Page 75 - DCOM309_INSURANCE_LAWS_AND_PRACTICES
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Insurance Laws and Practices
Notes 3. To consider the contract void, the bereaved party must notify the offending party that
breach has been noticed and as per the conditions of the contract he is no longer governed
with the terms of the contract agreed upon in covering the risk. In case the breach is
discovered at the time of claim he will refuse to honour his promise and will not pay the
claim. This again occurs when there has been a deliberate breach.
4. When the breach is innocent but it is material to the fact then the insurer may impose a
penalty in the form of additional Premium.
5. Where the breach is found to be innocent and is not material the insurer can choose to
ignore the breach or waive off the breach.
Self Assessment
Fill in the blanks:
1. Insurance contracts insist on the practice of …………………………………….. on the part of
the insured.
2. Material fact is every circumstance or information, which would influence the
……………………………… of a prudent insurer in assessing the risk.
5.2 Principle of Insurable Interest
Remember, one of the essential ingredients of an Insurance contract is that the insured must
have an insurable interest in the subject matter of the contract. Insurance without insurable
interest would be a mere wager and as such unenforceable in the eyes of 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.
Example: The concept is the basis of the doctrine of insurable interest and was cleared in
the case of Castellain v/s Priston in 1883 as follows:
“What is it that is insured in a fire policy? Not the bricks and materials used in building the house but the
interest of the Insured in the subject matter of Insurance.”
The subject matter of the contract is the name given to the financial interest, which a person has
in the subject matter and it is this interest, which is insured.
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.”
Example: The owner of a taxicab has insurable interest in the taxicab because he is
getting income from it. But, if he sells it, he will not have an insurable interest left in that taxicab.
From above example, we can conclude that, ownership plays a very crucial role in evaluating
insurable interest. Every person has an insurable interest in his own life. A merchant has insurable
interest in his business of trading. Similarly, a creditor has insurable interest in his debtor.
There are four essential components of Insurable Interests:
1. There must be some property, right, interest, life, limb or potential liability capable of
being insured.
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