Law of Insurance

ASSIGNMENT




Insurable Interest: Nature and Extent

Submitted To:
Dr. Saurabh Chaturvedi
Faculty of Insurance Law
COLS

Submitted By:
Yashraj S. Bundela 82
Siddarth Sharma 71
Nikita Sharma 40
Manish Pathak 33
Ayushi Mittal 11
B.A. LL. B. (Hons.)VIII
th
Semester


UNIVERSITY OF PETROLEUM AND ENERGY STUDIES
DEHRADUN

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Objective of the Assignment
The objective of the assignment is to enhance the understanding of
subject and to ameliorate the knowledge of Insurance theme
And also to accentuate the skills of legal research and critically
analysis of the legal subject


Importance of the Topic
To demark the difference between Insurance contracts and wagering
contracts.
Important to avoid any fallacies in the matter of misusage of insurance.
Since insurable interest is the soul of contract of insurance, so it is very
important to understand the meaning and its associated subjects.













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Chapterisation
1. Introduction
2. Origin in insurable interest and its position in England.
3. Insurable interest: what it means?
4. Characteristics of insurable interest
5. Nature of insurable interest
6. Importance
7. Types of insurable interest
8. Persons having insurable interest
9. The need for insurable interest
10. Insurable interest and life insurance contracts
11. Insurable interest and fire insurance
12. Insurable interest and marine insurance
13. Insurable interest when terminates
14. Conclusion.




Area of concentration
Introduction of the concept of insurable interest,
Its importance in law of Insurance,
Its colours on Life as well as on general Insurance,
Effect of Insurable interest on different parties,
And its voyage from England to India





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Table of contents
1. Objective of the Assignment.............................................................02
2. Importance of the topic.....................................................................02
3. Area of Concentration.......................................................................03
4. Introduction.......................................................................................05
5. Origin in insurable interest and its position in England....................07
6. Insurable interest: what it means?.....................................................10
7. Characteristics of insurable interest..................................................12
8. Nature of insurable interest...............................................................12
9. Importance........................................................................................14
10. Types of insurable interest................................................................14
11. Persons having insurable interest......................................................15
12. The need for insurable interest..........................................................16
13. Insurable interest and life insurance contracts..................................17
14. Insurable interest and fire insurance................................................19
15. Insurable interest and marine insurance............................................21
16. Insurable interest when terminates...................................................24
17. Conclusion.........................................................................................28
18. Summary of the Assignment.............................................................29










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Introduction

To understand insurable interest it is important to understand the concept of insurance.
A promise of compensation for specific potential future losses in exchange for a periodic payment.
Insurance is designed to protect the financial well-being of an individual, company or other entity in
the case of unexpected loss. Some forms of insurance are required by law, while others are optional.
Agreeing to the terms of an insurance policy creates a contract between the insured and the insurer. In
Exchange for payments from the insured (called premiums), the
insurer agrees to pay the policy holder a sum of money upon the occurrence of a specific event. In
most cases, the policy holder pays part of the loss (called the deductible), and the insurer pays the rest.
Examples include car insurance, health insurance, disability insurance, life insurance, and business
insurance.
Insurable Interest True, valid, determinable, and direct economic stake of an insurance
policy holder or of the beneficiary of the policy in the continued existence or safety of
the insured property or person. Often stated as "an interest in the outcome of
a contingency other than that arising under the contract of insurance," an insurable
interest means that the policy holder (or the beneficiary) must stand to suffer a
direct financial loss if the event (against which the insurance cover was bought) does occur.
A tenant may not necessarily have a direct insurable interest in the rented property but
the landlord may. An employer may not necessarily have such claim in the life of
an employee, but a married couple may in one another's life. To an insurance company, an
insurable interest is the basic reason for issuing a legal insurance cover, to an insured (or
beneficiary) it gives the legal right to enforce an insurance claim. According to
legal precedents:
(1) in life insurance, an insurable-interest must be present when the insurance policy is taken,
but not necessarily when a claim occurs; for example, anyone who takes a life insurance
policy on his or her spouse, and continues to pay premium even if the marriage breaks up,
is entitled to collect death benefits under the policy.
(2) in marine insurance, an insurable-interest must be present when a claim occurs, but not
necessarily when the policy is taken; for example, a supplier may obtain a blanket policy for
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the goods to be shipped in an year but must show that the goods were actually shipped
when making a claim for loss or damage, and
(3) in most other types of insurance (such as fire or auto insurance), an insurance interest
must be present, both at the time the policy is taken and when a claim occurs; for example, a
homeowner who sells the house on which fire insurance was taken, cannot collect on it in
case of a fire. Insurable interest is one of the foundations of insurance because, in its absence,
insurance would be no different from gambling and (even if legal) would not constitute
a binding agreement
1
.

In the law of insurance, the insured must have an interest in the subject matter of his or her
policy, or such policy will be void and unenforceable since it will be regarded as a form of
gambling. An individual ordinarily has an insurable interest when he or she will obtain some
type of financial benefit from the preservation of the subject matter, or will sustain pecuniary
loss from its destruction or impairment when the risk insured against occurs.
In certain jurisdictions, the innocent purchaser of a stolen car, who has a right of possession
superior to all with the exception of the true owner, has an insurable interest in the
automobile. This is not the case, however, where an individual knowingly purchases a stolen
automobile.
Insurable interest is not dependent upon who pays the premiums of the policy. In addition,
different people can have separate insurable interests in the same subject matter or property.
In certain situation these question arises that whether Insurable interest required ? A basic
principle of insurance law is that the insurance policy does not cover any property in which
the insured has no insurable interest. The insurance must cover property (or other loss) in
which the insurance beneficiary has some legal right. Otherwise "insured" parties could
gamble in the risks of loss by others and thereby turn insurance underwriting into a casino for
gamblers. Without an insurable interest, the underwriter has no assurance that the insured will
use any efforts to protect and preserve the insured property (or other potential liability) from
loss.

1
Murthy KSN & Sarma Dr KVS, Modern Law of Insurance, Lexis Neexis,4
th
edition
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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
meant to safeguard man from unforeseen events, which might be of some detriment to him. It
provides him with an assurance to save him from any loss which might be brought about by
the happening of any unforeseen event either to his life or property.

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 by describing the nature
of insurable interest and also explains the necessity of an 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.


ORIGIN OF INSURABLE INTEREST AND ITS POSITION IN ENGLAND

The insurable interest doctrine, as recognized today, originated in English statutes designed to
remove insurance contracts from the environment of gambling and the misconduct commonly
associated with one having the ability to profit from anothers loss. As described in the
Appleman insurance treatise, English underwriters of the eighteenth century insured marine
risks without requiring the policy beneficiary to have an interest in the vessel or its
cargo. The practice created an incentive to destroy the insured property by those expecting to
receive insurance benefits from the loss. The English Parliament reacted to the situation in
1749 by enacting the Statute of George II
4
, which recognized that a mischievous kind of
gaming or wagering had caused great numbers of ships, with their cargoes, [to] have . . .
been fraudulently lost and destroyed . . . . The statute sought to remedy the situation by

2
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
19 Geo. 2, ch. 37 (1746)
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declaring that assurances for shipping risks not supported by an interest, or by way of gaming
or wagering, would be null and void to all intents and purposes.
According to Appleman, enterprising Englishmen insured the lives of famous persons
reported to be seriously ill and the unfortunate gentlemen accused of crimes punishable by
death. The amount wagered was the policy premium and the gamble, obviously, was whether
the insured person lived or died. The wagers had a substantial, negative impact on the persons
whose lives were insured. In his 1761 publication The Mystery and Inquiry of Stock
Jobbing, Thomas Mortimer wrote:
The inhuman sport affected the minds of men depressed by long sickness; for when such
persons, casting an eye over a newspaper for amusement saw that their lives had been
insured in the Alley at 90 per cent, they despaired of all hopes; and thus their dissolution was
hastened.
In 1774, Parliament enacted a statute
5
to discourage the mischievous kind of gaming on
human life:
no insurance shall be made . . . on the life or lives of any person or persons, or on any other
event or events whatsoever, wherein the person or persons for whose use, benefit, or on
whose account such policy or policies shall be made, shall have no interest . . ..
The English Statutes of George II and George III form the fundamental principles of the
insurable interest doctrine by requiring owners of property and life insurance to have an
interest the subject matter of those contracts.
Two major cases interpreted insurable interest legislation prior to 2005. First, Lucena v.
Craufurd,
6
laid out the definition of insurable interest for England and all of its territories.
Laying out what later became known as the beginnings of an economic relationship test,
[t]o be interested in the preservation of a thing, is to be circumstanced with respect to it as to
have benefit from its existence, prejudice from its destruction.
7
Thus, if ones position in
life were either benefitted or damaged by an interest in a life or object, then an interest can be
claimed in that subject. This logic seems mildly circular, as the existence of one legal right
depends on the existence of other legal or equitable rights. Macaura v. Northern Assurance,

5
14 Geo. 3, ch. 48 (1774)
6
1806 2 Bos & Pul (NR) 269, 320
7
Id.
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over 100 years later helped sharpen the definition of an insurable interest only somewhat.
8
In
Macaura, Lord Buckmaster indicated that no shareholder had any right to any company
property because she (or, more likely at the time, he) had no legal or equitable interest.
According to Macaura, a shareholders relationship was to the company, not its goods and
thus any damage to the goods was not to the shareholder, but merely to a companys assets.
To at least one Lord adjudging the Macaura case, this difference in interests mirrored the
separation of ownership and control in a corporation. The Macaura court also indicated that
a creditor does not have an insurable interest in a debtors property, but an interest did exist in
the life of that debtor. More recently in 1987, Insurance Co (Canada) v. Kosmopolous,
9
in
Canada called into question the legal interest test developed in Lucena. The Kosmopoulous
court, decided by the Supreme Court of Canada, found no basis in public policy for a
restrictive formalistic definition. Thus, some economic relationship or concern in the subject
of the insurance would be sufficient for an insurable interest. This economic interest test was
said to fall in line with the majority of U.S. jurisdictions on the topic. Uncertainty in both the
definition and status of an insurable interest remained paramount in England until 2005.
At least legislatively, the area of insurable interest law remained unchanged until the
Gambling Act of 2005.
10
The Gambling Act intended to regulate new gambling ventures on
the internet and through technologies that helped such transactions occur outside British Law.
[The English] government wanted to provide rigorous and effective protection for the public
by creating a regulatory regime for gambling.
11
The Gambling Act repealed Section 18 of
the 1845 Gaming Act and replaced it with the following language, a fact that a contract
relates to gambling does not prevent its enforcement.
12
Thus, by making gambling legal in
an effort to regulate it in the United Kingdom, the insurable interest doctrine was dealt a
death knellat least when it came to insurance relating to property. Meanwhile, for life
insurance, the 1774 Act still controls. Thus, in England, the insurable interest doctrine was
eliminated by accident.




8
[1925] AC 619.
9
1987 34 DLR (4
th
) 208.
10
See Gambling Act, 2005, c. 19, 334-335 (Eng.)
11
Note 18 at 8. (citing British Government Response to the First Report of the Joint Committee on the Draft
Gambling Bill, session 2003-04 (June 2004) p. 2).
12
See Gambling Act, 2005, c. 19, 335.
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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. Thus it is very clear that a
contract of insurance is a contract of indemnity, based on the principles of uberrima fides
and insurable interest. 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. 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.
Rodda defines insurable interest as:
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
13

MEANING
Webster 3
rd
new international Dictionary has defined this term as interest (as based on
blood tie or likely hood of financial injury) i.e., judged to give an insurance applicant a
legal right to enforce the insurance contract against the objection that it is a wagering
contract. This term has not been defined in the Insurance Act 1988 but the definition
has been given in the section 7 of Marine Insurance Act, 1963 According to which a
person is interested in a Marine adventure where he stands in any legal or equitable
relation to the adventure to any insurable property at risk therein, in consequence of
which he may benefit by the safety or due arrival of insurable property, or may be
prejudiced by its loss, or by damage thereto, or by the detention thereof, or may incur
liability in respect thereof.
It answers the questions: What can be insured? ; Who can have an insurable interest against
loss of a property; Who can have an interest against loss of life in a relationship that can be
subject to be insured? In other words, who can insure whom against loss of life? ; Who may
not insure or who can be seen to have no interest in a loss in order to ensure?

13
WH Rodda Fire and Property Insurance Pg. 22
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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.
Insurable interest is the legal right of the insured in insurance. The taking of an insurance
policy does not protect the insured property from loss or damage, but protects the insureds
interest in the property.
In a case before in the Adndra Pradesh high court, namely , united india insurance comp. Ltd
v. Shri balaji dental laboratories
14
, respondent had taken one policy of fire , lightening ,
explosion , malicious damages etc and other policy was for burgalary , house breaking and
damages caused in December 1987 regarding which a police report was lodge and a claim
was preferred with the insurance company that was repudiated on the ground that the lost
caused to machinery etc. Was in the premises that was not insured. The question for
determination was whether the respnedent had insurable interest in the property. The
respondent was admittedly a lesse who had mortgaged the leasehold interest to the Andhra
Pradesh State Finance Corporation.
The contention for the appellant was that since the respondents were not owner of the
property in question, they had no insurable interest in the premises insured and, therefore,
they were not entitled to the insured amount. In this connection, the court refrred to Gnana
Sundram v. Vulcon Insurance Co. Ltd.
15
where the meaning of Insurable interest was
explained. In that case a suit was filed for recovery of an amount under an insurance policy in
respect of a house and the objection that was raised by the insurance company was that the
plaintiff was only an agreement holder and since he had no right of ownership he was not
entitled to the claim the amount ensured.




14
(2001) 103,company case 58 (1998)6 ald
15
(1931) 1 Comp Cas 3665 (Rangoon)
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CHARACTERISTICS OF INSURABLE INTEREST
The following are some important characteristics that emerge from the definition of insurable
interest.
1. There must be some subject matter to ensure, namely, the life of a person, property
like house, vehicle, etc;
2. The insured must have some legally recognised relationship with the subject matter of
the insurance.
3. The insured must be benefitted by the safety of the subject matter and suffers loss if
the subject matter is lost, damaged or destroyed;
4. The subject matter should be definite and it should be capable of being valued in
terms of money.
NATURE OF INSURABLE INTEREST
The insurable interest must have a pecuniary value i.e. it must be measurable in terms of
money. It must be recognised and enforceable by law. In Geismar v. Sun Alliance and
London Insurance Ltd. and another
16
it was held that although the purchase of goods abroad
will normally result in the insured having an insurable interest in these goods but, if he
smuggles them into the country without disclosure to the Customs authorities, an insurable
interest does not exist, and he is possession of the goods illegally, which are subject to
forfeiture. In Lucena v. Craufurd
17
insurable interest was explained as:
A man is interested in a thing to whom advantage may arise or prejudice happen from
the circumstances which may attend it. Interest does not necessarily imply a right to the
whole, or a part of a thing, nor necessarily and exclusively that which may be subject of
privation, but the having some relation to, or concern in the subject of insurance, which
relation or concern by the happening of the perils insured against may be so affected as to
produce a damage, detriment or prejudice to the person insuring; 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 for those risks or dangers, he may be said to interested
in the safety of the thing. The property of a thing and the interest divisible from it may be
very different; of the first, the price is generally the measure, but by interest in a thing every

16
[1977] 3 All ER (QBD)
17
[1806] 2 Bos. & P(N.R) 269
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benefit or advantage arising out of or depending on such a thing may be considered as
comprehending
Although the insurable interest has to be enforceable by law, the enforceability is not the sole
criterion, howsoever strong it might be. Lord Eldon has observed that expectation, though
founded on highest probabilities, is not interest and it is equally not interest whatever might
have been the chances in favour of expectation.
18
In Moran Galloway v. Uzielli
19
Lord
Walton observed that the definition of insurable interest has to be continuously expanding,
and dicta in some of the older cases, which tend to narrow it, must be accepted with caution.
Interest may thus be possessory, expectant or contingent or equitable and not necessarily
vested.
It is the existence of an insurable interest that alone differentiates a contract of insurance,
being a contract of indemnity, from a mere wager. Therefore, for the validity of an insurance
contract, the existence of an insurable interest is a mandatory precondition.
Thus, in nutshell nature of insurable interest can be summarized as under :
1. There must be some subject matter to insure, namely, the life of a person, property
like house, vehicle etc.
2. The insured must have some legally recognized relationship with the subject-
matter of the insurance.
3. The insured must be benefited by the safety of the subject matter and suffers loss
if the subject matter is lost, damaged or destroyed.
4. The subject matter must be definite and it must be capable of being valued in
terms of money.
5. The interest should not be mere sentimental right or interest, for example, love
and affection alone cannot constitute insurable interest.
6. It should be right in property or a right arising out of contract in relation to
property.
7. The interest must be pecuniary, capable of estimation in terms of money.
8. The interest should be lawful and must not be illegal, immoral or opposed to
public policy.

18
Ibid
19
[1905] 2 KB 555, 563
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IMPORTANCE
The significance of insurable interest is the contract of insurance came into existence when
the assured has an insurable interest in the subject-matter of insurance. This serves as in
important element of insurance and as such insurance without insurable interest is
inoperative. Insurable interest denotes the legal right to insure. The insured is so situated with
regard to the things in such a manner that he would have benefit from its existence and loss
from its destruction. The following are the broad essentials of insurance interest:
There must be a physical object which is subject to risks.
It must be capable of measurement.
The insured must have a legal relationship with regard to the subject matter.
The physical objects of a thing must be treated as the subject matter of insurance.
There must be a potential liability.
In life insurance, insurable interest exist at the time of making contract. In fire insurance, it
exist both at the time of making contract and incurring losses. In other insurance contracts,
insurable interest exist at the time of loss only.
For instance, a person or business can have an insurable interest in important relationships
such as a family member or key employee.
If no insurable interest exists between the policyowner and the insured at policy issuance, the
life insurance policy will be little more than a bet or wager on the insureds life. This is
contrary to the purpose of life insurance and is a detriment to consumer safety. However,
determining an insurable interest can be difficult and insurance carriers and agents sometimes
attempt to push the envelope
20
.
TYPES OF INSURABLE INTEREST
Time or duration of interest
At, one time it was thought, that just as it was in marine insurance, interest must be shown to
exist at the time of loss, similarly view was even for life insurance. But the decision was
overruled in Dalby V London Life Insurance Company
21
where it was held that insurable

20
www.businessdictionary.com/definition/insurable-interest.html
21
(1854) 15 CB 365
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interest in life insurance need be proved to have existed at the time of taking the policy and
the date only.
In life insurance the presence of insurable interest is necessary at the time of the
commencement of the policy and it is not necessary afterwards not even at the time of the
occurrence of the risk, so cannot be considered as a contract of indemnity. That is in life
insurance contracts the insurable interest must exist at the time of insurance.
But in some other forms like Fire or Marine insurance the insurable interest must exist at both
times as a Personal Contract at the commencement and as a Contract of Indemnity at the time
of occurrence of event. That is in marine or fire insurance, the insurable interest should be
present when the loss had been caused.
PERSONS HAVING INSURABLE INTEREST
Every person is presumed to have insurable interest in his/her life, but it is limited or
restricted by the capacity of the person to pay the premium.
Husband and wife
A husband has insurable interest in the life of his wife and vice versa is also true. In Reed V
Royal Exchange Assurance Co
22
, it was observed that it must be presumed that every wife
had interest in the life of her husband. It means that wife may prefer an insurance claim on
death on her husband.
When a husband insures the life of the wife or vice-versa, even after dissolution of marriage
the policy subsists, because the subject matter of the insurance is the life other spouse, and
not the marriage.
Earlier it was well settled law that wife had insurable interest in the life of the husband on
reason that she depends upon him. But after passing of English Married Womens property
Act, it is now well settled by virtue of section 2 that a husband is presumed to have interest in
the life of the wife. This principle was laid down in Reed V Royal Exchange Assurance Co.



22
(1975) PEAKE Add Cas 70
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Parent and child
Parents have no insurable interest in the lives of their child unless a person has some
pecuniary interest in the life of the child because only love and affection is not sufficient to
constitute an insurable interest.
A child is presumed to have insurable interest in the life of the parent because it depend on
the life of the parent for support.
Employee and Employer
An employee has insurable interest in the life of employer to the extent they are working for
him.
Company
A company has insurable interest in the life of its important employees.
Creditor and Debtor
A creditor may have insurable interest in life of debtor only to the extent of loan advanced to
the debtor. For eg. When a creditor insured the life of the debtor the policy continues even
after debt is paid because the subject matter of insurance in that type of contract is the life of
the debtor and not the debt.
Partner and Co-partner
A partner in a firm has insurable interest in the life of the co-partner to the extent of his share
in the business.

THE NEED FOR INSURABLE INTEREST
All risks are not insurable; otherwise an insurance policy would become a wagering contract
or betting. A wagering contract is illegal in nature, in accordance to Section 30 of the Indian
Contract Act. But a subject matter of a contract must be legal. What separates an insurance
contract from a wagering contract is that an insured should have an insurable interest in the
subject of insurance. In other worlds, it is necessary that the proposer must have a stake in the
continuance of the subject matter to be insured and he/she would incur heavy loss if the risk
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occurs. The policyholder must be in a direct contact with the subject matter of insurance,
whereby he benefits from the safety and would suffer loss or damage due to its non-existence.
It has been observed that a person has insurable interest in his own life. In the case of life
insurance policy, it is necessary that the insurable interest exist at the time of taking the
policy.
It prevents wagering on the life of the assured

INSURABLE INTEREST AND LIFE INSURANCE CONTRACTS
A life insurance contract is an aleatory contract. An aleatory contract may be described as a
contract based on an element of chance or uncertainty. In a life insurance policy, the insurer
contracts to pay the insured, in consideration of a price called as premium, a specified sum of
money, either to the latter, upon maturity of that policy or should death happen to him, to his
legal dependants or executors as the case may be. In Dalby v. India and London Life
Assurance Co
23
,

it was held that a contract of life insurance is not a contract of indemnity,
like a marine or a fire policy, but is a contract to pay a definite sum in consideration of an
annuity paid during life.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. Therefore in a life insurance
contract, it is necessary that the person, who is privy to the contract, should have an insurable
interest in the life of the person, for whom the policy is being taken. Although it is difficult to
lay down in a precise manner as to what would constitute insurable interest in a life insurance
contract, yet it is a well settled principle of law that there has to be an insurable interest
attached to a life insurance contract. It is opposed to public policy to allow a person, who has
no interest in the life of another person, to take an insurance policy in the name of the latter.
In England, insurable interest is mandated by the Life Assurance Act, 1774 while in America
and in India, it is required as a matter of public policy.

23
[1854] 15 CB 365: 139 ER 465; Also see C. Duraiswamy Iyengar v United India Life Assurance Co. AIR 1956
Mad 320: (1956) 1 Mad LJ 344
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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, but it need not continue to exist at
the time of the occurrence of the loss.
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. In Wainwright v
Bland
24
an executor, suing on a policy effected by his testator on two years of his life, was not
required not to show any significant reason for making an insurance for such a limited time
period. As regard spouses are concerned, it is generally believed and accepted that a wife has
an insurable interest in the life of her husband and vice versa. Lord Kenyon CJ declared that
it must be presumed that every wife had interest in the life of her husbandand 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 husbands estate to another, upon his death
25
.

Farwell LJ has held
that a wife may insure a husbands life, and the husbands his wifes.
26
The English law limits
insurable interest on a sentimental basis only to the relationship of husband and wife.
As far as children are concerned, in England, the rule, which was recognised in the case of
Halford v Khymer
27
, 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. Similarly a child does not
have an insurable interest in the life of his parent provided he is not dependent on the latter.
28

Therefore, under English law, insurable interest is limited to statutory insurable interest.
While the English law restricts the scope of insurable interest to the parameters set by the
statutes dealing on the subject, the American law extends the principle to certain other
relationships viz parent and son, grandparent and grandchild etc. In an American case
29
, 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.
The Insurance Act, 1938 of India does not contain any provision which explains the concept
of insurable interest. In the absence of any statutory explanation, 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. Thus in India too, apart from husband,

24
[1836] 1 M&W 32
25
Reed v. Royal Exchange Assurance Co.[1795] Peake Add Cas 70
26
Griffith v Fleming [1909] 100 LT 765: [1909] 1 KB 805: [1908-10] All ER 760 CA
27
[1830] 10 B&C 724: 109 ER 619
28
Howard v. Refuge Friendly Society [1886] 54 LT 644: 2 TLR 474
29
Aetna Life Insurance Co. v France [1876] 94 US 561
19 | P a g e

wife or any other close relative, any person, who has a legal right to derive maintainance
from a person, can take a life insurance policy on the life of the latter without any proof of
insurable interest. Life insurance is a husbands privilege, a wifes right and a childs claim.
22

Another set of relations which acquire insurable interest for effecting a life insurance, are
relations which originate from contractual transactions. Therefore a creditor has an insurable
interest in the life of the debtor to the extent of his interest
30
and where the debt has been
guaranteed by a surety, then on the life of the surety too.
31
In Powell v Dewy
32
it was held that
a partner of a firm has no insurable interest in the life of the other partner, except when the
latter is indebted to him personally and only to the extent of such indebtedness.

INSURABLE INTEREST AND FIRE INSURANCE
Like all insurance contracts, a fire insurance contract also requires insurable interest on the
subject matter insured. The insurable interest need not arise from ownership

alone, it can even
arise in case of lawful possession or from a contract dealing with the subject matter insured.
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, from fire, explosion etc and therefore, if
the person transfers the thing insured to another, he loses his insurable interest in that thing
and the contract between him and the insurer comes to an end. It is the insurable interest of a
person that is protected by a fire insurance contract and not the subject matter insured. A
person has an insurable interest in the thing insured, if he likely to suffer a direct loss upon its
destruction.
As far as fire insurance is concerned, there are three essentials of insurable interest:
1. There must be a physical object which is capable of being destroyed, lost or damaged;
2. That physical object must constitute the subject matter of the insurance; and
3. The insured must have some legal relationship thereto so that he benefits by the
preservation of the property, and is prejudiced by its destruction, loss or damage.



30
Godsall v Boldero [1807] 9 East 72: 103 ER 500
31
Beauford v Saunders [1877] 25 WR 650
32
[1898] 123 Log NC
20 | P a g e

In Macaura v Northern Assurance Co.
33
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,
although both a shareholder and a creditor may suffer loss upon destruction of their
companys property. Where a person has contracted with another to sell the subject matter
insured, he retains an insurable interest in that subject matter till the time the title in the
subject matter is transferred, in finality, to the buyer. In a case,
34
where a property, insured by
fire, was contracted to be sold and pending transfer of title, it was destroyed by fire, 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.
In a fire insurance contract, the insurable interest in the property should exist both at the
inception of the policy as well as at the time of the loss. If it does not exist at the
commencement of the contract, it cannot be the subject matter of insurance and if it does not
exist at the time of loss, he does not suffer any loss and so needs no indemnity.


Wharfingers and warehousemen, with whom goods are entrusted for safekeeping and
custody, have an insurable interest in those goods
35
and so do carriers, inn keepers and
mortgagees. A tenant has an insurable interest in the property which he rents. The insurable
interest of a tenant may arise either through an express clause in the tenancy agreement, that
he shall be responsible for insuring the property or otherwise, as he stands to lose the
beneficial enjoyment of the property in the event of destruction, which is sufficient to give
him an insurable interest. A tenant, who has contracted to insure a property, continues to have
an interest in it, even after his tenancy has come to an end, if his liability continues.
36
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, by a will, on the formers death for
the owner might change his mind later. Insurable interest must be more than a mere
expectation may be.


Bailees are also entitled to insure goods

which are entrusted to them for custody
notwithstanding the fact that their liabilities to the owners or bailors depend upon a number
of circumstances, governed by statutes, contracts, common law and customs in trade. A

33
[1925] AC 619
34
Collingridge v Royal Exchange Assurance Corpn. [1877] 3 QB 173: 47 LJ QB 32: 37 LT 525
35
Marks v Hamilton [1852] 7 Exch 323: 155 ER 970
36
Heckman v Isaac [1862] 6 LT 383
21 | P a g e

bailee need not show the nature of his interest to the insurer while effecting an insurance
policy, provided the policy is effected solely on his own behalf.
There are instances where in two or more persons are interested in the same subject matter
insured viz. landlord and tenant, mortgagor and mortgagee, bailor and bailee etc. 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, both the insurance policies being valid.

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, be it a ship or the cargo, arising out of the perils
of the sea, subject to the conditions and the extent of the policy.
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. Therefore, a person can only
insure the subject matter if he is interested in the preservation and safety of that matter. Every
person who has an interest in a marine adventure has an insurable interest
38
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, he may incur liability or suffer a loss, on it.
39
A person has
an insurable interest in the subject matter insured when he has such a connection with it that:
1. He will derive some pecuniary benefit or advantage from its preservation; or
2. He will suffer some pecuniary loss or damage from its destruction, termination or
injury by the happening of the event insured against.


A marine insurance policy affected without an insurable interest, like all other insurance
contracts, becomes a mere wager, void in the eyes of law.

It is not necessary that to have an

37
Section 3 of the Marine Insurance Act, 1963[ Section 1 of the English Marine Insurance Act, 1906 ] defines
marine insurance as : A contract of marine insurance is an agreement whereby the insurer undertakes to
indemnify the assured, in the manner and to the extent thereby agreed, against marine losses, that is to say,
the losses incidental to marine insurance
38
Section 7(1) of the Marine Insurance Act, 1963 [Section 5(1) of the English Marine Insurance Act, 1906]
39
Section 7(2) of the Marine Insurance Act, 1963 [Section 5(2) of the English Marine Insurance Act, 1906]:
In particular, 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, in consequence of which he may benefit by the safety
or due arrival of insurable property, or may be prejudiced by its loss, or by damage thereto, or by detention
thereof, or may incur liability in respect thereof
22 | P a g e

insurable interest, the person insuring must be in possession of a vested right. It is sufficient
to constitute an insurable interest, if there is expectancy along with an existing present title,
out of which such expectancy has arisen. But expectation of some benefit, which might arise
from subject matter in which the person insuring is not actually interested but expects to be
interested is not an insurable interest.
40
A partial as well as a contingent interest is also
insurable.
Insurable interest, in a marine policy, 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.
41
The policy will be
considered valid if the insured insures the subject matter without being interested in it, at the
time of effecting the policy and if he acquires an interest in it after it has been lost, he can
recover under the policy.
42

A marine policy, just like a fire policy, is a personal contract and hence, the insurable interest
of the insured in the subject matter continues till the time he is in actual possession of it. If he
has transferred the title in the subject matter to another person, through an agreement to that
effect, he ceases to have any interest in it and the policy will also come to an end. So long as
the seller of a ship or of the goods retains any interest in the property, he can insure it to the
extent of his interest.

In Reed v Cole
43
it 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, the owner has an insurable interest to the extent of
such a sum.

Where the subject matter insured has been mortgaged, 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.
44
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, and may recover the whole amount on the condition that he shall hold the
amount recovered, in trust for the bonafide beneficiary.
Even captors have an insurable interest over the ship or cargo captured by them. As they are
generally in possession of the captured property and liable to pay damages if they take
possession illegally, it is generally accepted that they have an insurable interest over such a
property.

40
Stockdale v Dunlop [1840] 6 M & W 224
41
Section 6(1) of the Marine Insurance Act, 1963
42
Sutherland v Pratt [1843] 11 M&W 296
43
[1764] 3 Burr 1512
44
Section 14(1) of the English Marine Insurance Act, 1906[Section 16(1) of the Marine Insurance Act, 1963]
23 | P a g e

Chalmers says The definition of insurable interest has been continuously expanding and
the dicta on some of the older cases which would tend to narrow it must be accepted with
caution
51
Therefore any person can effect a marine insurance policy as long as he has an
insurable interest, 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.

The Indian View :
The insured must bear some relationship to the insured thing whereby s/he stands to benefit
by its safety or be prejudiced by its loss or by incurring liability. That is to say, insurable
interest exists where insured stands in a legal relationship to the property or otherwise stands
to suffer loss as a result of its destruction.
The Indian Act does not profess to give an exhaustive definition of insurable interest nor is it
possible to define the expression insurable interest exhaustively, but the general rule is clear
that to constitute interest insurable against a peril, there must be an interest such that the peril
would, by its proximate effect, cause damage to the assured.
A condition in which the person applying for insurance and the person who is to receive the
policy benefit will suffer a loss. Without insurable interest, an insurance contract is invalid.
In re Oriental Insurance Company VS M/S Kamal Tours & Travels, the question was
liability of the insurer after sale of the vehicle. In the present case National Commission
observed that respondent did have any insurable interest at the time of the accident, hence set
aside the order of the State Commission and accepted the revision petition of insurance
company. National Commission has already given a clear ruling that if a vehicle is sold by
the insured to another person without intimation to the insurance company then in case of
any claim covered under the insurance policy, the insured ceases to have an insurable
interest. The present case is squarely covered by the decision in New India Assurance Co.
Ltd. Vs. Divya Prashad
45

Insurable interest is a fundamental principle of insurance. It means that the person wishing to
take out insurance must be legally entitled to insure the article, or the event, or the life. In
other words, the happening of the event insured against, or the death of the life insured must

45
(2011) CPJ 22(NC).
24 | P a g e

cause the policyholder financial loss. Mr. Singh would not be able to insure Mr. Mehtas
house because its destruction would not cause Mr. Singh financial loss. Similarly, you cannot
insure the lives of other people unless you have a financial interest in the life being insured.
The principle of insurable interest demonstrates the difference between insurance and a wager
or bet.
Insurable interest: When Terminates?
The complainant had sold the vehicle and then it met with an accident though it was asserted
that the accident though it was asserted that the accident took place before delivery of the
vehicle to the seller. The claim was, however repudiated on the ground that the complainant
had no insurable interest in the vehicle at the time of accident. The complainant had signed
the transfer of ownership and other necessary forms. Under such circumstances, it was
observed by the Commission, it was impossible to accept the contention that on the date of
accident the complainant had any insurable interest in the insured property.
46


I llustrative Cases
In a Rajasthan case
47
the vehicle in question was question was purchased by the complainant
on 26-3-1992 i.e. two days after its accident. The complainant preferred a claim regarding the
loss due to accident, on which a surveyor was appointed, who gave his report on 27-3-1992.
After the survey the complainant got the vehicle repaired at a cost of Rs. 65,000 and preferred
a claim which was rejected. A complaint was filed which was allowed by the District Forum.
Feeling aggrieved, the Insurance Company preferred an appeal. Reliance was placed on a
decision of the National Commission, namely, K.Rajagopal v. National Insurance Co. Ltd.
48

Which had somewhat similar facts in that case the complainant transferred the insured
vehicle under an agreement for sale and a part payment was also received from the buyer.
The possession of vehicle was also delivered to the buyer. After this transfer, the vehicle was
stolen. The complainant, being the registered owner, filed a claim with the Insurance
Company which was repudiated on the ground that since the vehicle was sold and the

46
New India Assurance Co. Ltd. V. S.G.Rajendran, (2005) 3 CPJ 325 T.N. State Commission.
47
United India Insurance Co. Ltd. V. Ramesh Chandra Khatri, (2003) 3 CPJ 588: (2003) 3 CPR 525 Rajasthan
State Commisiion. See also Balvinder Singh v. Oriental Insurance Co. Ltd., (2004) 4 CPJ 102 Chattisgarh State
Commission.
48
(1995) 2 CPR 502; (1995) 1 CPJ 239 NC
25 | P a g e

possession was delivered, his interest in the car ceased. Feeling aggrieved the complainant
preferred an appeal where it was observed that it was not variation but complete termination
of the insureds interest in the vehicle. No insurable interest was left with the complainant at
the time of the theft of the vehicle.
Reliance was also placed on a decision of the SC, namely, Complete Insulations (P) Ltd. V.
New India Assurance Co. Ltd.
49
Where also a similar observation was made. Thus, the
Rajasthan State Commission held that the respondent had no insurable interest in the vehicle
in question at the time it met with accident. Thus, the appeal preferred by the Insurance
Company was allowed.
The SC in New India Assurance Co. Ltd. V. G.N.Sainani
50
also made a similar observation.
In that case the complainant was an assignee of two insurance policies taken out by Ajanta
Paper and General Products Ltd. from the appellant company. The question that required
consideration was whether the complainant was s consumer. The Court observed:
To come under the scope of the word consumer as defined in the defined in the
Act, it should be possible for the assured to assign his insurable interest in the goods
subject-matter of policy for the assignee as a consumer with reference to the goods
which are insured. What has been assigned in the present case is the amount of loss
suffered by the assured on account of short landing of the goods, meaning thereby that
right to recover the loss is assigned and not that any service is to be rendered under
the policy by the insurer with reference to the goods. Unless the assignee has some
insurable interest in the property subject-matter of the insurance until the time the
policy terminates she cannot be beneficiary of any service required to be rendered by
the insurer under the policy. Admittedly, it was much after the goods had reached the
port of destination and appropriated that the policy was transferred by the insured to
the complainant to recover the amount of loss suffered by the assured. Thus, what is
assigned is in effect a mere right to sue for the loss on account of short landing of the
goods. It is difficult to see as to how it could be said that the respondent, that is the
assignee, is the beneficiary of any service under the policy. He may, however, have
right to recover the loss from the insurer by filing a suit in the Civil Court but
certainly to seek remedy under the Act he must be a consumer. By not extending the

49
(1996) 1 SCC 221: (1996) NCJ 325 SC.
50
(1997) 2 CPR 205 SC. It was against the decision of the National Commission in New India Assurance Co. Ltd.
V. G.N.Sainani, (1996) 3 CPR 167 NC.
26 | P a g e

policy beyond a particular period, that is 60 days, the insurer acted within the terms of
the contract of insurance and on that account it could not be said that there was
deficiency in service to be provided by the insurer under the policy.
Insured must have some interest for the preservation of the property. It is not necessary that
the insured should have the ownership of whole of the property
51
. In this case the two
brothers had insured the three-storeyed house through the complainant who was karta of the
Hindu Undivided Family. Some unidentified militants put the house on fire. A claim was
preferred by the complainants with the Insurance Company where the contention of the
Company was that only Jaggar Nath Pandita had insurable interest and the other brother
Triloki Nath Pandita had no such interest. The Company thus justified offering only 50% of
the assessed amount. On a complaint, the Commission did not agree with this contention and
observed:
We have examined the statement of Triloki Nath Pandita who in the statement has
categorically deposed that his elder brother was Karta of the family and was
managing the whole house. He insured the property himself but he disclosed in the
proposal from that property is jointly owned by both the complainants. This version is
supported by Complainant 1 Jaggar Nath Pandita who also has admitted that he was
the Karta of the family for being the elder brother and he was managing the property.
He insured the house on his behalf and on behalf of Triloki Nath also. On the other
hand the Company has nowhere stated that the policy is only in the name of
Complainant 1. He has denied that it was shown in the proposal form that the two
brothers were the owners but it is an admitted fact that Company so far has not
produced the proposal form so that it could be looked into and verified whether this
wasdisclosed in the proposal from or not.
The Commission referred to one of its earlier decisions and observed that they had held that it
was not necessary that the insured should be wholly and solely owner of the house. The
insured must have some interest for the preservation of the property. It was not necessary that
the insured should have the ownership of the whole property.
Regarding life insurance, since a person has insurable interest in his own life, any person
cannot insure the life of any other person.

51
Jaggar Nath Pandita v. Oriental Insurance Co. Ltd. (2004) 2 CPR 390 J&K State Commission.
27 | P a g e

A good case regarding insurable interest came up before the Delhi State Commission.
52
The
complainant insured the property comprising of godowns and other offices against fire for Rs.
7,40,000. A fire broke out engulfing the entire property as a result of which extensive damage
was caused to the building, furniture, fixtures, fittings, electricity and sanitary system. A
surveyor was appointed and during course of investigation it was found that one M/s Anantraj
Agencies Pvt. Ltd. claimed themselves to be occupant of 60% of the building representing
that they had insured said portion with another insurance company.
A claim was preferred by the complainant. The respondent took the plea that it was
discovered during investigation that 60% of the property was given to Anantraj Agencies
under various agreements whereas only 40% property remained with the complainant, and,
therefore, the complainant was entitled to only 40% of the assessed loss. Thus, it was said
that the complainant had insurable interest of only 40%. In order to justify this stand, the
opposite party/Insurance Company relied upon a Deed of Consent executed between the
complainant and Anantraj Agencies. It was revealed that Anantraj had to get said 60% on
completion of building. On these facts, the Commission observed:
Once a party insures a building the ownership of which vest in him, he has insurable
interest in the whole building. In this case the complainant had only entered into a
deed of consent that after completion of the building Anantraj Agencies will be
entitled to have 60% shares in the capacity as builders/promoters. It does not mean
that by virtue of this deed the insurable interest of the complainant was to the extent
of 40%, While receiving the premium the Insurance Company had assessed the
insurance amount and therefore, to say that the Insurable Interest of the complainant
was to the extent of 40% is difficult to accept.






52
Virmani Refrigeration & COLd Storage Pvt. Ltd. V. New India Assurance Co. Ltd. , (2005) 1 CPJ 767 Delhi State
Commission.
28 | P a g e

CONCLUSION

Insurable interest is a mandatory precondition to all types of insurance contracts, although it
is not possible to give an exhaustive list of the various persons who are said to possess
insurable interest. Whether a person has an insurable interest in the subject matter or not is a
question of facts and circumstances of each case and the courts interpretation of the
insurance contracts clauses. But it is an undeniable truth that insurable interest is a sine qua
non to a contract of insurance. In fact, it is the existence of insurable interest which
differentiates a contract of insurance from a wager
53
, which is void in the eyes of law. Every
contract of insurance, to whichever category it may belong to, shall display an insurable
interest and in the absence of such an interest, it shall be void and inoperative.















53
Section 30 of the Indian Contract Act, 1872 defines Wager as :
Agreements by way of wager are void; and no suit shall be brought for recovering anything alleged to be won on any
wager, or entrusted to any person to abide by the result of any game or other uncertain event on which any wager is made
29 | P a g e

Summary of the Assignment

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.
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
Insurable interest is the legal right of the insured in insurance. The taking of an
insurance policy does not protect the insured property from loss or damage, but
protects the insureds interest in the property.
The insurable interest doctrine, as recognized today, originated in English statutes
designed to remove insurance contracts from the environment of gambling and the
misconduct commonly associated with one having the ability to profit from anothers
loss.
In a life insurance contract, it is necessary that the person, who is privy to the
contract, should have an insurable interest in the life of the person, for whom the
policy is being taken, but not necessarily at the time of taking benefit. Whereas in
general insurance the insurable interest must present at the time making insurance
contract as well as at the time of taking benefit.