2017

LAW OF INSURANCE

CHAPTER I - SYNOPSIS
 INTRODUCTION
The whole idea of insurance has developed on the fact that human life is full of uncertainties and
the life of a person itself is very uncertain. Eventualities do cast their shadows, and therefore one
has to equip oneself with possible means so as to face the unforeseen. It is well said that “Life is
full of risks. For property, there are fire risks, for shipment of goods, there are perils of sea, for
human life, there is the risk of death or disability and so on and so forth”. Insurable interest is the
fundamental principle of wide range of contracts of insurance. In insurance contracts it is
necessary that the parties to the contract are competent to enter into contract, the contract is made
with free consent and with lawful consideration. Apart from these the insured must have
insurable interest on subject matter of the insurance. Without insurable interest, the contract will
amount to wager. In broader term insurable interest means that there must be a specific
relationship of insured or policyholder with subject matter of the insurance, be it life or property.

In Lucena v Craufurd the most commonly quoted definition of insurable interest has been given
by Lawrence J wherein it was said that “A man is interested in a thing to whom advantage may

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arise or prejudice may happen, from the circumstances which may attend it…to be interested in
the preservation of a thing, is to be so circumstanced with respect to it as to have benefit from its
existence, prejudice from its destruction”1

Broadly one might say that when due to loss or damage to something, a person will suffer a
financial loss or any other kind of loss then it can be said that he has an insurable interest in it.
For instance, if the car of a man meets with an accident, he will have to incur the repairing cost
of the car or he will sell it in scrap and get a meagre sum in return. Here, he suffers a financial
loss thus gets a strong reason to insure his car. If there exist a 'reason', there also exists an
insurable interest in the subject of insurance.

The ruling rationale is that the interest should be an enforceable one.

To render a life insurance valid assured must have an insurable interest in such person’s safety,
and this interest must be of pecuniary nature.

 STATEMENT OF PROBLEM

The law on insurable interest is complex and often inconsistent. It is governed by different
statutes depending on the subject matter of the insurance. There is no single rule on whether an
interest is required and if so, whether it is required when the policy is taken out or when the loss
is suffered. Equally the rules on what constitutes a valid insurable interest vary according to the
subject matter of the insurance. There is a real need for clarity in the law.

So, the question that arises is whether a requirement for insurable interest is still necessary in its
present form. There are indications that it prevents legitimate insurance being taken out in
circumstances where it would be beneficial. However, abolishing the requirement altogether
could make it difficult to keep insurance separate from other forms of risk transfer or gambling.
We also need to consider the original purpose of the law – the prevention of moral hazard and
gambling in the guise of insurance. The question is whether these dangers still exist and whether
insurable interest is still necessary to prevent them arising.

1
Lucena v Craufurd CEC ((1802) 3 Bos & P 75, (1802) 127 ER 42 Ex Ch)

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 RESEARCH QUESTIONS

1. In the absence of insurable interest can there be any valid contract of insurance?
2. When is the insurable interest needed? Whether at the commencement of contract or at
the time of loss?

 HYPOTHESIS

Insurable Interest makes a contract of insurance valid and legally binding and in the absence of
insurable interest the contract of insurance will be void and will be considered as a wagering
contract and according to Section 30 of Indian Contract Act 1872, such kind of contracts are
void.

 OBJECTIVE

The objective of the research project is to analyze and examine the Meaning, components and
types and importance of Insurable Interest and to determine the time when it is needed in Life
Insurance Contracts, fire insurance contracts as well as marine insurance contracts.

 SCOPE
The project is limited to the general interpretation of insurable interest in the contract of
insurance and explanation of how it makes the contract of insurance different from wager. The
project does not deal with insurable interest in different types of contracts of insurance in detail.
The research is limited to the overview of insurable interest in the insurance contract and when
the insurable interest is needed in different kinds of insurance.

 RESEARCH METHODOLOGY
The researcher has used doctrinal method of research that is, extensive use of literary sources and
materials from internet and also conducted the study on a micro level to make the study more
objective and precise in relation to insurable interests in life insurance and other insurance
contracts. Secondary data were collected from books, articles published, etc. Collected data are
inspected and analyzed to make the study more meaningful

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CHAPTER II: DEFINITION, COMPONENTS AND TYPES OF

INSURABLE INTEREST
An insurance contract has been defined as an agreement between two or more parties in which
one party, the insured, pays a specific sum to the other, the insurer, in exchange for the latter's
indemnification for losses incurred as a result of certain risks, contingencies or occurrences
specified under the contract. Thus it is very clear that a contract of insurance is a contract of
indemnity, based on the principles of ‘uberrima fides’ and insurable interest. All insurance
contracts, except life insurance are contracts of indemnity.2

Insurable interest is one of the fundamental elements of an Insurance contract. The insured
should have an insurable interest in the subject matter of the insurance contract. In absence of
insurable interest, insurance would be called as wager and thus cannot be enforced by law. The
subject matter of the Insurance contract may be a property or an event that may create a liability
but it is not the property or the potential liability which is insured but it is the pecuniary interest
of the insured in that property or liability which is insured.

In Castellain v/s Priston, in 1883, it was said that in a fire policy, it is not the bricks or the
materials used in the building that is insured but what is insured is the subject matter of
insurance.

The insurable interest can be called as the pecuniary interest. The existence of subject matter
benefits the policy holder and death or damage to the subject matter prejudices him. Insurable
interest is not defined in the Insurance Act, 1938. Section 16 only contains reference to the words
‘insurable interest’. Insurable interest is defined under Section 7 of the Marine Insurance Act,
1963. It defines insurable interest as:

Insurable Interest is defined as “The legal right to insure arising out of a financial relationship
recognized under the law between the insured and the subject matter of Insurance”.3

2
Ksn murthy & dr.kvs sharma,modern law of insurance, 59 (Butterworths, 4th Ed.)
3
Section 7 of the Marine Insurance Act, 1963.

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 ESSENTIAL COMPONENTS OF INSURABLE INTERESTS

1) Some property, interest, right, life or limb must be capable of being insured.
2) Any of these above should be the subject matter of Insurance.
3) There must exist some formal/legal relationship of the insured with the subject matter of
Insurance. And he should benefit from its safety and well-being and be prejudiced if there is any
loss, damage to it.
4) Law should recognize the relationship of the insured with the subject matter of insurance.4

 TYPES OF INSURABLE INTEREST

It is said that contract of insurance is basically of two types: (1) Contractual (2) Statutory

Contractual Insurable Interest: Where the insurable interest’s existence is required by an

insurance contract for effecting the policy, such interest is called as Contractual insurable
interest. If insurable interest is absent, the insurance will be illegal or void and there can be no
effective agreement between the parties which dispense away with this requirement.

Statutory Insurable Interest: Where a particular statute that deals on insurance mandate an
insurable interest then such interest is known as statutory insurable interest. In some cases for the
validity of the policy, the law itself requires the interest in the subject matter of insurance, either
by express statutory law like in the Marine Insurance Act 1906 or as by section 30 of the Indian
Contract Act according to which all wagering contracts are void. Statue or the statutory holder
requires this interest.

In case of Macaura v Northern Assurance Company5, timber was insured against fire by one
macaura. He was a sole substantial shareholder in a company and he sold that timber to that
company. Thereafter due to fire the timber was destroyed so, he demanded to be indemnified.
The insurer refused to indemnify him. The insured did not have statutory interest in the assets of
the company although he also would suffer loss in loss of the company’s property, he didn’t even
have any contractual interest in the policy because at the time of loss he was not able to prove his

4
Kutty K Shashidharan, Managing Life Insurance(2008)
5
Macaura v Northern Assurance Co Ltd [1925] AC 619

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interest. Although there was no statutory interest of the insured the policy was not held as a
wagering contract because he had an interest being the sole shareholder.

CHAPTER III: CREATION OF INSURABLE INTEREST

Insurable interest is created in number of ways:
1) By Common Law: When there is automatic existence of insurable interest then it can be said
that Insurable Interest have arisen by common law. Owner of a building, car etc, has the right to
insure the property. Like the use or driving of a motor vehicle in a public place is sufficient
insurable interest for the purpose of effecting insurance in the favour of the third party.
2) By Contract: A person at times agrees for the liability of something and for which he would
not be liable ordinarily. For instance a tenant in a lease deed of house might be responsible for its
repair and maintenance. The tenant in such contract has legal relationship with the house and
thus has the insurable interest.
3) By Statute: Statutes sometimes grant some benefit or impose a duty and thus creating
insurable interest.

 WAGER AND INSURANCE

In wagering contract all the parties have interest only in the sum or stake that he will win or lose
and not in happening of the event. So the difference between the wagering and insurance contract
lies in the fact that insurable interest is required for the validity of every insurance contract.6

Without insurable interest, an insurance becomes a wager and therefore void.7 The risk of loss
which the insured might be exposed on the happening of certain event is insurable interest.
Whereas in wagering contract neither party runs any risk of loss except that which is created by
the agreement between two or more than two parties. In India wagering is illegal and against
public policy.

In case of Alamani v. Positive Govt Security Life Insurance Co8, the husband of the plaintiff had
taken an insurance policy on the life of a clerk’s wife working under him and after a week he
assigned the policy in plaintiff’s favour. After a month, the clerk’s wife died and the plaintiff

6
Rejda E George, Principles of Risk Management and Insurance(2011)
7
Logue D Kyle, Insurance Law and Policy: Cases and Materials(2017)
8
Alamani v. Positive Govt. Security Life Assurance Co. Ltd., (1899) ILR 23 Bom 191

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being an assignee claimed the sum assured. The court found that insurable interest was absent in
this case and thus this contract of insurance was held to be a wagering contract and thus was
void.

CHAPTER IV: INSURABLE INTEREST IN LIFE INSURANCE AND NON

LIFE INSURANCE

 INSURABLE INTEREST IN LIFE INSURANCE

Life insurance contract is not an indemnity contract and a person affecting a policy must have an
insurable interest in the life to be assured. The persons who are in relationship by marriage, by
blood or adoption have an insurable interest in the life of each other in life insurance policy.9

Few example of relationship which have insurable interest in the life of other:

1. In Parents life, child including the illegitimate child has the insurable interest and vice versa.
2. In husband’s life, wife has insurable interest and vice versa
3. In creditor’s life the debtor has insurable interest and vice versa
4. A company has an insurable interest in the life of manager or director or partners or other
employees and vice versa
In India, Insurable interest extends itself from pecuniary interest to sentimental interest or an
interest based on close family relationship. But insurable interest in own life of a person seeking
insurance is immaterial.10

 INSURABLE INTEREST IN NON LIFE INSURANCE

Marine insurance and insurable interest

The subject of the marine insurance is strictly speaking different from the subject matter of
insurance. In a contract of marine insurance, what is insured is not the property exposed to peril
but only the risk or adventure of the assured. From this it can be seen that what is really insured

9
Richmond S Douglas,Understanding Insurance Law(2012)
10
Vaughan M Therese, Fundamentals of Risk and Insurance(2013)

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is the risk of adventure that is the pecuniary interest of the assured in the subject matter in or in
respect of the property exposed to the peril and not the subject-matter itself.

Few instances which shows insurable interest of following person in marine insurance
policy:
 The insurer under a contract of marine insurance has a insurable interest in his risk which he may
reinsure.11
 The lender of money on bottomry or respondentia has a insurable interest in respect of loan.12
 The masters and the crew of a ship have insurable interest in their wages.13
Fire insurance and insurable interest
In case of fire insurance also, there is a requirement of insurable interest in the subject matter of
insurance. Absence of insurable interest makes the contract a mere wager. If the insurer suffers a
direct loss on destruction of the subject matter then he can be said to have insurable interest in
such property.

Few example of peoples those can have insurable interest in any insured property by fire:
1. Owner of the property , joint owner, sole owner, or a farm owning the property
2. Lessor and lessee both have insurable interest on any property
3. The mortgagor and mortgagee
4. Trustees are legal owners and beneficiaries the beneficial owner of the trust property and each
can insure it.

WHEN SHOULD INSURABLE INTEREST EXIST

The presence of insurable interest varies according to the nature of the contracts of insurance.
(i) Life Insurance -- Insurable Interest should exist at the time of commencement of Insurance
policy and not at the time of occurrence of risk or time of claim
(ii) Marine Insurance -- Insurable Interest is not required at the time commencement of policy
rather it is required should at the time of loss or claim.

11
Section 11(1) of the Marine Insurance Act 1963
12
Section 12 of the Marine Insurance Act 1963
13
Section 13 of the Marine Insurance Act 1963

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(iii) other property insurance -- Insurable Interest should exist both at the time of
commencement of policy as well as during occurrence of loss/ claims

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