LIST AND EXPLAIN THE CHARACTERISTICS OF INSURABLE INTEREST

Insurable interest refers to the financial or pecuniary interest that an individual or entity has in the subject matter of insurance. It is a fundamental principle in insurance that helps determine whether an individual or entity can legally obtain insurance coverage for a particular risk.

Here are characteristics of insurable interest:

1. Existence of a financial stake

The first characteristic of insurable interest is the existence of a financial stake or a potential financial loss for the policyholder. This means that the policyholder would suffer a financial loss if the insured item or person is damaged or lost. For example, if a person takes out an insurance policy on their car, they have a financial stake in the car’s well-being and would suffer a loss if the car were damaged or stolen.

2. Legal capacity

Another characteristic of insurable interest is that the policyholder must have the legal capacity to enter into an insurance contract. This means that the policyholder must be of legal age and mental capacity to understand the terms and conditions of the policy. If a person does not have the legal capacity to enter into an insurance contract, the policy will not be valid.

3. No speculative interest

Insurable interest cannot be based on speculation or the possibility of future financial gain. The policyholder must have an existing financial stake or a potential financial loss in the insured item or person. For example, if a person buys an insurance policy on a stock that they hope will increase in value, this would not be considered insurable interest because it is based on speculation.

4. No interest in one’s own wrongdoing

A policyholder cannot have insurable interest in an event that they intentionally caused or contributed to. For example, if a person sets fire to their own house and then takes out an insurance policy on the house, they would not have insurable interest in the damage caused by the fire.

5. No interest in the death of another person

Insurable interest cannot be based on the death of another person. This means that a person cannot take out a life insurance policy on someone else’s life unless they have a financial stake in that person’s life, such as being a beneficiary of the policy. For example, a spouse or a dependent child would have insurable interest in the life of the insured person, while a stranger would not.

6. Existence at the Time of Loss

Insurable interest should exist at the time of loss or when the insured event occurs. It is not enough to have had an insurable interest in the past; it must be present at the time of making an insurance claim. This characteristic ensures that individuals do not take out insurance policies solely for speculative purposes.

7. Public Policy

Insurable interest is influenced by public policy considerations. Insurance contracts are designed to protect against risks and promote stability within society. Therefore, insurable interest requirements prevent individuals from taking out excessive insurance policies on others’ lives or properties, as it may lead to moral hazards and potentially harmful practices.

8. Consent

Insurable interest requires the consent of the party being insured. This means that individuals cannot obtain insurance coverage on someone else’s life or property without their knowledge and permission. Consent is essential to protect against fraudulent activities and ensure that all parties involved are aware and agree to the terms of the insurance contract.