The principle of insurable interest is one of the essential elements of insurance. It can be defined as the substantial emotional, financial, or pecuniary interest in the subject matter of the insurance contract. It means the party stands to gain something from its existence or he will suffer a loss from its damage.
In an insurance contract, the party must have an insurable interest in the property, goods or life insured. It occurs due to the ownership, possession, or through a direct relationship with the life or object insured. Insurable interest must exist if the proposer and insured are two independent entities.
The existence of the life (person), property exposed to loss, damage or a potential liability
Such life, property, or liability must be the subject matter of insurance.
The party must bear a legal relationship with the subject matter – a common logic will determine whether the proposer would suffer a loss or not.
In life insurance, lack of insurable interest causes a moral hazard, and underwriters need to ensure the existence of insurance interest up to consideration only. Only one has an unlimited insurable interest in self-life but has a limited interest in the life of other people.
When an Insurable Interest Must Exist in Insurance?
In Life Insurance: Insurable interest must exist at the time of purchasing the insurance policy.
In Marine Insurance: Insurable interest must exist at the time of loss.
In Property and other Insurance: Insurable interest must exist at the time of purchasing the insurance policy as well as at the time of loss.
Also Read: Whole Life Insurance Policy Definition, Types, Features and Advantages in India
Who Will Have an Insurable Interest?
In Life Insurance
Life insured: Every person has an insurable interest in his own life.
Family members: Spouse have an insurable interest in each other. Parents have an insurable interest on their children but children do not have an insurable interest on parents. There is no insurable interest between siblings.
Employer: The employer will incur a financial loss in case of the death of the insured; hence the employer has an insurable interest in the life of the employee. The death claim will be used for recovering the monetary loss arising out of the employee’s absence.
Creditor: The creditor can only avail after taking the consent of the insured debtor and the sum assured will be given to the extent of the debt.
In Marine Insurance
The insurable interest depends upon the nature of the sales contract.
For example, Mr. Ram sends the goods to Mr. Rajveer on a CIF basis which means the insurance has to be arranged by Mr. Ram. Therefore, Mr. Ram will have an insurable interest in the goods. If during transit, any loss occurs then Mr. Ram will be compensated for the loss.
In Property and other Insurance:
Property/ Goods’ owner: The ownership in the property/ good creates the insurable interest in that property/good.
The tenant, bailee, and financier can also have an insurable interest in the property.
Example: Mr. Aman is an owner of a flat. He has bought a fire insurance policy for the flat. Later he sold the flat to Mr. Bhanu. Thereafter, a fire took place in the flat.
Also Read: Mis-selling in Insurance: Buy With Care
Mr. Bhanu will not get compensation from the insurer as he did not purchase the policy. Also, according to the principle, Mr. Aman no longer has an insurable interest in the property (flat).
If you facing any problem related to insurance, then you must contact your insurance company with your complaint. If you need help with your insurance complaint, you can approach Insurance Samadhan.*
Insurance Samadhan has resolved 14500+ insurance complaints. These insurance complaints include claim rejection, delay in claim settlement, mis-selling and fraud in insurance.
Contact us to get samadhan for your insurance-related issues, we’ll be happy to help you.
*Insurance Samadhan is a private organization and has no association with IRDA or any Government body.
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It means the party stands to gain something from its existence or he will suffer a loss from its damage. In an insurance contract, the party must have an insurable interest in the property, goods or life insured.
Insurable interest just means that the subject matter of the contract must provide some financial gain by existing for the insured (or policyholder) and would lead to a financial loss if damaged, destroyed, stolen, or lost.
In insurance, there are 7 basic principles that should be upheld, ie Insurable interest, Utmost good faith, proximate cause, indemnity, subrogation, contribution and loss of minimization.
In general, there are three types of risks that are insurable: liability risk, personal risk and property risk. Property risk is any risk that could cause a partial or total loss of property.
In the insurance world there are six basic principles that must be met, ie insurable interest, Utmost good faith, proximate cause, indemnity, subrogation and contribution. The right to insure arising out of a financial relationship, between the insured to the insured and legally recognized.
An example of insurable interest is a policyholder buying property insurance for their own house but not for their neighbour's house. The person does not have an insurable interest in any financial loss arising from damage to their neighbour's house.
Insurable interest refers to an investment that protects anything subject to a financial loss. A person or entity may have an insurable interest in an event, item, or, action when the loss or damage of the insured object or person can cause a financial loss.
Utmost good faith, or “uberrima fides” in Latin, is the primary principle of insurance. In fact, many would argue that utmost good faith is the most important insurance principle. Essentially, this principle states that both parties involved in an insurance contract should act in good faith towards one another.
For life insurance, the insurable interest only needs to exist at the time the policy is purchased. Since a policyowner must have an insurable interest in the insured at the time the policy is purchased, individuals cannot arbitrarily take out a life insurance policy on anyone they want.
Documents like court orders prove this relationship. Debtor-creditor relationship: If you loan someone money, you have an insurable interest in them since you may not recover your loan if they pass away. You can prove this relationship with a loan agreement.
For example, people can have an insurable interest in their homes, cars, spouse, and jobs. The extent of the interest only stretches as far as the person's or entity's investment reaches. For example, if two sisters co-purchase a home together worth $500,000, they each only hold a 50% investment in that property.
When buying life insurance, insurable interest must exist at the time the life insurance policy is purchased. If the policyholder and insured person are different, both the policyholder and named beneficiary must have an insurable interest and prove financial loss and hardship if the insured were to pass away.
In the world of insurance, there are six basic principles or forms of insurance coverage that must be fulfilled, including Utmost Good Faith, Insurable Interest, Indemnity, Proximate cause (proximal cause), Subrogation (transfer of rights or guardianship), and Contribution.
The characteristics of an insurable interest are: (1) The loss must occur by chance (2) The lost must be definite in terms of time an amount (3) The loss must be significant (4) The loss rate must be predictable (5) The loss must not be catastrophic to the insurer Which of the above characteristics are violated if the ...
Insurable interest is a component of legal purpose. This means that the person acquiring the contract (the applicant) must be subject to loss upon the death, illness, or disability of the person being insured.
Insurable Interest. The legal right to insure arising out of a financial relationship recognized at law, between the insured and the subject-matter of insurance. Features. Subject-matter, legal relationship and financial value.
Insurable interest is the financial relationship between the person applying for life insurance and the person whose life is to be insured at the time of the application, not at the time of the insured's death.
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