Page 76 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Unit 5: Principles of Insurance

2. Any of these above i.e. property, right, interest etc. must be the subject matter of Insurance. Notes
3. The insured must stand in a formal or legal relationship with the subject matter of the
Insurance. Whereby he benefits from its safety, well-being or freedom from liability and
would be adversely affected by its loss, damage existence of liability.
4. The relationship between the insured and the subject matter must be recognized by law.

5.2.1 How is Insurable Interest Created?

You will be surprised to know that there are a number of ways by which Insurable Interest arises
or is restricted:
(a) By Common Law: Cases where the essential elements are automatically present can be
described as insurable interest having arisen by common law. Ownership of a building,
car etc., gives the owner the right to insure the property.
(b) By Contract: In some cases a person will agree to be liable for something which he would
not be ordinarily for. A lease deed for a house for example may make the tenant responsible
for the repair and maintenance of the building. Such a contract places the tenant in a
legally recognized relationship with the house or the potential liability and this gives
him the insurable interest.
(c) By Statute: Sometimes an Act of the Parliament may create an insurable interest by
granting some benefit or imposing a duty and at times removing a liability may restrict
the Insurable Interest.
Insurable Interest is applicable in the Insurance of property, life and liability.
In case of property Insurance, insurable interest arises out of ownership where the owner is the
insured but it can arise due to other situations & financial interests which give a person who is
not an owner, insurable interest in the property and some of the situations are listed below:
(i) Mortgagee and Mortgagers: The practice of Mortgage is common in the area of house &
vehicle purchase. The mortgagee is the lender normally a bank or a financial institution,
and the mortgager is the purchaser. Both have an insurable interest; the mortgager because
he is the owner and the mortgagee as a creditor with insurable interest limited to the
extent of the loan.
(ii) Bailee: Bailee is person legally holding the goods of another, may be for payment or other
reason. Motors garages and watch repairers have a responsibility to take care of the items
in their custody and this gives them an insurable interest even though he is not owner.

(iii) Trustees: They are legally responsible for the property under their charge and it is this
responsibility which gives rise to insurable interest.
(iv) Part Ownership: Even though a person may have only part interest in a property he can
insure the entire property. He shall be treated as a trustee or the co-owners; and in the
event of a claim he will hold the money received by him in excess of his financial interest
in trust for the others.
(v) Agents: When the principal has an insurable interest then his agent can insure the property.
(vi) Husband & Wife: Each has unlimited interest in each other’s life and hence they have an
insurable interest in each other’s property. These parties can insure each other’s lives as
they stand to lose in the event of death of any of them.
(vii) Creditor: Similarly a creditor may lose financially if a debtor dies before paying the loan
so the creditor gets an Insurable Interest in the life of the debtor to the extent of the loan
amount.

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