An insurable interest exists when an insured derives a financial or other benefit from the continued existence, without repair or damage, of the insured object (or, in the case of an individual, from its continued existence). A person has an insurable interest in something where loss or damage to that thing would cause the person to suffer financial or other loss. Typically, the insurable interest is determined by ownership, possession or direct relationship. For example, people have insurable interests in their own homes and vehicles, but not in the homes and vehicles of their neighbors, and almost certainly not in those of strangers.
The 'actual expectation test' and the 'statutory interest test' are the two most important concepts of insurable interest.
Historical background
The concept of insurable interest as a condition of purchasing insurance took the insurance industry away from gambling, strengthening the reputation of the industry and leading to greater acceptance of the insurance industry. The United Kingdom led that trend by passing legislation that prohibited insurance contracts if no insurable interest could be demonstrated. In particular, the Marine Insurance Act 1745 (which introduced the concept of insurable interest, although the term was not expressly used), the Life Insurance Act 1774, which made such life insurance contracts illegal, and the of Maritime Insurance of 1906, article 4., which annuls said contracts.
In 1806, Lord Eldon LC, sitting in the English House of Lords in Lucena v Craufurd (1806) 2 Bos & PNR 269, attempted to define an insurable interest and, although that definition is often used, it is considered unsatisfactory by modern commentators. Lord Eldon defined it as "a right in property, or a right derivable from a contract in property, which in any case may be lost by some unforeseen event affecting the possession or enjoyment of the party."
Life insurance
Insurable interest relates to the property rights to be insured. It may also be in the interest of the beneficiary of a life insurance policy to demonstrate a need for the product, the so-called "insurable interest doctrine." Insurable interest is no longer strictly part of life insurance contracts under modern law. Exceptions include viatization agreements and donations to charities.
The principle of insurable interest in life insurance is that if the insured person or organization values the life of the insured more than the policy amount, then one person or organization can buy insurance on the life of another person thus compensating for the insured loss can be done by the A company may have an insurable interest in any type of Chairman/Chief Executive Officer or any other employee who has special knowledge and skills. The creditor has an insurable interest during the life of the debtor, up to the amount of the loan. A person who is financially dependent on another person has an insurable interest in that other person’s life.
Several jurisdictions have established legal guidelines that specify the types of family relationships for which an insurable interest exists. It is recognized that the insurable interest of family members is both emotional and financial. The law permits insurable interests under the assumption that a personal connection makes a family member more valuable to the living than to the dead. Therefore, close relatives are expected to have an insurable interest in the lives of those relatives, but more distant relatives, such as cousins and in-laws, cannot insure the lives of other people connected through these connections. A married person has an insurable interest in the life of his or her spouse and minor children have an insurable interest in their parents. It is also assumed that a person has an insurable interest in his or her life. Broadly speaking, without a direct family or kinship relationship recognized by law, there is no insurable interest.
United Kingdom
A person is assumed to have an insurable interest in his or her own life and would prefer to be alive and in good health than to be sick, injured or dead. The unlimited annuity extends to the entire life of the spouses (and since 2004 also to registered couples), even if there is no financial dependence.
However, UK law does not recognize other classes of so-called "natural affections", as follows:
- Parents have no interest in the lives of their children.
- Siblings have no interest in their siblings' lives.
- Children have no interest in their parents' lives (Scotland only)
No insurable interest is recognized for cohabiting couples. Although many insurers accept these types of policies, they may be voided because they have not been tested in court. In recent years, steps have been taken to adopt clear legal provisions in this area, but they have not yet borne fruit.
In 2008, the Law Commission of Scotland and the Law Commission of England and Wales tentatively proposed some reforms to the existing law, hoping to clarify the complex rules. Its preliminary recommendations include expanding the category of “natural affection” to include dependent children and parents, as well as cohabitants. Officially this is still being investigated.
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