Insurable Interest: Definition Types,

Example (Explained)

Insurable interest is a part an

entity’s value for which an insurance policy is purchased to
cover the risk of loss.
Insurable interest is a requirement for the issuance of an
insurance policy, making it legal, valid and protecting against
intentionally harmful acts.
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’ Insurance is a collection of risk exposure,
to protect policyholders from financial losses.
Types of Insurable Interest are;

 Fidelity Guarantee Insurance,

 Credit Insurance,
 Performance Bond.

Fidelity Guarantee Insurance

This type of policy covers the insured in respect of the loss
sustained by him arising out of fraud, defalcation or
dishonesty caused by the employee of the insured.
Usually, this type of insurance who either handle cash or hold
positions of trust covers those employees.
Four types of guarantees are in use depending on the class of
employees, viz., Commercial Guarantees, for persons other
than below;

 Court Bonds, for administrators, receivers, and other

appointments.
 Government Bonds, for trustees, customs, and excite
people. Guarantees For Local Govt. Officers.

Credit Insurance
The present-day international trade is mainly transacted on
credit basis and exporters can sustain heavy losses because
of the possible insolvency of the buyers of such goods or
because of protracted default in payment on the part of
buyers.
The main purpose of credit insurance is to provide financial
protection to such exporters arising out of nonpayment.
Payment of the value of the goods may not be possible for the
buyers because of the outbreak of war and because of the
restrictions imposed on remittances abroad.
In addition, there is always the question of the possible
insolvency of the buyer.
Export Credit Guarantee Scheme aims at providing cover to
the exporter (insured) arising out of (a) such political risks and
(b) insolvency of the buyer.
Performance Bond
These types of policies basically aim at providing protection to
those who are responsible under a contract to perform some
obligations within a specified time or as per certain pre-
determined standard.
If the performance cannot be made as per contract leading to
a loss for the principal, then the principal would have a right
under the contract for claiming damages or compensation for
the default of the contractor or the person who is to perform, a
certain obligation under the contract.
The situation may relate to, for example, construction of
buildings, roads, bridges, mills, factories etc., or may relate to
a loan agreement repayable as per certain terms and
conditions.
Such persons, sometimes of their own or sometimes at the
direction of the principal, are required to take such
Performance Bonds or Surety Bonds when insurance
companies stand as sureties or guarantors.

In the business of insurance,

the pertinent question that usually crops up into our mind is
“Can anybody insure anything that he sees around?”
To put it the other way round, who can insure and what?
The answer relating to this pertinent question revolves around
the Principle of insurable interest.
This principle asserts that only the person who has an
insurable interest -on a subject matter of insurance can insure
that particular subject matter.
It is not possible to effect a policy of insurance on a subject
matter by somebody who has got no insurable interest in that
subject matter. This insurable interest is virtually a legal right
to insure.
It is the legal financial interest of a man on a property, the
interest being such that by the safety of the subject matter he
is benefited, by the loss, damage or destruction thereof he is
prejudiced.
Actually, before the promulgation of certain Acts by English
Parliament, it was not necessary to have an insurable interest
for the purpose of affecting a policy of insurance.
The notable Acts are The Marine Insurance Act, 1745, The
Life Assurance Act, 1774 & the Gaming Act, 1845 that
necessitated the presence of insurable interest.
Before that, anybody could insure anybody’s life or property
and the business of insurance became more of gaming and
wagering.
The Marine Insurance Act, 1745 prohibited effecting policies
of insurance on British ships or cargo without having an
insurable interest.
The Life Assurance Act, 1774 clearly provides that no
insurance shall be allowed to be made by a person for his
own benefit on the life of another unless the person affecting
the policy of insurance shall have an insurable interest on the
life of that another.
The Gaming Act, 1845 has made all contracts of gaming or
wagering null and void.
Present day position, therefore, is this that insurable interest
is necessary for every insurance contract. Insurable interest
has best been defined by Macgillivray in the following way.
“Where the assured is so situated that the happening of the
event on which the insurance money is to become payable
would, as a proximate cause, involve the assured in the loss
or diminution of any right recognized by law or in any legal
liability, there is an insurable interest in the happening of that
event to the extent of the possible loss or liability”.
(Macgillivray on Insurance law).
Some provisions of the law are considered below;

1. In the leading English case of LUCENA V. CRAUFURD

(1806) it was said by the learned judge:
“A man is interested in a thing to whom advantage may
arise or prejudice happen from the circumstances which
may attend it; interest does not necessarily imply a right to
the whole or a part of a thing, not necessarily and
exclusively that which may be the subject of privation, but
the having some relation to, or concern in the subject of the
insurance, which relation or concern by the happening of
the perils insured against may be so affected as to produce
a damage, detriment, or prejudice to the person insuring ;
and where a man is so circumstanced with respect to
matters exposed to certain risks or dangers as to have a
moral certainty of advantage or benefit, but for those risks
or dangers, he may be said to be interested in the safety of
the thing. 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. The
property of a thing and the interest devisable from it may be
 very different; of the first, the price is generally the
measure, but my interest in a thing every benefit or
advantage arising out of or depending on such thing may
be considered as being comprehended”. The students
should try to realize how the concept of insurable interest
was well grasped.
2. Section 5(2) of the Marine Insurance Act, 1906 (of the
United Kingdom) lays down a clear concept of the principle
of insurable interest when it says: “In particular a person is
interested in a marine adventure where he stands in any
legal or equitable relation to the adventure or to any
insurable property at risk therein, in consequence of which
he may benefit by the safety or due arrival of insurable
property, or may be prejudiced by its loss, or by damage
thereto, or by the detention thereof, or may incur liability in
respect thereof’.
3. The relevant provision of the Life Assurance Act, 1774 is as
follows: “No insurance shall be made on the life or lives of
any person or persons, or on any other event or events
whatsoever, wherein the person or persons for whose use,
benefit or on whose account such policy or Policies shall be
made, shall have no interest, or by way of gaming or
wagering”.

The situation that provoked the promulgation of the Life

Assurance Act, 1774 by the British Parliament might be of
interest to the students. Before the promulgation of this Act, it
was not necessary for an insured to have an insurable interest
in the subject matter of insurance.
Anybody could affect life insurance on any life, the result
being that it became a common practice amongst the judges
and jurors of the English judicial system to affect life policies
on the lives of the suspected criminals brought for trial, where
the maximum penalty could be a death sentence.
Being motivated by policy money consideration, the judgment
quite often used to be death sentence irrespective of the merit
of the case, because only by giving death sentence they could
realize policy money.
The scandal went to such an extent that the Parliament had to
enact the Life Assurance Act, 1774, prohibiting life insurance
in the absence of insurable interest.
Insurable interest is a fundamental principle of insurance.
It means that the person wishing to take out insurance must
be legally entitled to insure the article, or the event, or the life.
The happening of the event insured against or death of the life
insured must cause the policyholder financial loss.
Essentials of Insurable Interest
The following are the essentials of insurable interest;

1. There must be property, rights, interest, life, limb or

potential liability devolving upon the insured capable of
being covered by a policy of insurance.
2. Such property, right, life, limb, interest or liability must be
the subject matter of insurance.
3. The insured must bear such relationship, recognized by
law, to that subject-matter of insurance whereby the
benefits by the safety of that subject-matter and is
prejudiced by the loss, damage or destruction thereof.

When a person fulfills the above criteria or when a person has

such a relationship with the subject matter, it is said that he
has an insurable interest and it is only then that he can insure.
One point is very clear from the above requirement and that is
this that if the presence of such an insurable interest would
not have been required and if anybody would have been
allowed to effect a policy of insurance on anybody’s life or
property in the absence thereof, then there would have been
created intentional or deliberate losses solely for making
gains without losing anything at all.
It is actually this principle, which is keeping the business of
insurance absolutely free from gaming or wagering, or from
the creation of such a situation.
The subject of insurable interest will be further understood if
we can create a distinction in between -“subject matter of
insurance” and a subject-matter of the insurance contract”.
Subject- matter of insurance is nothing but the property that is
being insured.
For example, it is life in life insurance, factory, machinery,
stock, house, building etc. in fire insurance, ship, cargo etc, in
marine insurance and so and so forth.
But the subject-matter of an insurance contract is indeed not
the property as such but the insurable interest of a man in that
property.
It was, therefore, rightfully commented by the judge in the
leading case of Castellain V. Preston ( 1883 ) that in a fire
policy it is not the bricks or materials or the house itself that a
man insures, in fact, it is the interest of the man in that house
that he insures.
Examples of Insurable Interest
Insurable interest exists in the following cases;
1. Owners: Owners have got insurable interest to the extent
of full value.
2. Part owners or joint owners: They have an insurable
interest to the extent of their part or financial interest.
3. Mortgagor/ Mortgagee: Mortgagor, being the owner of the
property, has got insurable interest. Mortgagee, though not
the owner, has got insurable interest to the extent of the
money advanced, plus interest and, an amount to cover up
insurance premium.
4. Bailees: They have got insurable interest because of a
potential liability being created if goods belonging to others
get lost or damaged whilst in their custody.
5. Carriers: Like bailees, carriers have also got insurable
interest in view of potential liability that might devolve on
them for any mishap to the goods belonging to others, but
whilst in their custody.
6. Administrators, Executors & Trustees: They have an
insurable interest in view of responsibility put on them by
law.
7. Life: A person has got insurable interest in his own life. A
husband has also got insurable interest in the life of his wife
and vice-versa. No other relationship as such merits
existence of insurable interest. However, insurable interest
has been created up to £30 on the lives of parents,
stepparents, and grandparents, under the Industrial
Assurance & Friendly Societies Act, 1948 & 1958 of U. K.,
for meeting funeral expenses.
8. Debtor and Creditor: A Debtor has an insurable interest in
his own life, but he has no insurable interest in the life of his
Creditor. A Creditor, on the other hand, has an insurable
 interest in his own life and he has also insurable interest in
the life of his debtor to the extent of the loan, interest, and
something to cover up the premium. This is because of the
financial interest being created by advancing money.
9. Insurers: They have got insurable interest because of a
potential liability is undertaken from the insured under a
policy, and this justifies taking out a reinsurance policy.
10. Liability: The creation of a potential liability justifies the
existence of insurable interest. The best examples are
third-party motor insurance, public liability insurance,
employer’s liability insurance etc.

It should be remembered that a person in the lawful

possession of goods of another has got insurable interest so
long he is responsible for the goods.
Mere possession without responsibility does not carry any
insurable interest.
Similarly, a person having illegal possession of goods has got
no insurable interest, e.g., thieves.
One important point with regard to insurable interest is that it
must be capable of being valued in terms of money.
Sentimental value is no criteria.
When Insurable Interest Must Exist
The question as to when insurable interest must exist varies
depending on the type of insurance. The position is as
follows;

 Marine: Insurable interest must exist at the time of claim

although it need not exist at the time of effecting the policy.
However, at the time of effecting the policy, the insured
 must prove that he is going to acquire insurable interest
soon. (Marine Insurance Act, 1906).
 Fire: Insurable interest must exist both at the time of
effecting the policy and at the time of claim.
 Life: Insurable interest must exist at the time of effecting
the policy and it may not exist at the time of claim. For
example, if a creditor takes out a policy on the life of a
debtor and subsequently the debtor pays back the loan,
nevertheless, the creditor can continue the policy as per
original terms and shall be entitled to sum assured either
on death of the debtor or on maturity, even though at the
time of claim there existed no insurable interest. (The rule
was laid down in the English Case Dalby V. The India and
London Life Assurance Co., 1854).
 Accident: Like fire, insurable interest must exist both at the
time of effecting the policy and at the time of claim.

It should be remembered that in the absence of insurable

interest the contract should be void ab-initio.
Therefore, it is the duty of the underwriters to see the position
of insurable interest at the time of issuance of the policy and
similarly, it is the duty of the Claims Manager to see the
position of insurable interest at the time of settling a claim.
Insurable Interest in Life Insurance
Insurable interest is the pecuniary interest; the insured must
have an insurable interest in the life to be insured for a valid
contract insurable interest arises out of the pecuniary
relationship that exists between the policy-holder and the life
assured so that the former stands to lose by the death of the
latter and/or continues to gain by his survival.
If such a relationship exists, then the former has the insurable
interest in the life of the latter.
The loss should be monetary.
Mere emotion and expectation do not institute insurable
interest in the life of his friend or father merely because he
gets valuable advice from them.
The general rule of insurable interest in life
insurance
 Time of insurable interest: The insurable interest must
exist at the time of proposal. Policy, without the insurable
interest, will be the wager. It is not essential that the
insurable interest must be present at the time of claim.
 Services: Except the services of wife, services of other
relatives will not essentially form insurable interest. There
must be the financial relationship between the proposer
and the life assured. In other words, the services performed
by the son without dependence of his father, will not
constitute insurable interest of the father in the life of his
soil. Vice-versa is not essential for forming insurable
interest.
 Insurable interest must be valuable: In the business
relationship, the value or extent of the insurable must be
determined to avoid wager contract of the additional
insurance. Insurance is limited only up to the amount of
insurable interest.
 Insurable interest should be valid: Insurable interest
should not be against public policy and law should
recognize it. Therefore, the consent of life assured is
essential before the policy can be issued.
 The legal responsibility may be the basis of insurable
interest: Since the person will suffer financially up to the
extent of responsibility, the proposal has insurable interest
to that extent, for instance, a person will be under legal
responsibility to expense at the funeral of his wife and
children, and he can purchase insurance in their lives up to
that extent.
 Insurable interest must be definite: The insurable
interest must be present definitely at the time of proposal.
Mere expectation of gain or support will not constitute the
insurable interest.
 Legal consequence: The insurable interest must be there
to form legal and valid insurance contract without insurable
interest would be invalid.

After taking these rules into account, the insurable interest

principle in life insurance can be divided into two categories:
insurable interest in own life, and an insurable interest in
other’s life.
The latter is sub-divided into two classes: where the proof is
not required, and where the proof is required.
Again, this insurable interest is divided into two classes:
insurable interest arising due to the business relationship, and
the insurable interest in family relationships.
Insurable interest in one’s own life
An individual always has an insurable interest in his own life it
does not need any verification of proof. Every man is
presumed to possess an insurable interest in his estate for the
loss of his future gains or savings, which might be the result of
his premature death.
According to the definition of insurable interest, it is also
evident that the person will continue to gain financially while
lie is surviving and will suffer loss if he is dead because he will
be unable to earn or protect the property.
The insurable interest in own life is boundless because the
loss to the insured or his dependents cannot be measured
regarding money and, therefore, no limit can be placed to the
amount of insurance that one may take on one’s own life.
Thus, ideally, a person can take a policy to an unlimited
amount of his own life; but in practice no insurer will issue a
policy for an amount larger than amount seems suitable to the
circumstances and means of the applicant generally, it is
mentioned that one cannot purchase policy usually more than
ten times of his one year’s income.
The third party could pay the premium if there were no
intention of speculation. If there is a possibility of a wager, the
contract will become void.
Insurable interest in other’s life
Life insurance can be affected by the lives of third parties
provided the proposer has the insurable interest in the third
party. There are two types of insurable interest in other’s life.
First where the proof is not required and second, where the
proof is required,
Proof not required
There are only two such cases where the presence of
insurable interest is legally presumed and therefore need not
be proved.
Wife has an insurable interest in the life of her
husband
It is presumed and decided by reed vs. Royal exchanged 795)
that wife is presumed to have the insurable interest in the life
of her husband because the husband is legally bound to
support his wife.
The wife will suffer financially if she husband is dead and will
continue to gain if the husband was surviving.
Since the extent of loss or gain cannot be measured in this
case; the wife has the insurable interest in the husband’s life
up to an unlimited extent.
Husband has an insurable interest in the life of
his wife
The insurable interest is presumed to exist here, and no proof
is required. It was decided in Griffith vs. Fleming (1909) that
the husband has the insurable interest in his wife’s life
because of domestic services performed by the wife.
If the wife is dead, a husband has to employ another person
to render the domestic services, and certain other financial
expenditures will involve at her death which is not calculable.
The husband is benefited by the survival of his wife, so it is
self-proved that husband has the insurable interest in his
wife’s life.
Since the monetary loss at her death or monetary gain at his
survival cannot be measured; there is unlimited insurable
interest in the life of the wife.
Proof is required
Insurable interest has to be proved in the following cases;
Business relationship. The policy-holder may have the
insurable interest in the life of assured due to business or
contractual relationship. In this case, the amount of insurable
corresponds to the amount of risk involved. Some of such
examples are narrated below:
A creditor has in the life or his debtor. The creditor may lose
money if (the debtor dies before the loan is repaid.
The continuance of debtor’s life is financially meaningful to the
creditor because (the latter will get all his money repaid at the
former’s survival.
The maximum amount of loss to a creditor may be the amount
of outstanding loan plus interest thereon and the amount of
premium paid; so, the maximum amount of insurable interest
is limited to the outstanding loan, plus interest and amount of
premium expected to be paid.
The interest is calculated on the estimation of duration of debt
to be paid.
The maximum amount of interest does not say about the
payment of policy amount, it, merely, determines the chances
of speculation. The full amount of policy is payable
irrespective of the payment of loan and interest. Since it is life
insurance, the full policy amount is paid.
A trustee has the insurable interest in respect of the interest of
which he is the trustee because of the survival of the other
person the trustee is benefited, and at his death, he will suffer.
A surety has the insurable interest in the life of his principal. If
the principal (the debtor) is dead, the surety is responsible for
payment of the outstanding loan, or obligated amount.
At the survival of principal, he will not suffer this loss. The
insurable interest is limited up to the amount of outstanding
loan, interest, and premium paid.
A partner has the insurable interest in the life of each partner.
At the death of a partner, the partnership will be dissolved,
and the surviving partner will lose financially.
Even if the firm continues at the death of the partner, the firm
has to pay the deceased partner’s share to his dependents;
this will involve a huge financial loss to the partnership.
Therefore, the firm collectively can purchase insurance
policies in the life of each partner of the firm: since the firm
part of money up to the extent of deceased partner goodwill,
capital, the share of profit and reserve the firm has insurable
interest up to the extent in each partner.
Similarly, all the partners have the insurable interest in the life
of each partner because they will financially suffer death.
An employer has in the life of a key-man. A key-man is the
person whose presence, capital, capacity cause profit to the
business. If the key-man is dead, the business will reduce
profit up to a certain extent.
The business suffers reduced profit, expenses involved in
appointing and training new persons and the amount to be
given to the dependents of key-man at his death. So the
business has insurance interest up to such an extent in the
key-man’s life.
An insurer has in the life assured. The insurer suffers from the
death of the life assured and, therefore, he can get
reinsurance of the assured persons by him. The insurable
interest is limited up to the policy amount.
Family relationship
The insurable interest may arise due to family relationship if
pecuniary interest exists between the policy-holders and life
assured because mere relationship or tics of blood and
affection does not constitute insurable interest, proposer must
have a reasonable expectation of financial benefit from the
continuance of the life of the person to be insured or of
financial loss from his death.
The interest must be based on value and not on mere
sentiments.
Similarly,
the mere moral obligation is not sufficient to warrant the
existence of insurable interest although the legal obligation to
get support will form insurable interest of the person who is
supported in the life of the person who is supporting.
Thus,
a son can insure his father’s life only when he is dependent
on him, and the father can take the insurance policy on his
son’s life only when he is dependent on his son.
Insurable interest in life insurance indicates that the insured
must have a pecuniary interest in the life to be insured for a
valid life insurance contract.
Insurable Interest in Marine Insurance
An insured person will have insurable interest in the subject-
matter where he stands in any legal or equitable relation to
the subject-matter in such a way that he may benefit by the
safety or due arrival of insurable property or may be
prejudiced by its loss, or by damage thereto or by the
detention thereof or may incur liability in respect thereof.
Since marine insurance is frequently affected before the
commercial transactions to which they apply are formally
completed it is not essential for the assured to have an
insurable interest at the time of effecting insurance, though he
should have an expectation of acquiring such an interest.
If he fails to acquire an insurable interest in due course, he
does not become entitled to indemnification.
Since the ownership and other interest of the subject matter
often change from hands to hands, the requirement of the
insurable interest to be present only at the time of loss this
makes a marine insurance policy freely assignable.
Exceptions
There are two exceptions to the rule in marine insurance; Lost
or Not Lost and P.P.I. Policies.
Lost or Not Lost
A person can also purchase a policy in the subject-matter in
which it was known whether the matters were lost not lost, in
such cues the assured and the underwriter are ignorant about
the safety or otherwise of the goods and complete reliance
was placed on the principle of Good Faith.
The policy terminated if any one of the two parties was aware
of the fact of loss, in this case, therefore, the insurable interest
may not be present at the time of contract because the
subject-matter would have been lost.
Related: Utmost Good Faith in Life Insurance
P.P.I. Policies
The subject-matter can be insured in the usual manner by
P.P.I. (Policy Proof of Interest), i.e., interest proof policies. It
means that in the event of claim underwriters may dispense
with all proof of insurable interest.
In this case, if the underwriter does not pay the claims, it
cannot be enforced in any court of law because of P.P.I.
policies are equally void and unenforceable.
But the underwriters are generally adhering on the terms and
pay the amount of claim.
The insurable interest in marine insurance can be of the
following forms:
According to Ownership
The owner has insurable interest up to the Rill value of the
subject-matter. The owners are of different types according to
the subject-matter.

 In Case of Ships: The ship-owner or any person who has

purchased it on charter-basis can insure the ship up to its
full price.
 In Case of Cargo: The cargo-owner can purchase a policy
up to the full price of the cargo. If he has paid the freight in
advance, he can lake the policy for the full price of the
goods plus the amount of freight plus the expense of
insurance.
 In Case of Freight: The receiver of the freight can insure
up to the amount of freight to be received by him.

Related: Doctrine of Subrogation in Marine Insurance

Insurable Interest in Re-insurance
The underwriter under a contract of marine insurance has an
insurable interest in his risk and may re-insure in respect of it.
Insurable Interest in other Cases
In this case, all those underwriters are included who have an
insurable interest in the salary arid own liabilities.
For example, the master or any member of the crew of a ship
has an insurable interest in respect of his wages.
The lender of money on bottomry or respondentia has an
insurable interest in respect of the loan