PRINCIPLE OF INSURABLE INTEREST

Insurable Interest means an interest which can be or

is protected by a contract of insurance. This interest is
considered as a form of property in the contemplation
of law. It is only the presence of Insurable Interest that
distinguishes a contract of insurance from a wagering
contract and hence it is sine qua non for the validity of
the contract of insurance. All the statutes say that an
insurance contract will become a wagering contract
and hence void if it is taken place without an insurable
interest.
It is also defined as, “When the assured is so stipulate
that the happening of the event on which the insurance
money is to be payable would as an approximate
result involve in the loss or determination of any right
recognized by law or in any legal liability there is an
insurable interest to the extent of the possible loss or
liability.”
According to E. W. Patterson, “Insurable Interest is a
relation between insured and the event insured
against such as the occurrence of events will cause
substantial loss or injury of some kind to the insured.”
According to Rodda, “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.”
According to R. N. Ray, “When the assured is so
stipulated that the happening of the event on which the
insurance money is to be payable would as a
approximate result involved in the loss or diminution of
any right recognized by law or any legal liability, there
is an insurable interest to the extent of possible loss or
liability.”
In Lucena v. Craufurd[1], Lawrence J defined
insurable interest. In his words ‘Insurable interest’
means ‘if the event happens, the party will gain
advantage, if it is frustrated, he will suffer a loss’.
CONCEPT OF INSURABLE INTEREST
The existence of insurable interest is an essential
ingredient of any insurance contract. It is a legal right
to insure arising out of a financial relationship
recognized under law, between the insured and the
subject matter of insurance.
The interest should not be a mere sentimental right or
interest, for example love and affection alone cannot
constitute insurable interest. It should be a right in
property or a right arising out of a contract in relation
to the property. The interest must be pecuniary i.e.
capable of estimation in terms of money. In other
words, the peril must be such that its happening may
bring upon the insured an actual or deemed pecuniary
loss. Mere disadvantage or inconvenience or mental
distress cannot be regarded as an insurable interest
but this rule not strictly followed in life insurance cases.
The interest must be lawful, that is, it should not be
illegal, unlawful, and immoral or opposed to public
policy and does not harm any others legal justified
claim.
Insurable interest means an interest which can be or
is protected by a contract of insurance. In the case
of Brahma Dutt v. LIC[2], Mukhtar Singha petty
school teacher on salary of Rs 20 took a policy for Rs
35,000 on his life making false statements in the
proposal and nominated a stranger Brahma Dutt for
the policy. The nominee paid the first two quarterly
premiums by which time the life insured died. The
nominee intimated the insured's death and claimed the
sum assured. It was found on evidence that Brahma
Dutt had taken the policy without any insurable interest
in the life of the deceased for his own benefit and that
therefore it was void being a wagering agreement.
Supreme court in case of Suraj Mal Ram Niwas Oil
Mills (Private) Limited v. United India Insurance
Company Limited & Another[3], held that the
objection of the insurer about the non-disclosure of
dispatch of each and every consignment, as pointed
by the second surveyor, learned counsel submitted
that the said condition has to be understood in the
context of the fundamental condition that the
insurance cover was intended to secure only the
‘insurable interest’ of the appellant in the dispatches.
It was urged that the appellant had declared only those
consignments in which they had an "insurable interest"
as in relation to dispatches which had not been
declared, the consignees had desired that their
consignments should be dispatched without an
insurance cover.
In all such cases, the purchasers took the risk of loss
to their goods, and hence the appellant had no
"insurable interest" in them, unlike in the consignment
in question for which due declaration was made.
Reference was made to the decisions of this Court
in New India Assurance Co. Ltd v. G.N. Sainani[4]
and New India Assurance Company Limited v. Hira
Lal Ramesh Chand & Ors[5], wherein it was held that
"insurable interest" over a property is "such interest as
shall make the loss of the property to cause pecuniary
damage to the assured and under this case it will make
a damage to the interest of the insured.
HISTORY OF INSURABLE INTEREST
Essentially, the insurable interest requirement typically
functions as a safeguard to an insurer allowing the
insurer to justify nonpayment after a covered
occurrence has taken place. If the insurer can
successfully prove the insured lacked an insurable
interest in the property, a court will hold the insurance
contract is void on grounds of public policy. Prior to
1745, a pecuniary or emotional interest in the subject
of an insurance policy was not a requirement for the
receipt of a payout from that policy and Roche J
observed that there is nothing in the common law of
England which prohibits insurance even if no interest
exists.
Thus, insurance contracts were held valid,
notwithstanding that the absence of an insurable
interest gave the transaction the characteristics of a
wager.[6] In 1746, the English Parliament outlawed
gambling contracts on marine insurance. And
subsequently in 1774, Parliament extended this
gambling prohibition to life insurance contracts as well.
Accordingly, the original purpose of the doctrine was
Parliament’s attempt to remit the use of insurance
contracts as a vehicle to gamble. The insurable
interest doctrine developed in response to the
common law’s validation of such contracts in an effort
to both prevent wagers on the lives of individuals and
to quell attempts to destroy the subject of an insurance
policy.
WAGER AND INSURANCE CONTRACT
In a contract of wager all the parties does not have any
interest in happening of the event other than the sum
or stake he will win or lose. This is what marks the
difference between a wagering agreement and a
contract of insurance because every contract of
insurance requires for its validity the insurable interest.
Insurance affected without insurable interest is no
more than a wagering agreement and therefore void.
‘Insurable interest’ means the risk of lose to which the
assured is likely to be exposed by the happening of
the event assured against. In a wager on the other
hand neither party is running any risk of loss except
that which is created by the agreement between two
or more than two parties.
We all also know that wagering is illegal in India and
against to the norms of society or in short wagering is
against public policy and distinction between a
insurance and a wager is that a insurance is properly
speaking a contract to indemnify the insured in respect
of some interest which he has against perils which he
contemplates it will be liable to.
In case of Alamani v. Positive Govt. Security Life
Insurance Co[7] the plaintiff’s husband took a policy
of insurance on the life of Mehbub Bi, the wife of a clerk
working under him and about a week later got the
policy assigned in the favor of the plaintiff, Mehbub Bi
died a month later and the plaintiff as assignee
claimed the sum assured and in this case court find
that there was no insurable interest present in this
case and hence this insurance contract held to be
contract of wager and held to be void.
NATURE OF INSURABLE INTEREST
The court in Castellain v Preston[8] stated that an
insured’s insurable interest is the object of the
insurance and that only those who have an insurable
interest can recover. To this, the court added that an
insured could recover only to the extent to which his
insurable interest had been impaired by the insured
peril.
In Lucena v. Craufurd[9], it has been pointed out that
the interest must be enforceable by law. Mere hope,
however strong it may be, is not sufficient.
There is a requirement that an insurable interest must
be in the nature of a legal right or liability. The insured
must have a legal or equitable relation to the object
insured. In Macaura v Northern Assurance Co
Ltd[10] Macaura insured a quantity of timber in his
own name. The timber was owned by a company in
which Macaura was the sole shareholder. It was held
that the shareholder had no insurable interest in the
assets of a company because he stood in no legal or
equitable relation to the timber insured in his name
which was the sole asset of the company. Here it is
the company that possesses the insurable interest and
Macaura’s claim failed for a lack of insurable interest
even though he was financially prejudiced when the
property was destroyed.
TYPES OF INSURABLE INTEREST
There are basically two types of insurable interest: (1)
Contractual (2) Statutory
 1. Contractual: If the insurable interest is absent,
the insurance contract is illegal or void and no
agreement between the parties dispensing with
this requirement can be effective. Contractual
insurable interest is an interest which is being
required by contract of insurance by itself. In an
action upon such a contract if the insurer does not
raise the plea of want of interest nevertheless the
court of its own motion may refuse to enforce the
contract.
2. Statutory: As we have seen in some cases that
interest in the subject matter of insurance is
required by law itself for the validity of the policy,
whether by express statutory law as in the Marine
Insurance Act 1906 or as by section 30 of the
Indian Contract Act which merely declares that all
contracts by way of wager is void. This is the
interest required by statue.
CREATION OF INSURABLE INTEREST
There are three ways by which insurable interest will
arise or can be created. Which are given below:–
• BY COMMON LAW: Where the essential elements
of insurable interest are automatically present, the
same can be described as having arisen at
common law. The most straight forward example
is ownership. One can own a house, and
therefore there is entitlement to insure it. Like the
use or driving of a motor vehicle in a public place
is sufficient insurable interest for the purpose of
effecting insurance in the favor of the third party.
 • BY CONTRACT: In some contracts a person will
agree to be liable for something, which he or she
would not ordinarily be liable for. A landlord is
normally liable for the maintenance of property he
owns rather than the tenants. A lease may,
however, make the tenant responsible for the
maintenance, repair etc. of the building. Such a
contract places the tenant in legally recognized
relationship to the building. This gives him an
insurable interest, which would not be present if
the contract had not been entered into so these
kinds of special contractual relationships give
arise to the insurable interest on something on
which otherwise one does not have any kind of
insurable interest.
• BY STATUTE: Some time an act of parliament will

create an insurable interest either by granting

some benefit or imposing a duty. While the statute
may create insurable interest where none would
otherwise exist. There can be some statutes
which can restrict liability and thereby also restrict
insurable interest. Like compulsory insurance of
the employees by the employer of a company.
WHEN INSURABLE INTEREST MUST EXIST
The time when the insurable interest must be present
varies with the nature of the insurance contracts. The
question is whether insurable interest should exist at
the time when the contract is formed or should it also
continue to exist until it is discharged but as we have
seen in life insurance the presence of insurable
interest is necessary at the commencement of the
policy although it is not necessary afterwards, not even
at the time of occurrence of risk. So it should be there
in life insurance policies at the time of taking the policy
it need not exist at the time when the lose take place
or even when the claim is made under the policy. Life
insurance contracts are not strictly speaking contracts
of indemnity. In case of Dalby v. India and London
Life Insurance Co.[11] Court held that the insurable
interest should be present at the time of the contract
though not at the time of the loss in life insurance
policies.
In fire insurance it is required both at the
commencement of the policy and at the time when the
risk occurs. In a sense, therefore it may be said that
insurable interest is doubly insisted upon in fire
insurance. The insurance interest is necessary at both
the times because it is treated as a personal contract
and also a contract of indemnity. And even the onus
that the fire was intentional is on the insurer not on
insured. The insurance interest required both at the
commencement of the policy and at the time when the
risk occurs in motor insurance also.
In a marine insurance contract the presence of
insurable interest is necessary only at the time of the
loss. It is immaterial whether he has or does not have
any insurable interest at the time when the marine
insurance policy was taken.
INSURABLE INTEREST IN LIFE INSURANCE
The general rule is that every person has an insurable
interest in his own life. Accordingly, a person may
purchase a life insurance policy on his own life, making
the proceeds payable to anyone he wishes. Life
insurance contract is not a contract of indemnity and a
person affecting a policy must have an insurable
interest in the life to be assured. But when a person
seeks insurance on his own life, the question of
insurable interest is immaterial. Every person is
presumed to have insurable interest in his own life
without any limitation. Every person is entitled to
recover the sum insured whether it is for full life or for
any time short of it. If he dies, his nominee or
dependents are entitled to receive the amounts.
In case of Liberty National Life Insurance v.
Weldon[12], the aunt of the of a two year old child who
was a nurse by profession, managed 3 life insurance
policies by different 3 companies on the life of the
child. One day she mixed some poisonous thing into
the milk and by that milk child was died. And the lady
claimed a huge amount from three companies. The
father filed a case against all the insurance companies
that without knowing the fact that whether she had any
insurable interest in the life of child they issued the life
insurance policies. In this case Court held that the aunt
has no insurable interest in the life of child therefore
the companies were not liable but the companies are
liable to pay compensation to father of the child.
In the life insurance policy persons having relationship
by marriage, blood or adoption have been recognized
as having insurable interest.
Few example of relationship which has insurable
interest in the life of other:–
1. Husband and Wife: Husband and wife have an
insurable interest of life of each other. In case
of Griffith v. Flemming[13], Griffith and his wife
 each signed a proposal from for a joint life policy
on their life and both contributed towards the
premium. After the policy was taken, the wife
committed suicide and the husband claimed the
sum assured. The insurer alleged that at the time
of taking the policy the husband had no insurable
interest in his wife’s life as required by the Life
Assurance Act, 1774. In this case Vaughan
Williams L.J. held that ‘the husband has an
interest in his wife’s life which ought to be
presumed’.
2. Child and Parents: In England only children
have an insurable interest on the life of parents,
but parents does not have any insurable interest
in life of the child. But in India Child and parents
both have the insurable interest in life of each
other. In case of Halford v. Kymer,[14] it was
held that a father has no insurable interest in the
life of his son unless he is getting some pecuniary
benefit from him.
3. Debtor and Creditor: Creditor has the insurable
interest on life of the debtor to that extent on which
amount he has the position to recover from
debtor. It was held in case of Godsall v.
Boldero[15], that if a creditor affects a policy of
insurance upon the life of his debtor for greater
amount than due, then he will not be able to
recover any greater sum than the amount or value
of his interest. In Beauford v. Saunders[16], it was
held that if the debt has been guaranteed by a
surety, the creditor will have interest in the life of
the surety as well.
 4. Bailor and Bailee: A bailor has an insurable
interest in the property bailed to the extent of
possible loss. The bailor has a potential loss from
two sources. Compensation as provided for in the
contract of bailment might be lost. Second, the
bailee may be held legally liable to the owner if
the bailee’s negligence cause the loss.
5. Mortgagee and Mortgagor: The mortgagee has
an insurable interest in the life of mortgagor to the
extent of the property mortgaged.
6. Employer and Employee: An employee has an
insurable interest in his employer’s life to the
extent of his salary as held in case of Hebdon v.
West[17].
INSURABLE INTEREST IN NON-LIFE INSURANCE
For all the insurance policy other than life insurance,
the person taking the insurance policy must have an
insurable interest in the property insured. Insurable
interest is not confined to legal ownership only but
there are certain other conditions when a person other
than a legal owner has the insurable interest in the
property. Which are described as under different
policies of insurances:–
MARINE INSURANCE: Insurable interest is a special
requirement of the marine insurance contract and any
valid contract of marine insurance can be entered into
by person only if he has insurable interest in the
marine adventure. And what is important for insurable
interest is that (1) there should be a physical object
which is exposed to the marine perils and (2) the
assured must have some legally recognized
relationship with that object in consequences of which
he benefits by its preservation and is prejudiced by its
loss or damage.
In Wilson v. Jones[18], it was held that a contingent
buyer of goods, who has not obtained property, risk or
possession, has no insurable interest in the goods
themselves even though he expects at a future date to
acquire it.
FIRE INSURANCE: ‘A contract of fire insurance, like
all other contracts of insurance, requires an insurable
interest in the subject-matter of the insurance to
support it; in the absence of an insurable interest, the
assured can suffer no loss, and the contract becomes
a mere wager.'[19] In fire insurance, a person is said
to have interest in a property if he is liable to suffer a
direct loss upon its destruction. But a person who is so
connected with a property that he might suffer loss
upon its destruction may not be said to be interested
in it. As the House of Lords in case of Macaura v.
Northern Assurance Co.[20] ruled that neither a
shareholder nor a simple creditor of a company has
any insurable interest in any particular asset of the
company although both the shareholder and creditor
may suffer loss upon destruction of their company’s
property.
Few example of peoples those can have insurable
interest in any insured property by fire.
• Owner of the property, joint owner, sole owner, or
a firm owning the property.
• Lessor and lessee both have insurable interest on

any property.
 • The vendor and the purchaser both have the
insurable interest.
• The mortgagor and mortgagee.

• Trustees are legal owners and beneficiaries or the

beneficial owner of the trust property and each

can insure it.
• Bailees such as carriers, pawnbrokers or
warehouse men are responsible for the safety of
the property entrusted in them and so can insure
it.
OTHER PROPERTY INSURANCE: In other types of
insurance policies such as burglary insurance, flood
insurance, vehicle insurance, agricultural insurance
etc. the person making the insurance policies must
have the insurable interest in the property being
insured at the time of the taking policies.