Principle of Insurable Interest

Insurance is a rapidly but creatively expanding sector in the modern day financial world. It provides minimum safeguard for everybody’s day to day work by taking the risk of losses on the occurrence of an uncertain event.

But, to obtain an insurance policy for a particular subject, every person should have an insurable interest on the subject proposed to be so insured.

What is the principle of insurable interest?  

Insurable interest is prerequisite of every insurance contract and it simply means any policy holder should have a particular relationship to the subject matter that is being insured.  

However, insurable interest basically refers to pecuniary interest. Thus, if a person is said to have an insurable interest on the subject matter, he should enjoy benefits from its existence and would suffer a financial loss from its destruction. For example, a creditor has an insurable interest in the life of his debtor.

Hence, insurable interest is a fundamental requirement of every insurance contract and its absence renders the contract void and unenforceable.

However, insurable interest can arise in various ways such as by way of ownership of property, legal possession and even through the employer and employee relationship. 

Generally, the insurable interest in the subject proposed to be insured must exist both at the time when the policy is taken and at the time of the loss incurred. But in life insurance policy, the insurable interest need only be existence at the time of taking the policy.  

For an instance, if X who married to Y takes a life insurance policy on his life and later would divorce from Y. But, the policy would pay Y on X’s death even though the insurable interest is no longer existing as the parties had already divorced.

However, the rationale behind the principle of insurable interest is to ensure that contracts of insurance are not taken as gambling transactions. Therefore no body is entitled to take an insurance policy unless he obtains financial benefit from the existence of the subject matter and suffers financial loss on its destruction.

Therefore, mother cannot claim on the life insurance policy in the life of her son unless she is able to prove that she is likely to suffer financially on the death of her son.

Thus, a person cannot take a life insurance policy for the life of his neighbor if he does not suffer financial loss on the death of such neighbor. If it permitted to do so, he could cause the death to the neighbor so as to allow him to profit from the neighbors’ death.

Therefore, every insurance contract must follow the principle of insurable interest in order to prevent gambling and related moral hazards.