NECESSITY OF INSURABLE INTEREST IN INSURANCE CONTRACTS

By: V Prashanth1

INTRODUCTION

The need for an insurance cover is growing today owing to the occurrence and risk
of enhanced perils, which were previously unknown to life, trade and commerce.
Insurance is meant to safeguard man from unforeseen events, which might be of
some detriment to him. It provides him with an assurance to save him from any
loss which might be brought about by the happening of any unforeseen event
either to his life or property.

Insurance is a contract by which one party in consideration of a price (called the

premium) paid to him, adequate to the risk, becomes security to the other that he
shall not suffer loss, damage or prejudice by the happening of the perils specified
to certain things which may be exposed to them.2 There must be either some
uncertainty whether the event will happen or not, or if the event is one which
must happen at some time or another, there must be uncertainty as to the time at
which it will happen.3

This article provides an insight into the concept of insurable interest by describing
the nature of insurable interest and also explains the necessity of an insurable
interest in regard to Life Insurance, Fire Insurance and Marine Insurance and also
the various persons who have an insurable interest in these contracts.

PART I - INSURABLE INTEREST: WHAT IT MEANS?

As explained above, a contract of insurance is one whereby one person promises to

compensate another for any loss which the latter might have to suffer on being
exposed to certain dangers, in consideration of a price known as premium. 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. Insurable interest means an
interest which can be or is protected by a contract of insurance.4 It is a relation
between the insured and the event insured against, such that the occurrence of

1 Student of 4th year BA(LLB) Amity Law School, Noida

2 As laid down by Lawrence J in Lucena v Craufurd, (1806) 2 Bos & PNR 269 at Pg. 301: 127 ER 42 HL
3 Prudential Insurance Co v Inland Revenue Commsr,(1904) 2 KB 658
4 KSN Murthy & Dr.KVS Sarma “Modern Law of Insurance” 4th Edn. Butterworths @ pg. 59

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the event will cause substantial loss or injury of some kind to the insured.5Rodda
defines insurable interest as:

“…Insurable interest may be defined as an interest of such a nature that the

occurrence of the event insured against would cause financial loss to the
insured…”6

Insurable interest is of two types – Contractual and Statutory. Where an insurance

contract requires the existence of an insurable interest for effecting the policy,
such interest is known as Contractual insurable interest while an insurable interest
mandated by a particular statute dealing on insurance is known as Contractual
insurable interest. It is noteworthy that neither the British Life Assurance Act,
1774 nor the Insurance Act, 1938 of India defines the term insurable interest.

Insurable interest is the legal right of the insured in insurance. The taking of an
insurance policy does not protect the insured property from loss or damage, but
protects the insured’s interest in the property.7

PART II – NATURE OF INSURABLE INTEREST

The insurable interest must have a pecuniary value i.e. it must be measurable in
terms of money. It must be recognised and enforceable by law.8In Geismar v. Sun
Alliance and London Insurance Ltd. and another9 it was held that although the
purchase of goods abroad will normally result in the insured having an insurable
interest in these goods but, if he smuggles them into the country without
disclosure to the Customs authorities, an insurable interest does not exist, and he
is possession of the goods illegally, which are subject to forfeiture. In Lucena v.
Craufurd10 insurable interest was explained as:

“… 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, nor necessarily and exclusively
that which may be subject of privation, but the having some relation to, or
concern in the subject of insurance, which relation or concern by the happening
of the perils insured against may be so affected as to produce a damage,

5 EW Patterson “Elements of Insurance Law” Pg. 109

6 WH Rodda “Fire and Property Insurance” Pg. 22; E.J.D Peverett “ Fire Insurance Laws and Claims” Pg.160 “The legal
right to insure is known as insurable interest”
7 M.N. Srinivasan “Principles of Insurance Law” 7th edn @ Pg. 75 para 8
8 E.J.D. Peverett “Fire Insurance Law and Claims” Pg.161
9 [1977] 3 All ER (QBD)
10 [1806] 2 Bos. & P(N.R) 269

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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 of benefit, but for those risks or dangers, he
may be said to interested in the safety of the thing…. The property of a thing and
the interest divisible from it may be very different; of the first, the price is
generally the measure, but by interest in a thing every benefit or advantage
arising out of or depending on such a thing may be considered as
comprehending…”

Although the insurable interest has to be enforceable by law, the enforceability is

not the sole criterion, howsoever strong it might be. Lord Eldon has observed that
expectation, though founded on highest probabilities, is not interest and it is
equally not interest whatever might have been the chances in favour of
expectation.11 In Moran Galloway v. Uzielli12 Lord Walton observed that the
definition of insurable interest has to be continuously expanding, and dicta in some
of the older cases, which tend to narrow it, must be accepted with caution.
Interest may thus be possessory, expectant or contingent or equitable and not
necessarily vested.

It is the existence of an insurable interest that alone differentiates a contract of

insurance, being a contract of indemnity, from a mere wager. Therefore, for the
validity of an insurance contract, the existence of an insurable interest is a
mandatory precondition.

The nature of insurable interest can thus be, briefly, understood by the following
points:

1. The interest should not be a bare sentimental or emotional right or interest;

2. It should be a right in a property or a right arising from a contract made in
respect to that property;
3. The interest must be pecuniary; mere inconvenience or disadvantage cannot
be regarded as an insurable interest;
4. The interest should be lawful and must not be illegal, immoral or opposed to
public policy.

11 Supra
12 [1905] 2 KB 555, 563
PART III – INSURABLE INTEREST AND LIFE INSURANCE CONTRACTS

A life insurance contract is an aleatory contract. An aleatory contract may be

described as a contract based on an element of chance or uncertainty. In a life
insurance policy, the insurer contracts to pay the insured, in consideration of a
price called as premium, a specified sum of money, either to the latter, upon
maturity of that policy or should death happen to him, to his legal dependants or
executors as the case may be. In Dalby v. India and London Life Assurance Co.13 it
was held that a contract of life insurance is not a contract of indemnity, like a
marine or a fire policy, but is a contract to pay a definite sum in consideration of
an annuity paid during life.“A contract of life insurance may be defined as one in
which one party agrees to pay a given sum of money upon the happening of a
particular event contingent upon the duration of human life in consideration of
immediate payment of a smaller sum or other equivalent payments by the
other”.14 So as to effect a life insurance contract, it is necessary that the person,
who is privy to the contract, should have an insurable interest in the life of the
person, for whom the policy is being taken. Although it is difficult to lay down in a
precise manner as to what would constitute insurable interest in a life insurance
contract, yet it is a well settled principle of law that there has to be an insurable
interest attached to a life insurance contract. It is opposed to public policy to
allow a person, who has no interest in the life of another person, to take an
insurance policy in the name of the latter. In England, insurable interest is
mandated by the Life Assurance Act, 1774 while in America and in India, it is
required as a matter of public policy.

The most important aspect of insurable interest in a life insurance contract is that
the interest should exist at the time of commencement of the policy, but it need
not continue to exist at the time of the occurrence of the loss.

Every man is presumed to have an interest in his own life and he is not required to
show at any point that he had some particular interest in the continuation of his
life. In Wainwright v Bland15 an executor, suing on a policy effected by his testator
on two years of his life, was not required not to show any significant reason for
making an insurance for such a limited time period. As regard spouses are
concerned, it is generally believed and accepted that a wife has an insurable

13 [1854] 15 CB 365: 139 ER 465; Also see C. Duraiswamy Iyengar v United India Life Assurance Co. AIR 1956 Mad

320: (1956) 1 Mad LJ 344

14 Bunyon on Life Insurance, 4th edn; followed by Cozens Hardy MR in Joseph v Law Integrity Insurance Co.[1912]

82 LJ 187: [1912] 2 Ch 581

15 [1836] 1 M&W 32
interest in the life of her husband and vice versa. Lord Kenyon CJ declared that
“…it must be presumed that every wife had interest in the life of her
husband…”and it is not necessary for her to prove that she had an insurable
interest only because a large sum of money would go from her husband’s estate to
another, upon his death.16Farwell LJ has held that a wife may insure a husband’s
life, and the husband’s his wife’s.17 The English law limits insurable interest on a
sentimental basis only to the relationship of husband and wife.

As far as children are concerned, in England, the rule, which was recognised in the
case of Halford v Khymer18, is that a parent has no insurable interest in the life of
his child as mere love and affection is not sufficient to constitute insurable
interest. Similarly a child does not have an insurable interest in the life of his
parent provided he is not dependent on the latter.19 Therefore, under English law,
insurable interest is limited to statutory insurable interest.20 While the English law
restricts the scope of insurable interest to the parameters set by the statutes
dealing on the subject, the American law extends the principle to certain other
relationships viz parent and son, grandparent and grandchild etc. In an American
case21, it was held that any relative may insure the life of another when he is so
related to the other to the claim for maintainance enforceable at law.

The Insurance Act, 1938 of India does not contain any provision which explains the
concept of insurable interest. In the absence of any statutory explanation, courts
take recourse to the English and American decisions which are in conformity with
the prevailing currents of social, economic and religious thought in the society.
Thus in India too, apart from husband, wife or any other close relative, any person,
who has a legal right to derive maintainance from a person, can take a life
insurance policy on the life of the latter without any proof of insurable interest.
Life insurance is a husband’s privilege, a wife’s right and a child’s claim.22

Another set of relations which acquire insurable interest for effecting a life
insurance, are relations which originate from contractual transactions. Therefore a
creditor has an insurable interest in the life of the debtor to the extent of his

16 Reed v. Royal Exchange Assurance Co.[1795] Peake Add Cas 70

17 Griffith v Fleming [1909] 100 LT 765: [1909] 1 KB 805: [1908-10] All ER 760 CA
18 [1830] 10 B&C 724: 109 ER 619
19 Howard v. Refuge Friendly Society [1886] 54 LT 644: 2 TLR 474

20 In England, insurable interest is governed by the English Marine Insurance Act, 1745, the English Life

Assurance Act, 1774 and the English Gambling Act 1845.

21 Aetna Life Insurance Co. v France [1876] 94 US 561
22 SS Hubner “Life Insurance” pg. 17
interest23and where the debt has been guaranteed by a surety, then on the life of
the surety too.24 In Powell v Dewy25 it was held that a partner of a firm has no
insurable interest in the life of the other partner, except when the latter is
indebted to him personally and only to the extent of such indebtedness.

PART III – INSURABLE INTEREST AND FIRE INSURANCE

Like all insurance contracts, a fire insurance contract also requires insurable
interest on the subject matter insured.26 The insurable interest need not arise
from ownership27 alone, it can even arise in case of lawful possession or from a
contract dealing with the subject matter insured. A fire insurance contract is a
personal contract to indemnify a person for any loss which he may suffer upon the
destruction of the thing insured, from fire, explosion etc and therefore, if the
person transfers the thing insured to another, he loses his insurable interest in that
thing and the contract between him and the insurer comes to an end. It is the
insurable interest of a person that is protected by a fire insurance contract and not
the subject matter insured. A person has an insurable interest in the thing insured,
if he likely to suffer a direct loss upon its destruction.

As far as fire insurance is concerned, there are three essentials of insurable

interest:

1. There must be a physical object which is capable of being destroyed, lost or

damaged;
2. That physical object must constitute the subject matter of the insurance;
and
3. The insured must have some legal relationship thereto so that he benefits by
the preservation of the property, and is prejudiced by its destruction, loss
or damage.28

In Macaura v Northern Assurance Co.29 it was held that neither a shareholder nor a
simple creditor of a company has any insurable interest in any particular asset of
that company, although both a shareholder and a creditor may suffer loss upon

23 Godsall v Boldero [1807] 9 East 72: 103 ER 500

24 Beauford v Saunders [1877] 25 WR 650
25 [1898] 123 Log NC
26 Castellian v Preston [1883] 11 QBD 380 @ pg. 397(as cited in para 606 of Halsbury’s Law of England, Vol. 25, 4th

Edn; pg 325)
27 Ward v Carttar [1865] LR 1 Eq 29 @ pg 31: Romilly MR held that to have an insurable interest, it is not necessary

that the owner of the subject matter insured should actually be in possession of that subject matter.
28 Relevant excerpts from “Fire Insurance Law and Claims” by E.J.D. Peverett; pg 161
29 [1925] AC 619 (as cited in Dr. Avtar Singh “Law on Insurance”1st edn @ Pg. 62)
destruction of their company’s property. Where a person has contracted with
another to sell the subject matter insured, he retains an insurable interest in that
subject matter till the time the title in the subject matter is transferred, in
finality, to the buyer30. In a case,31where a property, insured by fire, was
contracted to be sold and pending transfer of title, it was destroyed by fire, it was
held that the owner of the property was entitled to recover the insurance money
as he was still interested in the safety of the property.

In a fire insurance contract, the insurable interest in the property should exist
both at the inception of the policy as well as at the time of the loss. If it does not
exist at the commencement of the contract, it cannot be the subject matter of
insurance and if it does not exist at the time of loss, he does not suffer any loss
and so needs no indemnity.32

Wharfingers and warehousemen, with whom goods are entrusted for safekeeping
and custody, have an insurable interest in those goods33and so do carriers, inn
keepers and mortgagees. A tenant has an insurable interest in the property which
he rents. The insurable interest of a tenant may arise either through an express
clause in the tenancy agreement, that he shall be responsible for insuring the
property or otherwise, as he stands to lose the beneficial enjoyment of the
property in the event of destruction, which is sufficient to give him an insurable
interest. A tenant, who has contracted to insure a property, continues to have an
interest in it, even after his tenancy has come to an end, if his liability
continues.34 But a person does not have any insurable interest in a property which
is spes successionis or where the owner has promised to bequeath that property to
him, by a will, on the former’s death for the owner might change his mind later.
Insurable interest must be more than a mere expectation may be.35

Bailees are also entitled to insure goods36 which are entrusted to them for custody
notwithstanding the fact that their liabilities to the owners or bailors depend upon

30 See also Sellers v Continental Insurance Co [1974] 48 DLR (3d)369, NS App Div: where the insured had built his
house at his own expense and had a contractual right to acquire the land; he was correctly described as “owner”
and to have an insurable interest in the house. (Also see Halsbury’s Laws of England; Vol. 25; 4th edn; para 607;
pg. 326)
31 Collingridge v Royal Exchange Assurance Corpn. [1877] 3 QB 173: 47 LJ QB 32: 37 LT 525
32 Relevant excerpts from M.N. Srinivasan “ Principles of Insurance Laws” 7th Edn; Pg.200; para 5
33 Marks v Hamilton [1852] 7 Exch 323: 155 ER 970
34 Heckman v Isaac [1862] 6 LT 383
35 E.J.D. Peverett “ Fire Insurance Law and Claims” pg 162 para 6
36 Waters v Monarch Fire and Life Assurance Co. [1856] 5 E & B 870; Also see Petrofina (UK) Ltd v Magnaload Ltd

[1983] 2 Lloyd’s Rep 91: whether the bailee has insured his own interest as bailee or the interest of the bailor as an
owner of the goods is a matter of interpretation.
a number of circumstances, governed by statutes, contracts, common law and
customs in trade. A bailee need not show the nature of his interest to the insurer
while effecting an insurance policy, provided the policy is effected solely on his
own behalf.

There are instances where in two or more persons are interested in the same
subject matter insured viz. landlord and tenant, mortgagor and mortgagee, bailor
and bailee etc. In such cases the insurable interests of both the persons are quite
separate and distinct from each other and therefore both of them can effect a
separate insurance policy on the same subject matter, both the insurance policies
being valid.

PART IV – INSURABLE INTEREST AND MARINE INSURANCE

A marine insurance contract is one in which the insurer promises to indemnify the
insured against any loss to the insured subject matter, be it a ship or the cargo,
arising out of the perils of the sea, subject to the conditions and the extent of the
policy.37 Justice Blackburn defines a marine insurance policy as a contract of
indemnity against all losses occurring to the subject matter of the policy from
certain perils during the adventure.38Therefore, a person can only insure the
subject matter if he is interested in the preservation and safety of that matter.
Every person who has an interest in a marine adventure has an insurable interest39
and a person is said to be interested in a marine adventure if he stands in such a
relationship with the thing insured that upon its destruction, he may incur liability
or suffer a loss, on it.40A person has an insurable interest in the subject matter
insured when he has such a connection with it that:

1. He will derive some pecuniary benefit or advantage from its preservation; or

37 Section 3 of the Marine Insurance Act, 1963[ Section 1 of the English Marine Insurance Act, 1906 ] defines
marine insurance as :
“A contract of marine insurance is an agreement whereby the insurer undertakes to indemnify the assured, in the manner
and to the extent thereby agreed, against marine losses, that is to say, the losses incidental to marine insurance”
38 Blackburn J in Lloyd v Fleming [1872] LR 7 QB 299, 302 (as cited in KSN Murthy and Dr. KVS Sarma “Modern

Law of Insurance” 4th Edn, Butterworths @ Pg 252 para 1)

39 Section 7(1) of the Marine Insurance Act, 1963 [Section 5(1) of the English Marine Insurance Act, 1906]
40 Section 7(2) of the Marine Insurance Act, 1963 [Section 5(2) of the English Marine Insurance Act, 1906]:

“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 detention thereof, or may incur liability in
respect thereof”
 2. He will suffer some pecuniary loss or damage from its destruction,
termination or injury by the happening of the event insured against.41

A marine insurance policy effected without an insurable interest, like all other
insurance contracts, becomes a mere wager, void in the eyes of law.42 It is not
necessary that to have an insurable interest, the person insuring must be in
possession of a vested right. It is sufficient to constitute an insurable interest, if
there is an expectancy along with an existing present title, out of which such
expectancy has arisen. But expectation of some benefit, which might arise from
subject matter in which the person insuring is not actually interested but expects
to be interested is not an insurable interest.43 A partial as well as a contingent
interest is also insurable.

Insurable interest, in a marine policy, must exist at the time of the loss though it is
not necessary that it should be in existence at the time of effecting the
policy.44The policy will be considered valid if the insured insures the subject
matter without being interested in it, at the time of effecting the policy and if he
acquires an interest in it after it has been lost, he can recover under the policy.45

A marine policy, just like a fire policy, is a personal contract and hence, the
insurable interest of the insured in the subject matter continues till the time he is
in actual possession of it. If he has transferred the title in the subject matter to
another person, through an agreement to that effect, he ceases to have any
interest in it and the policy will also come to an end. So long as the seller of a ship
or of the goods retains any interest in the property, he can insure it to the extent
of his interest.46 In Reed v Cole47it was held that where the owner of a ship has
sold her under a contract which requires him to pay the buyer a certain sum of
money should a loss happen within a particular period of time, the owner has an
insurable interest to the extent of such a sum.48 Where the subject matter insured
has been mortgaged, the mortgagor has an insurable interest in that subject

41 Relevant excerpts from “Modern Law of Insurance” by KSN Murthy and Dr. KVS Sarma , 4th Edn, Butterworths;

Pg. 69 Para 4.
42 Section 6 of the Marine Insurance Act, 1963
43 Stockdale v Dunlop [1840] 6 M & W 224: expectation of profit or commission, to arise out of the sale of goods,

not contracted at the time of their loss, is not an insurable interest under the policy.
44 Section 6(1) of the Marine Insurance Act, 1963
45 Sutherland v Pratt [1843] 11 M&W 296
46 Relevant excerpts from Halsbury’s Laws of England, Vol. 25, 4th Edn. Para 377; Pg. 210
47 [1764] 3 Burr 1512
48 But where the property, which is the subject matter of a contract of sale has completely passed to the buyer

from the seller, then the seller ceases to have any insurable interest in that property and the buyer acquires the
same: Joyce v Swann [1864] 17 CBNS 84; Also see Seagrave v Union Marine Insurance Co [1866] LR 1 CP 305 and
Sparkes v Marshall [1836] 2 Bing NC 761.
matter to its full value and the mortgagee has an insurable interest on any sum
due or to become due under the contract.49 A trustee who has a legal interest in
the subject matter insured may insure in respect of that interest to the full value
of the subject matter, and may recover the whole amount on the condition that he
shall hold the amount recovered, in trust for the bonafide beneficiary.50

Even captors have an insurable interest over the ship or cargo captured by them.
As they are generally in possession of the captured property and liable to pay
damages if they take possession illegally, it is generally accepted that they have an
insurable interest over such a property.

Chalmers says “…The definition of insurable interest has been continuously

expanding and the dicta on some of the older cases which would tend to narrow it
must be accepted with caution…”51 Therefore any person can effect a marine
insurance policy as long as he has an insurable interest, which can be attributed to
him if he is interested in the preservation of the subject matter insured and he is
likely to suffer a direct loss upon its damage or destruction.

CONCLUSION

Insurable interest is a mandatory precondition to all types of insurance contracts,

although it is not possible to give an exhaustive list of the various persons who are
said to possess insurable interest. Whether a person has an insurable interest in
the subject matter or not is a question of facts and circumstances of each case and
the court’s interpretation of the insurance contract’s clauses. But it is an
undeniable truth that insurable interest is a sine qua non to a contract of
insurance. In fact, it is the existence of insurable interest which differentiates a
contract of insurance from a wager52, which is void in the eyes of law. Every
contract of insurance, to whichever category it may belong to, shall display an
insurable interest and in the absence of such an interest, it shall be void and
inoperative.

49 Section 14(1) of the English Marine Insurance Act, 1906[Section 16(1) of the Marine Insurance Act, 1963]
50 Ebsworth v Alliance Marine Insurance Co[1873] LR 8 CP 596 @ pg 638 according to Brett J
51 Chalmers “Marine Insurance”1901 Edn; Also see Ft. Note 12 for Walton J’s approval to the above quote.
52 Section 30 of the Indian Contract Act, 1872 defines Wager as :

“Agreements by way of wager are void; and no suit shall be brought for recovering anything alleged to be won on any
wager, or entrusted to any person to abide by the result of any game or other uncertain event on which any wager is made”