of insurance requires for its validity the insurable interest.
Insurance affected without insurable interest is no more than a wagering agreement and therefore void. “Insurable interest” means the risk to lose for which the assured is likely to be exposed by the happening of the event assured against.
In a wager on the other hand neither party is running any risk of loss except that which is created by the agreement between two or more than two parties.
In case of Alamani v. Positive Govt Security Life Insurance Co [(1899) ILR 23 Bom 191] the plaintiffs husband took a policy of insurance on the life of Mehbub Bi, the wife of a clerk working under him and about a week later got the policy assigned in the favour of the plaintiff, Mehbub Bidied a month later and the plaintiff as assignee claimed the sum assured and in this case court find that there was no insurable interest present in this case and hence this insurance contract held to be contract of wager and held to be void.
There are two types of insurable interest
Where an insurance contract requires the existence of an insurable interest for effecting the policy, such interest is known as Contractual insurable interest while an insurable interest mandated by a particular statute dealing on insurance is known as Contractual insurable interest.
It is to be noted that the main purpose of buying insurance is to compensate for losses—the insured’s losses. To allow someone to be compensated for a loss that does not affect them financially would create a moral hazard. For what purpose would anyone take out such insurance unless they hoped to profit from it, and if someone hoped to profit from it, they may cause the loss, since the loss isn’t their loss. Indeed, if the loss doesn’t happen, they may make it happen, since they are continually losing the premium money. A morale hazard also exists, because even if they don’t cause the loss, they have no incentive to prevent the loss. Thus, the insured must have an insurable interest in the thing being insured.
Without an insurable interest, buying insurance would be gambling—paying premiums in the hope of making a profit, which is not only against public policy, but also against the purpose of insurance, which is to compensate you for your losses.
In case of Monarch v Water Fire and Life, plaintiffs, merchants and ware housemen had goods of third persons deposited in their ware¬house in the way of their trade as warehousemen. They had taken floating poli¬cies against fire with the defendants ‘on goods the property of the assured or held by them in trust or on commission’. Some goods were destroyed by fire and they claimed their full value and not limited to their lien on the goods to the extent of their charges for warehousing, landing and cartage. The insurers contended that plaintiffs had no insurable interest in the goods. It was held that the words in trust’ meant goods of customers which the assured held and not merely goods of which they might be trustees in the strict legal” sense, that the insured must make good the value of the whole of the goods destroyed which the plaintiffs must apply to cover their own interest and for the balance they will be trustees for the owners of the goods.
In case of New India Assurance Company Ltd vs Shri G.N. Sainani 1997 Indlaw SC 3348 it was held that the interest of the insured must exist in the case of marine insurance at the time of loss and the assured must have some relation to or concern in, the subject of the insurance. The service which the insurer offers is with reference to the goods and the insurable interest has to be in respect of the goods. To put it in other words, insurable interest in property would be such interest as shall make the loss of the property to cause pecuniary damage to the assured.
All insurance contracts must be supported by an insurable interest. Insurance contracts must be supported by an insurable interest for the following reasons. The main purpose of Insurable Interest is to prevent gambling, insurable interest is necessary to prevent gambling. If insurable interest is not required, the contract would be gambling contract and would be against public interest. For example you can insure the property of another and hope for an early loss. You can similarly insure the life of another person and hope for an early death. These contracts would be gambling contracts and would be against public interest and public policy and therefore, in the insurance police it is considered to be one of the most important aspect before policy issuance
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