The Insurable Interest Doctrine- Indian Perspective

 I. Introduction

The aim of insurance is to shift risk from one person (the insured) to another (the insurers).

In insurance contract as a matter of public policy, certain insurable requirements must be met, to make it valid. Insurable interest is one of the basic requirements of the insurance. Without it the insurance contract is a mere wagering agreement. In India it is strange that the Insurance Act 1938 does not contain a definition of insurable interest. The only section, namely section 68, which makes a passing reference to the words 'insurable interest’ stands repeated by section 48 of The Insurance Amendment Act 1950.

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Briefly stated there is no legislative guidance in Indian law on the subject but still marine insurance defines under section 7 of the marine insurance act 1963 defines insurable interest. Insurable interest is also defined as a legal right to insure an asset or person. In theory, therefore, nothing more is payable than the amount of actual loss. It follows that unless the assured has a pecuniary interest in the thing insured, no question of loss or indemnity shall arise. A person cannot therefore insure a thing, the loss of which cannot cause him any financial loss.

A policy of insurance, therefore, is void if the insured has no such pecuniary interest in the subject matter of the insurance. Any person, who would suffer from destruction or loss of a thing, has insurable interest in that thing. The insurable interest must: Be definite Be capable of valuation * Be legally valid and subsisting Involve the loss of legal right Involve a legal liability

II. Can There Be Any Valid Insurance Agreement Without Insurable Interest?

The existence of insurable interest is an essential ingredient of any insurance contract. It is an important and fundamental principle of insurance.

It can be defined as the legal right to insure arising out of a financial relationship recognized under law, between the insured and the subject matter of insurance We find that the meaning of the term insurable interest is liberally interpreted. It is not always the legal interest or a full interest that's required by the courts but it should be such that it would be sufficient if it is recognized by court of law or equity as such interest. The following points may be gathered:

1) The interest should not be a mere sentimental right or interest, for example love and affection alone cannot constitute insurable interest. 2 ). It should be a right in property or a right arising out of a contract in relation to the property.

3) The interest must be pecuniary that is, 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.

4) 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.

In the case of Brahma Dutt v. LIC, one Mukhtar Singh a 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.

The Supreme Court in the case of Suraj Mal Ram Niwas Oil Mills (Private) Limited v United India Insurance Company Limited 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, and New India Assurance Company Limited v.

Hira Lal Ramesh Chand , 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.

III. Creation of Insurable Interest

There are a number of ways in which insurable interest will arise or can be created. Few main ways are: 1) 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. 2) 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 there is therefore entitlement to insure it equally the common law duty of care which one owes to the other, may give rise to a liability which again is insurable. 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 favour of the third party. 3) 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.

IV. Wager and Insurance

In a contract of wager all the parties do not have any interest in the happening of the event other than the sum. 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 loss 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 this 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 the case of Alamani v. Positive Govt Security Life Insurance Co. , 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 favour 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.

V. Types of Insurable Interest

There are basically two types of insurable interest (1) Contractual (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 r the statutory shareholder. If this agent is absent, the insurance is illegal or void and no agreement between the parties dispensing with this requirement can be effective. 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. Courts however, lean in favour of the existence of a valid interest as far as possible, so as to render the contract enforceable.

It has also been held in some cases that there is nothing illegal about the insurer paying on policy without interest as the objection or want of insurable interest is purely technical and has no real merit as between the insurer and the insured. Let's take a case law in detail that will clear the picture of the difference between these two kinds of insurable interest. In the case Macaura v. Northern Assurance Company, one Macaura insured timber in his estate against fire. He sold timber to a company of which he was the sole substantial shareholder.

Thereafter most of the timber was destroyed by fire and he demanded that he should be indemnified. The insurer succeeded in refusing to comply with the demand. The insured had no statutory interest in the assets of the company though too he would suffer loss on the company losing its property, nor he had any contractual interest under the policy because he could not prove interest at the time of the loss. Though the insured had no statutory interest the policy was held to be not a wagering contract because even being the sole shareholder he had an interest or better call insurable interest in the property.

VI. Time or Duration of Insurable Interest

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 policies at the time of taking the policy it need not exist at the time when the loss takes place or even when the claim is made under the policy. Life insurance contracts are not strictly speaking contracts of indemnity. In fire insurance, it's 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 and not the insured. 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.

VII. Insurable Interest Vis-A-Vis Life Insurance Contract

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. In the life insurance policy persons having relationship by marriage (example, husband and wife), blood (example, father and son) or adoption (example, adopted son and his mother), have been recognized as having insurable interest. Few examples of relationship which have insurable interest in the life of other: Child has the insurable interest in life of parents and vice versa even the illegitimate child. Wife has an insurable interest in the life of husband and vice versa. Debtor has an insurable interest of the life of creditor and vice versa. Master has an insurable interest in the life of servant and vice versa. A company has an insurable interest in the life of manager or director or partners or other employees and vice versa. Husband or wife have a insurable interest in the life of father-in- law or mother in law and vice versa . Insurable interest in the life of grandparents and vice versa . Insurable interest of a person on his own life

Insurable interest in India need not be confined to a pecuniary interest. Sentimental interest or an interest based on close family relationship may constitute a sufficient insurable interest. The closeness of relationship operates as a protection to the life of the insured and does not place him in the danger of being murdered. But when a person seeks insurance on his own life, the question of insurable interest is immaterial. There can also be no element of wagering, for whatever gain may accrue, will be by his death and that is no gain.

No man will gamble on his own life to gain a pyrrhic victory. And if somebody commits suicide to get the benefit of claim for his beneficiary or relatives his claim will not be entertained.

VIII. Insurable Interest Vis-A-Vis Marine Insurance Contract

Insurable interest is a special requirement of the marine insurance contract and any valid contract of marine insurance can be entered onto by person only if he has insurable interest in the marine adventure. And what is important for insurable interest is that:  There should be a physical object which is exposed to the marine perils . 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. Few instances which show insurable interest in a marine insurance policy: The insurer under a contract of marine insurance has an insurable interest in his risk which he may re-insure. The lender of money on bottomry or respondentia has an insurable interest in respect of loan .  The masters of the crew of a ship have insurable interest in their wages.

IX. Insurable Interest Vis-A-Vis Fire Insurance Contract

Few instances of persons who can have insurable interest in any insured property by fire:

1) Owner of the property , joint owner, sole owner, or a farm owning the property

2) Lessor and lessee both have insurable interest on any property

3) The vendor or the purchaser both have the right

4) The mortgagor and mortgagee

5) Trustees are legal owners and beneficiaries the beneficial owner of the trust property and each can insure it.

6 ) Bailees such as carriers, pawnbrokers or warehouse men are responsible for the safety of the property entrusted in them and so can insure it.

X. Conclusion

To be legally enforceable, all insurance contracts must be supported by an insurable interest. Insurance contracts must be supported by an insurable interest for the following reasons. To prevent gambling: Insurable interest is necessary to prevent gambling. If insurable interest is not required, the contract would be gambling contract and would be against public interest. For example you can insure the property of another and hope for an early loss.

You can similarly insure the life of another person and hope for an early death. These contracts would be gambling contracts and would be against public interest and public policy and so need to be checked and stopped. To reduce moral hazard: Insurable interest reduces moral hazard. If insurable interest is not required, a dishonest person could purchase a property's insurance belonging to someone else and then deliberately cause a loss to receive the proceeds; but if the insured stands to lose financially, nothing is gained by causing the loss.

Thus moral hazard is reduced. In life insurance, insurable interest requirement reduces the incentive to murder the insured for the purpose of collecting policy claim or anyone can set fire his home to claim the fire insurance claim or one can kill any third person insured by him. To measure the amount of the insured's loss in property insured: Finally in property insurance insurable interest measures the amount of the insured's loss. Most of the property insurance is contracts of indemnity and the measure of recovery is the insurable interest of the insured.

In the event of loss, payment cannot exceed the amount of one's insurable interest as the principle of indemnity shall apply. The object of insurance in such a case is to indemnify the assured to the extent of the commercial value of the thing lost. It follows that unless the assured has a pecuniary interest in the thing insured, no question of loss or indemnity shall arise. A person cannot therefore, insure a thing, the loss of which cannot cause him any financial loss.

A policy of insurance therefore is void if the insured has no such pecuniary interest in the subject matter of insurance. Any person who would suffer from the destruction of loss of a thing has insurable interest in that thing. Therefore, we can conclude that an insurable interest is essential for making any insurance agreement a legally binding insurance contract.

Bibliography

1. Emmett J. Vaughan & Therese Vaughan, Fundamentals of Risk and Insurance (9th Edn. 2003)

2. Dr. Rakesh Agarwal (Ed. , Guide to Practice of General Insurance (Paper No. 11 of I. I. I. ) (Key for Licentiate Examination), (2nd edition, 2011)

3. Centre of Publications, Handbook on Opening of Insurance Sector - Policy, Regulations, Guidelines and List of Foreign Companies (2011)

4. H. Narayanan, Indian INSURANCE - A Profile (2008)

5. C. L. Tyagi & Madhu Tyagi, Insurance - Law and Practice (2007)

6. India Brand Equity Foundation http://www. ibef. org/

7. Investopedia <http://www. investopedia. com>

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