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Insurable Interest on Life-Insurance and Non life-Insurance

Principle of Insurable Interest:

Insurable interest meansan interest which is protected by a contract of insurance. This interest is considered as a form of property in the contemplation of law. It is only the presence of Insurable Interest that distinguishes a contract of insurance from a wagering contract and hence it is sine qua non for the validity of the contract of insurance. All the statutes say that an insurance contract will become a wagering contract and hence void if it is taken place without an insurable interest. It is also defined as, When the assured is so stipulate that the happening of the event on which the insurance money is to be payable would as an approximate result involve in the loss or determination of any right recognized by law or in any legal liability there is an insurable interest to the extent of the possible loss or liability.

According to E. W. Patterson, Insurable Interest is a relation between insured and the event insured against such as the occurrence of events will cause substantial loss or injury of some kind to the insured. According to Rodda, Insurable Interest may be defined as an interest of such a nature that the occurrence of the event insured against would cause financial loss to the insured.

According to R. N. Ray, When the assured is so stipulated that the happening of the event on which the insurance money is to be payable would as a approximate result involved in the loss or diminution of any right recognized by law or any legal liability, there is an insurable interest to the extent of possible loss or liability. In Lucena v. Craufurd, Lawrence J defined insurable interest means if the event happens the party will gain advantage, if it is frustrated, he will suffer a loss.

Concept of Insurable Interest:

The existence of insurable interest is an essential ingredient of any insurance contract. It is a legal right to insure arising out of a financial relationship recognized under law, between the insured and the subject matter of insurance. Insurable interest means an interest which can be or is protected by a contract of insurance.

Supreme Court in case of Suraj Mal Ram Niwas Oil Mills (Private) Limited v. United India Insurance Company Limited & Another, held that the objection of the insurer about the non- disclosure of dispatch of each and every consignment, as pointed by the second surveyor, learned council submitted that the said condition has to be understood in the context of the fundamental condition that the insurance cover was intended to secure only the insurable interest of the appellant in the dispatches.

It was urged that the appellant had declared only those consignments in which they had an insurable interest as in relation to dispatches which had not been declared, the consignees had desired that their consignments should be dispatched without an insurance cover. In all such cases, the purchasers took the risk of loss to their goods, and hence the appellant had no insurable interest in them, unlike in the consignment in question for which due declaration was made.

Reference was made to the decisions of this Court in New India Assurance Co. Ltd v. G.N. Sainani [3]and New India Assurance Company Limited v. Hira Lal Ramesh Chand & Ors, wherein it was held that insurable interest over a property is such interest as shall make the loss of the property to cause pecuniary damage to the assured and under this case it will make a damage to the interest of the insured.

History of Insurable Interest:

Essentially, the insurable interest requirement typically functions as a safeguard to an insurer allowing the insurer to justify nonpayment after a covered occurrence has taken place. If the insurer can successfully prove the insured lacked an insurable interest in the property, a court will hold the insurance contract is void on grounds of public policy. Prior to 1745, a pecuniary or emotional interest in the subject of an insurance policy was not a requirement for the receipt of a payout from that policy and Roche J observed that there is nothing in the common law of England which prohibits insurance even if no interest exists.

Thus, insurance contracts were held valid, notwithstanding that the absence of an insurable interest gave the transaction the characteristics of a wager. In 1746, the English Parliament outlawed gambling contracts on marine insurance. And subsequently in 1774, Parliament extended this gambling prohibition to life insurance contracts as well. Accordingly, the original purpose of the doctrine was Parliament’s attempt to remit the use of insurance contracts as a vehicle to gamble. The insurable interest doctrine developed in response to the common law’s validation of such contracts in an effort to both prevent wagers on the lives of individuals and to quell attempts to destroy the subject of an insurance policy.

Nature of Insurable Interest:

The Court in Castellian v. Preston stated that an insured’s insurable interest is the object of the insurance and that only those who have an insurable interest can recover. To this, the court added that an insured could recover only to the extent to which his insurable interest had been impaired by the insured peril. In Lucena v. Craufurd, it has been pointed out that the interest must be enforceable by law. Mere hope, however strong it may be, is not sufficient. There is a requirement that an insurable interest must be in the nature of a legal right or liability. The insured must have a legal or equitable relation to the object insure.

Creation of Insurable Interest:

Basically there are three ways by which insurable interest will arise or can be created. They are (I) By common law, (II) By contract, (III) By statue. There are such automatically present elements of insurable interest common law is one of them.

For example, X own a house and there is obvious reason that he will take insurance of his house for his own interest. Insurable interest can be created by a contracts in which a person will agree to be liable for something, which he or she wouldn’t ordinarily liable for. If X gives his house on a lease to tenant then it will make the tenant responsible for repair, maintenance on the house etc. The contract wouldn’t be present, if parties had not been entered into a such kind of contractual relationship. Any act of parliament can also create some insurable interest by granting some benefits or imposing duty by which insurable interest can be created through statue. For example, there is a compulsory policy in the company to take insurance of employee by the employer of company.

When Insurable Interest Must Exist:

The nature of insurance contracts specifies the particular time period when insurable interest must be present. The question is whether insurable interest should be present at the time when the contract is formed or should it also remain to be present until it is settled. In life insurance the presence of insurable interest is obligatory at the commencement of the policy although it is not obligatory afterwards, not even at the time of occurrence of risk or even when the claim is made under the policy. Life insurance contracts are not contracts of indemnity. In case of Dalby v. India and London Life Insurance Co.

Court held that the insurable interest should be present at the time of the contract though not at the time of the loss in life insurance policies.

In fire insurance it is mandatory to have insurance interest at the commencement of the policy and at the time when the risk happens. In a sense, consequently it may be said that insurable interest is doubly asserted in fire insurance. The insurable interest is obligatory at both the times because it is treated as a personal contract and also a contract of indemnity. And even the onus that the fire was intentional is on the insurer not on insured. In a marine insurance contract the presence of insurable interest is necessary only at the time of the loss. It is irrelevant whether he has or does not have any insurable interest at the time when the marine insurance policy was taken.

Insurable Interest In Life Insurance:

The general rule is that every person has an insurable interest in his own life. Accordingly, a person may purchase a life insurance policy on his own life, making the proceeds payable to anyone he wishes. Life insurance contract is not a contract of indemnity and a person affecting a policy must have an insurable interest in the life to be assured. But when a person seeks insurance on his own life, the question of insurable interest is immaterial. Every person is presumed to have insurable interest in his own life without any limitation. Every person is entitled to recover the sum insured whether it is for full life or for any time short of it. If he dies, his nominee or dependents are entitled to receive the amounts.

In case of Liberty National Life Insurance v. Weldon, the aunt of the of a two year old child who was a nurse by profession, managed 3 life insurance policies by different 3 companies on the life of the child. One day she mixed some poisonous thing into the milk and by that milk child was died. And the lady claimed a huge amount from three companies. The father filed a case against all the insurance companies that without knowing the fact that whether she had any insurable interest in the life of child they issued the life insurance policies.

In this case Court held that the aunt has no insurable interest in the life of child therefore the companies were not liable but the companies are liable to pay compensation to father of the child. In the life insurance policy persons having relationship by marriage, blood or adoption have been recognized as having insurable interest.

Few example of relationship which has insurable interest in the life of other:
On one’s own life, Husband and Wife, Parent and child,

Contractual Relationship:

On one’s own life Every person is presumed to have insurable interest in his own life without any limitation. Every person is entitled to recover the sum insured whether it is for full life or for any time short of it. If he dies, his nominee or dependents are entitled to receive the amount.

Husband and wife:

With the due development of the life insurance business, just as a person is presumed to have a insurable interest in his own life, it is now well settled in England and America that a wife has a insurable interest in the life of the husband and vice versa. Husband and wife have an insurable interest of life of each other.

In case of Griffith v. Flemming, Griffith and his wife each signed a proposal from for a joint life policy on their life and both contributed towards the premium. After the policy was taken, the wife committed suicide and the husband claimed the sum assured. The insurer alleged that at the time of taking the policy the husband had no insurable interest in his wife’s life as required by the Life Assurance Act, 1774.

In this case Vaughan Williams L.J. held that the husband has an interest in his wife’s life which ought to be presumed’.

Parent and Child:

In England it has been laid down that a parent has no insurable interest in the life of the child because mere love and affection is not sufficient to constitute an insurable interest. If the parent has any interest in the life of the child, whether natural or adopted, he can take out an insurance policy in the life of such child.

In case of Halford v. Kymer, it was held that a father has no insurable interest in the life of his son unless he is getting some pecuniary benefit from him. Contractual Relationship:- A wide variety of relations may acquire insurable interest by reason of contractual and some of the common instances may be noted hereunder.

Debtor and Creditor:

Creditor has the insurable interest on life of the debtor to that extent on which amount he has the position to recover from debtor. It was held in case of Godsall v. Boldero, that if a creditor affects a policy of insurance upon the life of his debtor for greater amount than due, then he will not be able to recover any greater sum than the amount or value of his interest.

Bailor and Bailee:

A bailor has an insurable interest in the property bailed to the extent of possible loss.

The bailor has a potential loss from two sources. Compensation as provided for in the contract of bailment might be lost. Second, the bailee may be held legally liable to the owner if the bailee’s negligence cause the loss.

Mortgagee and Mortgagor:

The mortgagee has an insurable interest in the life of mortgagor to the extent of the property mortgaged. Employer and Employee:- An employee has an insurable interest in his employer’s life to the extent of his salary as held in case of Hebdon v. West.

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