Insurable interest exist when an insured person drives a financial benefit or other kinds of benefit from the continuous existence of the insured objects.
A person has insurable interest in something when loss of or damaged made 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 an interest in their own homes and vehicles but not in their neighbours homes and vehicles.
What is insurable interest
Insurable interest definition: This is the legal right to insure, arising out of financial relationship, recognised at Law between insured and subject matter of insurance.
It acts as one of the qualities of insurable risk shows that is 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 of 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.
Example of subject matter are fire policy: building rocks, stock or machinery.
Life insurance policy: Assured life. And Marine policy: cargo or ship owners legal liability to third parties for injury or damage.
The term insurable interest with regard to the above-mentioned policy is not to mention subject is about the pecuniary interest in the measured 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, that is 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
1. There must be property, righ, interest, life, limbs or potential liability that are capable of being insured.
2. This property, right, limbs or potential liability must be the subject matter of the insurance.
3. 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.
4. The insured must be in a legally recognised relationship with the subject matter of insurance whereby he benefits from his continued safety, well-being or absence of liability and is prejudice by his destruction, damage, loss or injury.
Creation of the 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.
Example ownership of property or potential ability to all 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 will 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.
Insurable interest in all classes of insurance can be acquired through different ways; life insurance and property insurance.
Insurable interest in life insurance
A person has an unlimited insurance interest only on his life, that is there is no restriction regarding the insurable interest in one’s life although it will be determined by the ability to afford the premium.
Insurable interest in life insurance does not include in blood relationship between the parents and the children, and it 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 society act 1948, amended by the amendment act 1958 where a person may assure the life of a parent from a step parent or grandfather or to an amount of £30 which is considered to be enough for their burial expenses.
If an insurable interest is to is it between parents and children, it must involve financial relationship whereby the parents or the children suffer financial loss following the destruction of the basics on which the relationship was established.
For instance in insurable interest in life insurance, a father giving out loan to a son for commencement of a business outfit or for the purchase of an item such as vehicle or building of a house.
The insurance bill 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 partners lineup to the limits 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 if the 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 see 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 part owner only that he will be regarded as holding on trust for the other partners owners for the difference in the actual value of the property and his financial involvement.
2. Agent: An agent can affect the insurance on behalf of his principal of his principal provided the principal possess an insurable interest in that circumstances.
3. Mortgages and mortgagors: This often relates to the purchase of house, a building society which the mortgages 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 case, names of them of the mortgagees and mortgagors will be mentioned in the policy which will remain until the full payment of the loans by 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 will be responsible for the placement of the rules of properties, if damaged or destroyed.
5. Executor And Trustee: As a trustee or executor of a will, one is legally responsible for the property under his charge. This position has given rise to a insurable interest on the part of 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 Bryan 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 interest for Mr Bryan 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.
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With this i do hope i have answered your question on what is insurable interest and also the insurable interest in life insurance. Your questions and suggestions are welcomed.