“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 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’ and also explains the necessity of 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. 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. 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 the event will cause substantial loss or injury of some kind to the insured.5Rodda defines insurable interest as follows: “…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.

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

J.D. Srinivasan “Principles of Insurance Law” 7th edn @ Pg. Lord Eldon has observed that expectation.11 In Moran Galloway v. Uzielli12 Lord Walton observed that the definition of insurable interest has to be continuously expanding. is not interest and it is equally not interest whatever might have been the chances in favour of expectation. The taking of an insurance policy does not protect the insured property from loss or damage.N. or concern in the subject of insurance. an insurable interest does not exist.7 NATURE OF INSURABLE INTEREST Insurable interest must have a pecuniary value i. detriment or prejudice to the person insuring. of the first. and dicta in some of the older cases. 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 the having some relation to. & P(N. howsoever strong it might be. which 7 8 M. though founded on highest probabilities.161 9 [1977] 3 All ER (QBD) 10 [1806] 2 Bos. and he is in possession of the goods illegally. 563 .e. or a part of a thing. In Lucena v. it must be measurable in terms of money. 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 insurable interest has to be enforceable by law. 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. he may be said to interested in the safety of the thing….R) 269 11 Supra 12 [1905] 2 KB 555. if he smuggles them into the country without disclosure to the Customs authorities. the price is generally the measure.Insurable interest is the legal right of the insured in insurance. Interest does not necessarily imply a right to the whole. Sun Alliance and London Insurance Ltd. It must be recognised and enforceable by law. 8In Geismar v. which relation or concern by the happening of the perils insured against may be so affected as to produce a damage. The property of a thing and the interest divisible from it may be very different. which are subject to forfeiture. nor necessarily and exclusively that which may be subject of privation. 75 para 8 E. Peverett “Fire Insurance Law and Claims” Pg. the enforceability is not the sole criterion. Craufurd10 insurable interest was explained as follows: “… A man is interested in a thing to whom advantage may arise or prejudice happen from the circumstances which may attend it. but for those risks or dangers. but protects the insured’s interest in the property.

understood by the following points : 1. In Dalby v. insurable interest is mandated by the Life Assurance Act. it is necessary that the person. briefly. expectant or contingent or equitable and not necessarily vested. 3. Interest may thus be possessory. It should be a right in a property or a right arising from a contract made in respect to that property. 1774 while in America and in India. INSURABLE INTEREST AND LIFE INSURANCE CONTRACTS A life insurance contract is an aleatory contract. immoral or opposed to public policy. upon maturity of that policy or should death happen to him.[1912] 82 LJ 187: [1912] 2 Ch 581 . 4th edn. It is the existence of an insurable interest that alone differentiates a contract of insurance. yet it is a well settled principle of law that there has to be an insurable interest attached to a life insurance contract. In a life insurance policy. a specified sum of money. The interest must be pecuniary.14 So as to effect a life insurance contract. Therefore. should have an insurable interest in the life of the person. Also see C. An aleatory contract may be described as a contract based on an element of chance or uncertainty. to take an insurance policy in the name of the latter. The nature of insurable interest can thus be.13 it was held that a contract of life insurance is not a contract of indemnity. either to the latter. In England. 4. being a contract of indemnity. India and London Life Assurance Co. but is a contract to pay a definite sum in consideration of an annuity paid during life. mere inconvenience or disadvantage cannot be regarded as an insurable interest. The interest should not be a bare sentimental or emotional right or interest. to his legal dependants or executors as the case may be.“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”. AIR 1956 Mad 320: (1956) 1 Mad LJ 344 14 Bunyon on Life Insurance. who has no interest in the life of another person. must be accepted with caution.tend to narrow it. who is privy to the contract. it is required as a matter of public policy. for whom the policy is being taken. It is opposed to public policy to allow a person. Duraiswamy Iyengar v United India Life Assurance Co. the insurer contracts to pay the insured. for the validity of an insurance contract. Although it is difficult to lay down in a precise manner as to what would constitute insurable interest in a life insurance contract. followed by Cozens Hardy MR in Joseph v Law Integrity Insurance Co. the existence of an insurable interest is a mandatory precondition. 13 [1854] 15 CB 365: 139 ER 465. from a mere wager. 2. The interest should be lawful and must not be illegal. in consideration of premium. like a marine or a fire policy.

v France [1876] 94 US 561 . 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. and the husband his wife’s.16Farwell LJ has held that a wife may insure a husband’s life. who has a legal 15 16 [1836] 1 M&W 32 Reed v. upon his death. any person.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. Royal Exchange Assurance Co. As far as children are concerned. under English law. the American law extends the principle to certain other relationships viz parent and son. in England.[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. grandparent and grandchild etc. the Insurance Act. Thus in India too. In an American case21. does not contain any provision which explains the concept of insurable interest. 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. As regards spouses are concerned. 1745. insurable interest is governed by the English Marine Insurance Act. 1774 and the English Gambling Act 1845. 21 Aetna Life Insurance Co.20 While the English law restricts the scope of insurable interest to the parameters set by the statutes dealing on the subject. 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. was not required to show any significant reason for making an insurance for such a limited time period. Refuge Friendly Society [1886] 54 LT 644: 2 TLR 474 20 In England. insurable interest is limited to statutory insurable interest. suing on a policy effected by his testator on two years of his life. Similarly a child does not have an insurable interest in the life of his parent provided he is not dependent on the latter. In India.17 The English law limits insurable interest on a sentimental basis only to the relationship of husband and wife. wife or any other close relative.19 Therefore. which was recognised in the case of Halford v Khymer18. In the absence of any statutory explanation. 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. the English Life Assurance Act. apart from husband. but it need not continue to exist at the time of the occurrence of the loss. In Wainwright v Bland15 an executor. it is generally believed and accepted that a wife has an insurable interest in the life of her husband and vice versa. 1938. the rule. 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.

although both a shareholder and 22 23 SS Hubner “Life Insurance” pg. 397(as cited in para 606 of Halsbury’s Law of England. It is the insurable interest of a person that is protected by a fire insurance contract and not the subject matter insured.right to derive maintenance from a person. 17 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. a fire insurance contract also requires insurable interest on the subject matter insured.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. 2. The insured must have some legal relationship thereto so that he benefits by the preservation of the property. from fire. 28 Relevant excerpts from “Fire Insurance Law and Claims” by E. 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. 4th Edn. and 3. 62) . 25. INSURABLE INTEREST AND FIRE INSURANCE Like all insurance contracts. and is prejudiced by its destruction.J. Avtar Singh “Law on Insurance”1st edn @ Pg. are relations which originate from contractual transactions. can take a life insurance policy on the life of the latter without any proof of insurable interest.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. he loses his insurable interest in that thing and the contract between him and the insurer comes to an end. then on the life of the surety too. except when the latter is indebted to him personally and only to the extent of such indebtedness. loss or damage. lost or damaged. There must be a physical object which is capable of being destroyed. etc. there are three essentials of insurable interest: 1. Life insurance is a husband’s privilege. a wife’s right and a child’s claim. it is not necessary that the owner of the subject matter insured should actually be in possession of that subject matter. explosion. That physical object must constitute the subject matter of the insurance..D. Therefore a creditor has an insurable interest in the life of the debtor to the extent of his interest23and where the debt has been guaranteed by a surety. pg 161 29 [1925] AC 619 (as cited in Dr. and therefore. Vol. if the person transfers the thing insured to another.26 The insurable interest need not arise from ownership27 alone. As far as fire insurance is concerned. Peverett. A person has an insurable interest in the thing insured.28 In Macaura v Northern Assurance Co.22 Another set of relations which acquire insurable interest for effecting a life insurance. pg 325) 27 Ward v Carttar [1865] LR 1 Eq 29 @ pg 31: Romilly MR held that to have an insurable interest. if he is likely to suffer a direct loss upon its destruction. it can even arise in case of lawful possession or from a contract dealing with the subject matter insured.

If it does not exist at the commencement of the contract. that he shall be responsible for insuring the property or otherwise. 25. it was destroyed by fire. NS App Div: where the insured had built his house at his own expense and had a contractual right to acquire the land. A tenant has an insurable interest in the property which he rents. Pg. In a case31where a property. 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. [1877] 3 QB 173: 47 LJ QB 32: 37 LT 525 32 Relevant excerpts from M. Where a person has contracted with another to sell the subject matter insured. para 5 33 Marks v Hamilton [1852] 7 Exch 323: 155 ER 970 34 Heckman v Isaac [1862] 6 LT 383 35 E.32 Wharfingers and warehousemen. who has contracted to insure a property.a creditor may suffer loss upon destruction of their company’s property. A tenant. insured by fire. 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. continues to have an interest in it. if his liability continues. pg. as he stands to lose the beneficial enjoyment of the property in the event of destruction. by a will. para 607. 4th edn. common law and customs in trade.N. governed by statutes. The insurable interest of a tenant may arise either through an express clause in the tenancy agreement. was contracted to be sold and pending transfer of title. mortgagor and 30 See also Sellers v Continental Insurance Co [1974] 48 DLR (3d)369. 326) 31 Collingridge v Royal Exchange Assurance Corpn.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 a number of circumstances.D. with whom goods are entrusted for safekeeping and custody. A bailee need not show the nature of his interest to the insurer while effecting an insurance policy. he retains an insurable interest in that subject matter till the time the title in the subject matter is transferred.J. There are instances where in two or more persons are interested in the same subject matter insured viz. which is sufficient to give him an insurable interest.200. . on the former’s death for the owner might change his mind later. Insurable interest must be more than a mere expectation may be. to the buyer30. the insurable interest in the property should exist both at the inception of the policy as well as at the time of the loss. [1856] 5 E & B 870. contracts. in finality. Vol. even after his tenancy has come to an end. (Also see Halsbury’s Laws of England. In a fire insurance contract. provided the policy is effected solely on his own behalf. Peverett “ Fire Insurance Law and Claims” pg 162 para 6 36 Waters v Monarch Fire and Life Assurance Co. it cannot be the subject matter of insurance and if it does not exist at the time of loss. inn keepers and mortgagees. 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. he does not suffer any loss and so needs no indemnity. Srinivasan “ Principles of Insurance Laws” 7th Edn. have an insurable interest in those goods33and so do carriers. landlord and tenant. he was correctly described as “owner” and to have an insurable interest in the house.

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. termination or injury by the happening of the event insured against. arising out of the perils of the sea. bailor and bailee etc. Pg. against marine losses. 1906]: “In particular.41 A marine insurance policy effected without an insurable interest. 1963[ Section 1 of the English Marine Insurance Act. or may be prejudiced by its loss. on it. 4th Edn. KVS Sarma . 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. 1906 ] defines marine insurance as : “A contract of marine insurance is an agreement whereby the insurer undertakes to indemnify the assured. 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. 1963 . 69 Para 4. if there is an expectancy along with an existing present title.38Therefore. subject to the conditions and the extent of the policy.42 It is not necessary that to have an insurable interest. or by damage thereto. or 2. he may incur liability or suffer a loss. like all other insurance contracts. It is sufficient to constitute an insurable interest. in consequence of which he may benefit by the safety or due arrival of insurable property. be it a ship or the cargo. void in the eyes of law. 1963 [Section 5(2) of the English Marine Insurance Act. a person can only insure the subject matter if he is interested in the preservation and safety of that matter. both the insurance policies being valid. out of which such expectancy has arisen. which might arise from subject matter in 37 Section 3 of the Marine Insurance Act. 42 Section 6 of the Marine Insurance Act. KVS Sarma “Modern Law of Insurance” 4th Edn. 1906] 40 Section 7(2) of the Marine Insurance Act. derive some pecuniary benefit or advantage from its preservation. suffer some pecuniary loss or damage from its destruction.40A person has an insurable interest in the subject matter insured when he has such a connection with it that he will: 1. becomes a mere wager. 1963 [Section 5(1) of the English Marine Insurance Act. But expectation of some benefit. 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. Butterworths @ Pg 252 para 1) 39 Section 7(1) of the Marine Insurance Act. 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. the person insuring must be in possession of a vested right. Butterworths. or may incur liability in respect thereof” 41 Relevant excerpts from “Modern Law of Insurance” by KSN Murthy and Dr. that is to say.mortgagee. 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. in the manner and to the extent thereby agreed. or by detention thereof.

48 Where the subject matter insured has been mortgaged. Chalmers says “…The definition of insurable interest has been continuously expanding and the dicta on some of the older cases which 43 Stockdale v Dunlop [1840] 6 M & W 224: expectation of profit or commission.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. 25. As they are generally in possession of the captured property and liable to pay damages if they take possession illegally. 1963] 50 Ebsworth v Alliance Marine Insurance Co[1873] LR 8 CP 596 @ pg 638 according to Brett J .43 A partial as well as a contingent interest is also insurable. Vol. is a personal contract and hence. 1963 45 Sutherland v Pratt [1843] 11 M&W 296 46 Relevant excerpts from Halsbury’s Laws of England. in trust for the bonafide beneficiary. 210 47 [1764] 3 Burr 1512 48 But where the property. the mortgagor has an insurable interest in that subject matter to its full value and the mortgagee has an insurable interest on any sum due or to become due under the contract. in a marine policy.which the person insuring is not actually interested but expects to be interested is not an insurable interest. at the time of effecting the policy and if he acquires an interest in it after it has been lost. 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. 4th Edn. and may recover the whole amount on the condition that he shall hold the amount recovered. it is generally accepted that they have an insurable interest over such a property. is not an insurable interest under the policy.45 A marine policy. he can insure it to the extent of his interest. the owner has an insurable interest to the extent of such a sum.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. Para 377. 1906[Section 16(1) of the Marine Insurance Act. the insurable interest of the insured in the subject matter continues till the time he is in actual possession of it. to arise out of the sale of goods.50 Even captors have an insurable interest over the ship or cargo captured by them. If he has transferred the title in the subject matter to another person. 49 Section 14(1) of the English Marine Insurance Act. So long as the seller of a ship or of the goods retains any interest in the property.44The policy will be considered valid if the insured insures the subject matter without being interested in it. 44 Section 6(1) of the Marine Insurance Act. Insurable interest. through an agreement to that effect. Also see Seagrave v Union Marine Insurance Co [1866] LR 1 CP 305 and Sparkes v Marshall [1836] 2 Bing NC 761. 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. Pg. just like a fire policy. he ceases to have any interest in it and the policy will also come to an end. he can recover under the policy. which is the subject matter of a contract of sale has completely passed to the buyer from the seller. not contracted at the time of their loss.

which is void in the eyes of law. although it is not possible to give an exhaustive list of the various persons who are said to possess insurable interest. Insurable interest is a necessary precondition to all types of insurance contracts.would tend to narrow it must be accepted with caution…”51 Therefore. and no suit shall be brought for recovering anything alleged to be won on any wager. any person can effect a marine insurance policy as long as he has an insurable interest. In fact. CONCLUSION As has been discussed herein above.(See Footnote No. or entrusted to any person to abide by the result of any game or other uncertain event on which any wager is made” . Also see Walton J’s approval to the above quote in Morgan Galloway v Uzeilli. Whether a person has an insurable interest in the subject matter or not is a question of facts and circumstances of each case. 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.12) 52 Section 30 of the Indian Contract Act. 1872 defines Wager as : “Agreements by way of wager are void. it is the existence of insurable interest which differentiates a contract of insurance from a wager52. ------------------- 51 Chalmers “Marine Insurance”1901 Edn.