Insurable Interest

Insurable interest refers to an investment that protects anything subject to a financial loss. A person or entity may have an insurable interest in an event, item, or, action when the loss or damage of the insured object or person can cause a financial loss.

An individual or an entity would purchase an insurance policy to have an insurable interest to protect the person, item, or event. The risk of loss to the person or an object is mitigated with the insurance policy.

Types of Insurable Interest

Insurance interest applies to all insurance policies. Anyone purchasing insurance on any asset or person must prove their insurable interest in the wellbeing of the insured asset or person. Without such insurable interest, the insurance contract will not be legally enforceable by either insurer or the policyholder.

In the world of insurance, the following two types of insurable are at play:

1. Contractual interest

2. Statutory interest

Contractual interest would be those insurable interests where the interest exists due to an existing relationship between the proposer and the insurable asset or person. For example, you are buying insurance for the expensive home theatre system at home.

In the case of statutory interest, the insurable interest may not exist before the contract. So, the contract covers those insurable interest relationships that may arise in the future. Liability insurance policies are an example of such insurance. These policies cover the unexpected and unintended damages caused to unknown persons due to your product or conduct.

Thus, with contractual interest, the insurance contract will occur due to the clear insurable interest. Whereas statutory interest defines your public and third-party liabilities.

How does Insurable Interest Work?

Insurance is a legal-financial contract based on seven principles. One of these principles is insurable interest. Insurable interest defines whether you can buy insurance on a certain property or people. The principle is that you must have an insurable interest in the asset or person you want to insure.

For example, an employer can buy health insurance coverage for its employees, as employees having difficulty recovering from sickness may lead to extended financial loss to the company.

Further, the insurable interest works in tandem with the indemnity principle. For example, a bank lends Rs 1 lakh to a customer and gets an accidental cover on their life. The accidental sum assured cannot exceed the loan amount for such cover. While the bank has an insurable interest in the borrower’s life it is limited to the amount still owed by the consumer.

Insurance offers to cover your financial loss in case of any mishap in the future due to loss of your health or an asset. That is, you should not suffer due to an unforeseen loss arising from an unexpected event.

This principle of insurable interest ensures that the covered members can recover most of the financial loss. On the other hand, it also safeguards the insurer from unnecessary contracts and obligations.

The principle of insurable interest also applies to life insurance policies.

Example of Insurable Interest

For example, you and your colleague both come to your office in your respective cars. Now you can take insurance only for your car and not your colleague’s since if something happens to your car, you will face financial loss.

Another real-life example can be from a marine insurance contract, where goods change hands starting from the exporter to finally the importer. Most of the export contracts are FOB or freight on board, where the seller is responsible to deliver the cargo to the port or ship.

Thus, if the buyer has bought insurance on the goods with an FOB contract, the buyer’s insurable interest will arise the moment goods are either loaded on the ship or have cleared customs.

Also, if the seller has insured the goods, they can claim damages from insurance only if goods are damaged before loading or clearing the customs. If the seller has bought insurance for the goods all the way to the buyer’s door, the contract will be null and void if the sale is on an FOB contract.

Here the insurable interest is changing hands as the cargo changes hands as per the contract.

Is Insurable Interest Required for Insurance Policies?

Yes, insurance interest applies to all insurance policies. Anyone purchasing insurance on any asset or person must prove their insurable interest in the wellbeing of the insured asset or person. Without such insurable interest, the insurance contract will not be legally enforceable by either insurer or the policyholder.