The Concept of Insurable Interest

Ina broad legal sense, an insurable interest is the kind of financial interest a person must possess in order to have legally enforceable insurance coverage. Section 5(2) of the Marine Insurance Act 1906 in the United Kingdom defines the insurable interest as: "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 the damage thereto, or by the detention thereof, or may incur liability in respect thereof."

In property insurance, a person has an insurable interest in a property whenever he may sustain direct and immediate damage by its loss or deterioration.  Future property and incorporeal property may be the subject of a contract of insurance.  The insurable interest need not exist at the time the insurance is purchased but must exist at the time of the loss. The insurance of a property in which the insured has no insurable interest is without effect.  The approach is similar for liability coverages.

Property and liability insurancecontracts are contracts of indemnity.  Therefore the monetary value and definition of the coverage must be stipulated in the contract.  It is also explicitly mentioned that duplicate coverage for the same insurable interest is not possible. This is evident for a property coverage to avoid multiple indemnification;  the provision is different for liability coverages if different limits of coverage are specified in several contracts. 

In addition to preventing the insured from collecting several times for the same loss, the insurance company has a subrogationright.  After the insured has been indemnified, the insurance company is subrogated to the insured's rights of recovery from anyone causing the loss.   However, the right of subrogation is not automatically accorded to insurers under every type of coverage they write. For example, in the common law, subrogation is automatically allowed for property insurance coverages but always denied to life insurers.

If there is a recognized insurable interest, arisk can be insured even if no statistics or risk analysis is possible.  This is brought out by the following case reported by Brown (1973):

In 1971, the whisky distillery Cutty Sark offered an award of one million pounds for the capture of the monster assumed to live in the Loch Ness in Scotland. Cutty Sark approached Lloyd's of London about the possibilities of insuring against the eventual discovery and the financial consequence for the firm. The premium was fixed at £ 2,500 to cover the risk of the monster being captured alive between May 1, 1971 and April 30, 1972. The definition of a "monster" was the following; "As far as this insurance is concerned the Loch Ness Monster shall be deemed to be: (1) in excess of 20 feet in length, (2) acceptable as the Loch Ness Monster to the curators of the Natural History Museum, London."

In life insurance, the contract is without effect if at the time of contacting it, the policyholderhas no insurable interest in thelife or health of the insured.  A person has an insurable interest in his own life and health and in the life and health: (a) of his consort, (b) of his descendants and of those of his consort, whatever their filiation, (c) of any person upon whom he is dependent for support or education, (d) of any person in whose life and health the insured has a pecuniary interest.

The creditor has an insurable interest in the life of the debtor that is equal to the amount of the debt and interest. Business relationships, other than that of a creditor and a debtor, can justify that an employer has an insurable interest on a key employee, a partner, a board officer. In all cases, however, the person being insured must agree to the proposed contract.

The absence of an insurable interest does not prevent the formation of the contract if the insured gives his written consent.  Contrary to property and liability insurance contacts, life insurance contracts make no reference to indemnification

because the value of a human life is not defined.  Therefore there is no problem of duplicate insurance.  In fact there is no problem if an individual wants to buy several life insurance contracts with one or more insurance companies. For the same reason,  life insurers do not posses subrogation rights.

In Health insurance, all types of medical expense coverages are contracts of indemnity and are similar to property and liability contracts.  On the other hand, income replacement paid under health insurance contracts must be assimilated to a life insurance type of coverage.