Page 77 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Insurance Laws and Practices

Notes (viii) Liability: In liability Insurance a person has insurable interest to the extent of any potential
liability which may be incurred due to damages and other costs. It is not possible to
foretell how much liability or how often a person may incur liability and in what form or
shape it arises. In this way Insurable Interest in Liability Insurance is different than Insurable
Interest in life and property – where it is possible to predetermine the extent of Insurable
Interest.
Therefore in liability assurance the insured is asked to choose the amount of sum insured as the
maximum figure that he estimates is ever likely to be required to settle the liability claims.

5.2.2 When Should Insurable Interest Exist

You need to know that this can happen in the following cases:
(i) In Life Insurance Insurable Interest must exist at the time of inception of Insurance and it
is not required at the time of claim.
(ii) In Marine Insurance Insurable Interest must exist at the time of loss/claim and it is not
required at the time of inception.

(iii) In Property and other Insurance Insurable Interest must exist at the time of inception as
well as at the time of loss/claims.

Other Salient Features of Insurable Interest

Let’s learn about the salient features of insurable interest:
1. Insurable Interest of Insurers: Once the Insurers have accepted the liability they derive an
insurable interest, which arises from that liability thus they are free to insure a part or
whole of the risk with another insurer. This is done by reinsurance.
2. Legally Enforceable: The Insurable Interest must be legally enforceable. The mere
expectation that one may acquire insurable interest in the future is not sufficient to create
insurable interest.
3. Possession: Lawful possession of property together with its responsibility creates an
insurable interest.

4. Criminal Acts: A person cannot avail benefits from insurance to cover penalties because of
a criminal act but insurance to take care of civil consequences arising out of his criminal
act can be done. This is applicable in the case of motor Insurance where a driver found
guilty of an offence which is involved in an accident receives the claim for damage to his
own car and also liability incurred due to damage to another’s property but he shall not be
insured for the amount of penalty that was imposed for his offense.
5. Financial Value: Insurable interest must be capable of financial evaluation. In the case of
property and liability incurred it is easily evaluated but in life it is difficult to put a value
on the life of a person or his spouse and this depends on the amount of premium the
individual can bear. However in cases where lives of others are involved a value on life
can be placed i.e. creditor can put a value on the life of debtor restricted to the extent of the
loan.
Employers have an insurable interest in the lives of their employees because if the employee
dies there will be cost on training of the replacement and in the case of death of a key employee
there may be loss of income as well. The amount of insurable interest cannot be exactly determined
but it should be reasonable and proportionally related with salary of an employee; contribution
level of a key personal or equity contribution in case of partners.

72 LOVELY PROFESSIONAL UNIVERSITY