Insurable interest exists when an insured person derives a financial benefit or other kinds of benefit from the continuous existence of the insured object. A person has insurable interest in something when loss of or damage to that thing would cause the person to suffer a financial loss or other kind of loss.
Typically, insurable interest is established by ownership possession or direct relationship. For example, people have insurable interest in their own homes and vehicles but not in their neighbours’ homes and vehicles.
DEFINITION OF INSURABLE INTEREST
Insurable interest is the legal right to insure, arising out of financial relationship, recognized at law between insured and subject matter of insurance.
LEGAL REQUIREMENTS FOR INSURABLE INTEREST
Insurable interest as one of the qualities of insurable risk shows that its presence is very essential in the creation of a valid contract which is further confirmed by Part X of Insurance Act 2003 where prospective policy holders are expected to possess insurable interest. To further understand the principle of insurable interest, there will be need to explain the concept of subject matter of insurance and subject matter of the contract.
SUBJECT MATTER OF INSURANCE
The term, Subject matter of insurance is said to refer to a physical object. It could be a property or an event that may result in a loss of a legal right or creation of a legal liability. Examples of subject matter are:
- Fire policy: Building, stock or machinery.
- Life assurance policy: Assured life.
- Marine policy: cargo or ship owner’s legal liability to third parties for injury or damage.
The term insurable interest with regard to the above mentioned policies is not the mentioned subject itself but the pecuniary interest in the mentioned object. That is, the pecuniary interest in building, stock, machinery, person’s legal liability for injury or damage, ship.
The subject matter of contract is referring to the financial interest of an insured in the subject matter of insurance i.e. the financial relationship between the insured and the subject matter. It is what an insured is going to lose financially upon a loss or damage to the subject matter of insurance.
ESSENTIALS OF INSURABLE INTEREST
- There must be property, right, interest, life, limbs or potential liability that are capable of being insured.
- These property, right, limbs or potential liability must be the subject matter of the insurance.
- The relationship between the insured and the subject matter of the insurance must be the type that could either benefit the insured if nothing happens to the subject matter of the insurance, or as the type that will affect the insured negatively following the destruction or damage of the subject matter.
- The insured must be in a legally recognized relationship with the subject matter of insurance whereby he benefits from its continued safety, well-being or absence of liability and is prejudiced by its destruction, damage, loss or injury.
CREATION OF INSURABLE INTEREST
The presence of insurable interest in the contract of insurance are made possible through the following:
1) By common law: This refers to those interest acquired through one’s existence e.g. ownership of property or potential liability towards others caused by negligence on one part to another.
2) By contract: It is interest that arises through contractual relationship between one party and another. In any contract where certain contractual conditions are imposed on either party, such party would be held liable for contravening the conditions and as a result, the party has an insurable interest to enter into insurance contract to protect such conditions. Such instances include:
- A tenant required by tenancy agreement to maintain or repair the building occupied.
- A building contractor that would be liable for negligence of sub-contractors.
3) By statute: The right to insurable interest was also made possible following the placement of responsibilities on certain people through various laws enacted.
METHODS OF ACQUIRING INSURABLE INTEREST
Insurable interest in all classes of insurance can be acquired through different ways:
A person has an unlimited insurance interest on his life. i.e. there is no restriction regarding the insurable interest in one’s life although it will be determined by the ability to afford the premium. Blood relationship between the parents and the children does not constitute the right to insurable interest in each other’s life.
A person who is married has an interest on his or her spouse. In this case, wife can affect policy on the life of her husband and husband can also affect policy on the life of his wife.
An exception of this situation is expressed in the Industrial Assurance and Friendly Societies Act 1948, amended by the Amendment Act 1958, where a person may assure the life of a parent, step parent or grand father up to an amount of 30 pounds which is considered to be enough for their burial expenses. If an insurable interest is to exist between parents and children, it must involve financial relationship whereby the parents or the children suffer financial loss following the destruction of the basis on which the relationship was established. For instance, a father giving out loan to his son for commencement of a business outfit or for the purchase of an item such as vehicle or building of a house. The insurable interest of the father in this aspect is limited to the amount of loan given to his son.
In the case of partnership, a partner can insure the other partner’s line up to the limit of their financial involvement such as they stand to lose on the death of any one of them.
A creditor can also stand to lose money if a debtor dies before repaying the loan and therefore has an insurable interest to the extent of the loan plus interest. But a debtor has no insurable interest on the life of the creditor. This is quite obvious since if the creditor dies, the debtor has nothing to lose.
Insurable interest in property insurance can arise from any of the following situations.
1) Ownership: The owner of a property has insurable interest in the property which allows him to seek the insurance policy. In the case of property jointly or partially owned, such insurable interest will be limited to the extent of their financial involvement although the property may be insure for its full value by the part owner only that he would be regarded as holding on trust for the other part owners for the difference in the actual value of the property and his financial involvement.
2) Agent: An agent can affect insurance on behalf of his principal provided the principal possesses an insurable interest in that circumstance.
3) Mortgagees and mortgagors: This often relates to the purchase of house, a building society which the mortgagees and the mortgagors who is the purchaser. Both parties under this arrangement have an insurable interest in the property. However, the insurable interest of the mortgagees will be limited to the extent of the loan granted to the mortgagors. The insurance of the property is usually arranged on a joint basis in which case, names of the mortgagees and mortgagors will be mentioned in the policy which will remain until the full payment of the loans by the mortgagors.
4) Bailees: A bailee is a person legally holding the goods of another either for payment or gratuitously. A vulcanizer who is holding a tyre for repair upon which payment will be made is a bailee. The goods or property of another person which is legally in possession of certain people can be insured by them against their future financial loss while in their care for its full value since they would be responsible for the replacement of the goods or properties, if damaged or destroyed. Bailees include mechanics, repairers, tailors, etc.
5) Husband and wife: A spouse has insurable interest in the property of his/her partner so they also have mutual interest on each other’s lives. Mr. and Mrs. Babalola are said to have insurable interest in the property owned by either of them so also they have insurable interest in the life of each other.
6) Executor and trustees: As a trustee or executor of a will, one is legally responsible for the property under his charge. This position has given rise to insurable interest on the part of the trustee or executor in the property. There is often need to effect an insurance policy to cover the property of his upon which an executor or a trustee assumes control.
For example, Mr. Babalola is the executor of a will of his late friend. There are some properties he ought to keep, maintain and control for the benefit of the beneficiaries of the deceased. The law has created an insurable interest for Mr Babalola as a result of his relationship with the property of his deceased friend; he can therefore obtain an insurance policy to cover the loss or damage to the property in his custody.