Insurance Contract is based on Insurable Interest (6)

Introduction

A person cannot buy life insurance on the life of a stranger, hoping to gain if the stranger dies. Insurers normally sell life insurance when there is a reasonable expectation of a financial loss from the death of the insured person, such as the loss of an insured’s future income that the insured’s dependents would face. Insurable interest is not an issue in liability insurance because a liability claim against an insured results in a financial loss if the insured is legally responsible. Even if the insured is not responsible, the insured could incur defense costs.

 What is Insurable Interest

The existence of insurable interest is essential to any insurance contract. The legal right to insure arising out of a financial relationship recognized at law, between the insured and the subject matter of insurance is called insurable interest. The subject matter of insurance can be any type of property or any event which may result in a loss of a legal right or the creation of a legal liability. It can be buildings, stock or machinery, a person’s legal liability for injury or damage or a life being insured. However, it is not the house, machinery, potential liability or life that is insured but the pecuniary (financial / money) interest of the insured in that house, ship, machinery, which is insured. As stated in Casellain v. Preston (1883):

Essentials of insurable interest

There are at least four features which are essential to insurable interest. Firstly, there must be some property, right, interest, life, limb or potential liability capable of being insured and this is the subject matter of insurance. Secondly, the insured must stand in a relationship with the subject matter of insurance whereby he/she benefits from its safety, well-being or freedom from liability and would be prejudiced by its damage or the existence of liability. She/he must have an economic or financial interest in the subject matter of insurance. The insured must have a current interest in the subject matter, not just an expectancy of having an interest. Furthermore, the relationship between the insured and the subject matter of insurance must be recognized at law: Macaura v Northern Assurance Company (1925). Insurable interest is very important and required by the law to reduce moral hazard and discourage wagering.

Ways Insurable interest may arise

• Common law: For example, through ownership of property or liability at common law.
• Contract: For example, where the tenant agrees in a lease to accept responsibility for the maintenance or repair of a building.
• Statute: For example, the Married Women’s Property Acts provide married women with an insurable interest in their own lives and in their husbands’ lives, for the wives’ benefit.

When Insurable Interest Must Exist

• Marine insurance: The assured must be interested in the subject matter insured at the time of the loss. There need be no insurable interest when the insurance is affected. The insured should be able to proof at the time of lose that, he has insurable interest.
• Life assurance: Insurable interest is required at inception only. The policyholder should be able to proof that he has insurable interest in the life of the assured person at the time of taking the policy.
• Other insurances: Insurable interest must exist at inception, at the time of the loss and throughout the currency of the contract. Eg is motor insurance. This is the main reason why when you sell your vehicle, you cannot and you are not suppose to add the insurance for the person. Because your interest in the vehicle is gone but the insurance is in your name.

Insurable interest may be waived by insurers on policies not governed either by the Marine Insurable Act 1906 or the life Assurance Act 1774. It cannot be waived on policies governed by these Acts such policies can be issued by insurers, but cannot be enforced in court.

Application of Insurable Interest

Insurable interest arises as follows in the case of most Insurance Classes:

• Owner: Policyholder as owner of insured property or Policyholder as user of insured property.
• Hire Purchase/Finance: A Hire Purchase Company or Finance company may have an interest to the extent of the outstanding debt. Therefore, a bank acquires an interest in property of the borrower, if the property purchased is financed through a bank loan.
• Hirer/Renter/Tenants: Person hiring/renting property may insure his interest in a risk to the extent of the interest. For example, a warehouseman or hauler acquires insurable interest on goods for any damage that may occur to them while they are within its custody, care or control notwithstanding that ownership of the goods rests with someone else.
• Borrower/Lease/Charterer: A person borrowing or leasing property in which case he may insure the property if he is liable for any damage to the extent of his interest.
• Bailers: Have an insurable interest in customers’ property whilst in their care.
• Service Engineers, for example, can insure equipment in their custody, for which they would be responsible. Likewise, laundry operators acquire an insurable interest in the clothing/linen of their clients.
• Mortgages: A creditor may take joint legal title to the property as security against a loan.
• Mortgagors: A person who holds deeds of title has an interest, which is compromised, to the extent of the loan.
• Executors: Administrators, executors and trustees may have an insurable interest in a property which forms part of an estate entrusted to their care or for which they are responsible.

Conclusion

A contract has been defined as a legally enforceable agreement. We have explained in our earlier write-ups the elements that make a contract be legally enforceable agreement. These we said include agreement (offer and acceptance), capacity (the competence of all parties), mutual assent, consideration, legal purpose, and the form required by law.

Insurance contracts should have all the necessary elements of a legally enforceable contract, so they are similar to other contracts in many ways. Nonetheless, insurance contracts have distinctive features and their own body of law. In addition to having the necessary elements of all contracts, valid insurance contracts have certain special characteristics. We have discussed adhesion, utmost good faith, conditional contract and indemnity. Today we discuss insurance as a contract base on insurable interest.

Written by: Justice Peprah AGYEI.

A Chartered Insurer and an Associate of the Chartered Insurance Institute of United Kingdom and also Ghana (ACII-UK, ACIIG), and holds MPhil in Enterprise Risk Management and Business Consulting from Kwame Nkrumah University of Science and Technology. Attained Bachelor’s degree from University of Ghana, Legon and have Applied Insurance studies, Diploma and Advanced Diploma (AAIS & AIS) from Ghana Insurance College / Malta Insurance Training Institute.

+233 (0) 549705031                      kwameabann@gmail.com

 

Edited by Kofi Tawiah Sarpong.

 

Reference

Navigating the Legal Landscape of Insurance, American Institute for Chartered Property and Casualty Underwriters. Edited by Martin J. Frappolli

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