“INSURABLE INTEREST” IN INSURANCE CONTRACTS

By : V. Prashanth1

INTRODUCTION

The need for an insurance cover is growing today owing to the occurrence
and risk of enhanced perils, which were previously unknown to life, trade
and commerce. Insurance is a contract by which one party in
consideration of a price (called the premium) paid to him, adequate to the
risk, becomes security to the other that he shall not suffer loss, damage or
prejudice by the happening of the perils specified to certain things which
may be exposed to them.2 There must be either some uncertainty
whether the event will happen or not, or if the event is one which must
happen at some time or another, there must be uncertainty as to the time
at which it will happen.3 This article provides an insight into the concept of
‘insurable interest’ and also explains the necessity of insurable interest in
regard to Life Insurance, Fire Insurance and Marine Insurance and also the
various persons who have an insurable interest in these contracts.

INSURABLE INTEREST: WHAT IT MEANS?

As explained above, a contract of insurance is one whereby one person

promises to compensate another for any loss which the latter might have
to suffer on being exposed to certain dangers, in consideration of a price
known as premium. All insurance contracts, except life insurance are
contracts of indemnity. Insurable interest means an interest which can be
or is protected by a contract of insurance.4 It is a relation between the
insured and the event insured against, such that the occurrence of the
event will cause substantial loss or injury of some kind to the
insured.5Rodda defines insurable interest as follows: “…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…”6

Insurable interest is of two types – Contractual and Statutory. Where an

insurance contract requires the existence of an insurable interest for
effecting the policy, such interest is known as Contractual insurable
interest while an insurable interest mandated by a particular statute
dealing on insurance is known as Contractual insurable interest. It is
noteworthy that neither the British Life Assurance Act, 1774 nor the
Insurance Act, 1938 of India defines the term insurable interest.

1
Student of 4th year BA(LLB), Amity Law School, Noida
2
As laid down by Lawrence J in Lucena v Craufurd, (1806) 2 Bos & PNR 269 at Pg. 301: 127 ER 42
HL
3
Prudential Insurance Co v Inland Revenue Commsr,(1904) 2 KB 658
4
KSN Murthy & Dr.KVS Sarma “Modern Law of Insurance” 4th Edn. Butterworths @ pg. 59
5
EW Patterson “Elements of Insurance Law” Pg. 109
6
WH Rodda “Fire and Property Insurance” Pg. 22; E.J.D Peverett “ Fire Insurance Laws and Claims”
Pg.160 “The legal right to insure is known as insurable interest”
Insurable interest is the legal right of the insured in insurance. The taking
of an insurance policy does not protect the insured property from loss or
damage, but protects the insured’s interest in the property.7

NATURE OF INSURABLE INTEREST

Insurable interest must have a pecuniary value i.e. it must be measurable

in terms of money. It must be recognised and enforceable by law. 8In
Geismar v. Sun Alliance and London Insurance Ltd. and another9 it was
held that although the purchase of goods abroad will normally result in
the insured having an insurable interest in these goods but, if he
smuggles them into the country without disclosure to the Customs
authorities, an insurable interest does not exist, and he is in possession of
the goods illegally, which are subject to forfeiture.

In Lucena v. Craufurd10 insurable interest was explained as follows:

“… A man is interested in a thing to whom advantage may arise or
prejudice happen from the circumstances which may attend it. Interest
does not necessarily imply a right to the whole, or a part of a thing, nor
necessarily and exclusively that which may be subject of privation, but
the having some relation to, or concern in the subject of insurance, which
relation or concern by the happening of the perils insured against may be
so affected as to produce a damage, detriment or prejudice to the person
insuring; and where a man is so circumstanced with respect to matters
exposed to certain risks or dangers as to have a moral certainty of
advantage of benefit, but for those risks or dangers, he may be said to
interested in the safety of the thing…. The property of a thing and the
interest divisible from it may be very different; of the first, the price is
generally the measure, but by interest in a thing every benefit or
advantage arising out of or depending on such a thing may be considered
as comprehending…”

Although insurable interest has to be enforceable by law, the

enforceability is not the sole criterion, howsoever strong it might be. Lord
Eldon has observed that expectation, though founded on highest
probabilities, is not interest and it is equally not interest whatever might
have been the chances in favour of expectation.11 In Moran Galloway v.
Uzielli12 Lord Walton observed that the definition of insurable interest has
to be continuously expanding, and dicta in some of the older cases, which
7
M.N. Srinivasan “Principles of Insurance Law” 7th edn @ Pg. 75 para 8
8
E.J.D. Peverett “Fire Insurance Law and Claims” Pg.161
9
[1977] 3 All ER (QBD)
10
[1806] 2 Bos. & P(N.R) 269
11
Supra
12
[1905] 2 KB 555, 563
tend to narrow it, must be accepted with caution. Interest may thus be
possessory, expectant or contingent or equitable and not necessarily
vested. It is the existence of an insurable interest that alone differentiates
a contract of insurance, being a contract of indemnity, from a mere
wager. Therefore, for the validity of an insurance contract, the existence
of an insurable interest is a mandatory precondition.

The nature of insurable interest can thus be, briefly, understood by the
following points :
1. The interest should not be a bare sentimental or emotional right or
interest;
2. It should be a right in a property or a right arising from a contract
made in respect to that property;
3. The interest must be pecuniary; mere inconvenience or
disadvantage cannot be regarded as an insurable interest;
4. The interest should be lawful and must not be illegal, immoral or
opposed to public policy.

INSURABLE INTEREST AND LIFE INSURANCE CONTRACTS

A life insurance contract is an aleatory contract. An aleatory contract may

be described as a contract based on an element of chance or uncertainty.
In a life insurance policy, the insurer contracts to pay the insured, in
consideration of premium, a specified sum of money, either to the latter,
upon maturity of that policy or should death happen to him, to his legal
dependants or executors as the case may be. In Dalby v. India and
London Life Assurance Co.13 it was held that a contract of life insurance is
not a contract of indemnity, like a marine or a fire policy, but is a contract
to pay a definite sum in consideration of an annuity paid during life.“A
contract of life insurance may be defined as one in which one party
agrees to pay a given sum of money upon the happening of a particular
event contingent upon the duration of human life in consideration of
immediate payment of a smaller sum or other equivalent payments by
the other”.14 So as to effect a life insurance contract, it is necessary that
the person, who is privy to the contract, should have an insurable interest
in the life of the person, for whom the policy is being taken. Although it is
difficult to lay down in a precise manner as to what would constitute
insurable interest in a life insurance contract, yet it is a well settled
principle of law that there has to be an insurable interest attached to a life
insurance contract. It is opposed to public policy to allow a person, who
has no interest in the life of another person, to take an insurance policy in
the name of the latter. In England, insurable interest is mandated by the
Life Assurance Act, 1774 while in America and in India, it is required as a
matter of public policy.
13
[1854] 15 CB 365: 139 ER 465; Also see C. Duraiswamy Iyengar v United India Life Assurance
Co. AIR 1956 Mad 320: (1956) 1 Mad LJ 344
14
Bunyon on Life Insurance, 4th edn; followed by Cozens Hardy MR in Joseph v Law Integrity
Insurance Co.[1912] 82 LJ 187: [1912] 2 Ch 581
The most important aspect of insurable interest in a life insurance
contract is that the interest should exist at the time of commencement of
the policy, but it need not continue to exist at the time of the occurrence
of the loss.

Every man is presumed to have an interest in his own life and he is not
required to show at any point that he had some particular interest in the
continuation of his life. In Wainwright v Bland15 an executor, suing on a
policy effected by his testator on two years of his life, was not required to
show any significant reason for making an insurance for such a limited
time period. As regards spouses are concerned, it is generally believed
and accepted that a wife has an insurable interest in the life of her
husband and vice versa. Lord Kenyon CJ declared that “…it must be
presumed that every wife had interest in the life of her husband…”and it
is not necessary for her to prove that she had an insurable interest only
because a large sum of money would go from her husband’s estate to
another, upon his death.16Farwell LJ has held that a wife may insure a
husband’s life, and the husband his wife’s.17 The English law limits
insurable interest on a sentimental basis only to the relationship of
husband and wife.

As far as children are concerned, in England, the rule, which was

recognised in the case of Halford v Khymer18, is that a parent has no
insurable interest in the life of his child as mere love and affection is not
sufficient to constitute insurable interest. Similarly a child does not have
an insurable interest in the life of his parent provided he is not dependent
on the latter.19 Therefore, under English law, insurable interest is limited
to statutory insurable interest.20 While the English law restricts the scope
of insurable interest to the parameters set by the statutes dealing on the
subject, the American law extends the principle to certain other
relationships viz parent and son, grandparent and grandchild etc. In an
American case21, it was held that any relative may insure the life of
another when he is so related to the other to the claim for maintainance
enforceable at law.

In India, the Insurance Act, 1938, does not contain any provision which
explains the concept of insurable interest. In the absence of any statutory
explanation, courts take recourse to the English and American decisions
which are in conformity with the prevailing currents of social, economic
and religious thought in the society. Thus in India too, apart from
husband, wife or any other close relative, any person, who has a legal

15
[1836] 1 M&W 32
16
Reed v. Royal Exchange Assurance Co.[1795] Peake Add Cas 70
17
Griffith v Fleming [1909] 100 LT 765: [1909] 1 KB 805: [1908-10] All ER 760 CA
18
[1830] 10 B&C 724: 109 ER 619
19
Howard v. Refuge Friendly Society [1886] 54 LT 644: 2 TLR 474
20
In England, insurable interest is governed by the English Marine Insurance Act, 1745, the English
Life Assurance Act, 1774 and the English Gambling Act 1845.
21
Aetna Life Insurance Co. v France [1876] 94 US 561
right to derive maintenance from a person, can take a life insurance
policy on the life of the latter without any proof of insurable interest. Life
insurance is a husband’s privilege, a wife’s right and a child’s claim.22
Another set of relations which acquire insurable interest for effecting a life
insurance, are relations which originate from contractual transactions.
Therefore a creditor has an insurable interest in the life of the debtor to
the extent of his interest23and where the debt has been guaranteed by a
surety, then on the life of the surety too.24 In Powell v Dewy25 it was held
that a partner of a firm has no insurable interest in the life of the other
partner, except when the latter is indebted to him personally and only to
the extent of such indebtedness.

INSURABLE INTEREST AND FIRE INSURANCE

Like all insurance contracts, a fire insurance contract also requires

insurable interest on the subject matter insured.26 The insurable interest
need not arise from ownership27 alone, it can even arise in case of lawful
possession or from a contract dealing with the subject matter insured. A
fire insurance contract is a personal contract to indemnify a person for
any loss which he may suffer upon the destruction of the thing insured,
from fire, explosion, etc., and therefore, if the person transfers the thing
insured to another, he loses his insurable interest in that thing and the
contract between him and the insurer comes to an end. It is the insurable
interest of a person that is protected by a fire insurance contract and not
the subject matter insured. A person has an insurable interest in the thing
insured, if he is likely to suffer a direct loss upon its destruction.

As far as fire insurance is concerned, there are three essentials of

insurable interest:
1. There must be a physical object which is capable of being
destroyed, lost or damaged;
2. That physical object must constitute the subject matter of the
insurance; and
3. The insured must have some legal relationship thereto so that he
benefits by the preservation of the property, and is prejudiced by its
destruction, loss or damage.28

In Macaura v Northern Assurance Co.29 it was held that neither a

shareholder nor a simple creditor of a company has any insurable interest
in any particular asset of that company, although both a shareholder and
22
SS Hubner “Life Insurance” pg. 17
23
Godsall v Boldero [1807] 9 East 72: 103 ER 500
24
Beauford v Saunders [1877] 25 WR 650
25
[1898] 123 Log NC
26
Castellian v Preston [1883] 11 QBD 380 @ pg. 397(as cited in para 606 of Halsbury’s Law of
England, Vol. 25, 4th Edn; pg 325)
27
Ward v Carttar [1865] LR 1 Eq 29 @ pg 31: Romilly MR held that to have an insurable interest, it
is not necessary that the owner of the subject matter insured should actually be in possession of
that subject matter.
28
Relevant excerpts from “Fire Insurance Law and Claims” by E.J.D. Peverett; pg 161
29
[1925] AC 619 (as cited in Dr. Avtar Singh “Law on Insurance”1st edn @ Pg. 62)
a creditor may suffer loss upon destruction of their company’s property.
Where a person has contracted with another to sell the subject matter
insured, he retains an insurable interest in that subject matter till the time
the title in the subject matter is transferred, in finality, to the buyer30. In a
case31where a property, insured by fire, was contracted to be sold and
pending transfer of title, it was destroyed by fire, it was held that the
owner of the property was entitled to recover the insurance money as he
was still interested in the safety of the property.

In a fire insurance contract, the insurable interest in the property should

exist both at the inception of the policy as well as at the time of the loss. If
it does not exist at the commencement of the contract, it cannot be the
subject matter of insurance and if it does not exist at the time of loss, he
does not suffer any loss and so needs no indemnity.32

Wharfingers and warehousemen, with whom goods are entrusted for

safekeeping and custody, have an insurable interest in those goods33and
so do carriers, inn keepers and mortgagees. A tenant has an insurable
interest in the property which he rents. The insurable interest of a tenant
may arise either through an express clause in the tenancy agreement,
that he shall be responsible for insuring the property or otherwise, as he
stands to lose the beneficial enjoyment of the property in the event of
destruction, which is sufficient to give him an insurable interest. A tenant,
who has contracted to insure a property, continues to have an interest in
it, even after his tenancy has come to an end, if his liability continues. 34
But a person does not have any insurable interest in a property which is
spes successionis or where the owner has promised to bequeath that
property to him, by a will, on the former’s death for the owner might
change his mind later. Insurable interest must be more than a mere
expectation may be.35

Bailees are also entitled to insure goods36 which are entrusted to them for
custody notwithstanding the fact that their liabilities to the owners or
bailors depend upon a number of circumstances, governed by statutes,
contracts, common law and customs in trade. A bailee need not show the
nature of his interest to the insurer while effecting an insurance policy,
provided the policy is effected solely on his own behalf.
There are instances where in two or more persons are interested in the
same subject matter insured viz. landlord and tenant, mortgagor and

30
See also Sellers v Continental Insurance Co [1974] 48 DLR (3d)369, NS App Div: where the
insured had built his house at his own expense and had a contractual right to acquire the land; he
was correctly described as “owner” and to have an insurable interest in the house. (Also see
Halsbury’s Laws of England; Vol. 25; 4th edn; para 607; pg. 326)
31
Collingridge v Royal Exchange Assurance Corpn. [1877] 3 QB 173: 47 LJ QB 32: 37 LT 525
32
Relevant excerpts from M.N. Srinivasan “ Principles of Insurance Laws” 7th Edn; Pg.200; para 5
33
Marks v Hamilton [1852] 7 Exch 323: 155 ER 970
34
Heckman v Isaac [1862] 6 LT 383
35
E.J.D. Peverett “ Fire Insurance Law and Claims” pg 162 para 6
36
Waters v Monarch Fire and Life Assurance Co. [1856] 5 E & B 870; Also see Petrofina (UK) Ltd v
Magnaload Ltd [1983] 2 Lloyd’s Rep 91: whether the bailee has insured his own interest as bailee
or the interest of the bailor as an owner of the goods is a matter of interpretation.
mortgagee, bailor and bailee etc. In such cases the insurable interests of
both the persons are quite separate and distinct from each other and
therefore both of them can effect a separate insurance policy on the same
subject matter, both the insurance policies being valid.

INSURABLE INTEREST AND MARINE INSURANCE

A marine insurance contract is one in which the insurer promises to

indemnify the insured against any loss to the insured subject matter, be it
a ship or the cargo, arising out of the perils of the sea, subject to the
conditions and the extent of the policy.37 Justice Blackburn defines a
marine insurance policy as a contract of indemnity against all losses
occurring to the subject matter of the policy from certain perils during the
adventure.38Therefore, a person can only insure the subject matter if he is
interested in the preservation and safety of that matter. Every person who
has an interest in a marine adventure has an insurable interest39 and a
person is said to be interested in a marine adventure if he stands in such
a relationship with the thing insured that upon its destruction, he may
incur liability or suffer a loss, on it.40A person has an insurable interest in
the subject matter insured when he has such a connection with it that he
will:
1. derive some pecuniary benefit or advantage from its preservation;
or
2. suffer some pecuniary loss or damage from its destruction,
termination or injury by the happening of the event insured
against.41

A marine insurance policy effected without an insurable interest, like all

other insurance contracts, becomes a mere wager, void in the eyes of
law.42 It is not necessary that to have an insurable interest, the person
insuring must be in possession of a vested right. It is sufficient to
constitute an insurable interest, if there is an expectancy along with an
existing present title, out of which such expectancy has arisen. But
expectation of some benefit, which might arise from subject matter in
37
Section 3 of the Marine Insurance Act, 1963[ Section 1 of the English Marine Insurance Act,
1906 ] defines marine insurance as :
“A contract of marine insurance is an agreement whereby the insurer undertakes to indemnify the
assured, in the manner and to the extent thereby agreed, against marine losses, that is to say, the
losses incidental to marine insurance”
38
Blackburn J in Lloyd v Fleming [1872] LR 7 QB 299, 302 (as cited in KSN Murthy and Dr. KVS
Sarma “Modern Law of Insurance” 4th Edn, Butterworths @ Pg 252 para 1)
39
Section 7(1) of the Marine Insurance Act, 1963 [Section 5(1) of the English Marine Insurance Act,
1906]
40
Section 7(2) of the Marine Insurance Act, 1963 [Section 5(2) of the English Marine Insurance Act,
1906]:
“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 damage thereto, or by detention thereof, or may incur liability in respect thereof”
41
Relevant excerpts from “Modern Law of Insurance” by KSN Murthy and Dr. KVS Sarma , 4th Edn,
Butterworths; Pg. 69 Para 4.
42
Section 6 of the Marine Insurance Act, 1963
which the person insuring is not actually interested but expects to be
interested is not an insurable interest.43 A partial as well as a contingent
interest is also insurable.

Insurable interest, in a marine policy, must exist at the time of the loss
though it is not necessary that it should be in existence at the time of
effecting the policy.44The policy will be considered valid if the insured
insures the subject matter without being interested in it, at the time of
effecting the policy and if he acquires an interest in it after it has been
lost, he can recover under the policy.45

A marine policy, just like a fire policy, is a personal contract and hence,
the insurable interest of the insured in the subject matter continues till the
time he is in actual possession of it. If he has transferred the title in the
subject matter to another person, through an agreement to that effect, he
ceases to have any interest in it and the policy will also come to an end.
So long as the seller of a ship or of the goods retains any interest in the
property, he can insure it to the extent of his interest.46 In Reed v Cole47it
was held that where the owner of a ship has sold her under a contract
which requires him to pay the buyer a certain sum of money should a loss
happen within a particular period of time, the owner has an insurable
interest to the extent of such a sum.48 Where the subject matter insured
has been mortgaged, the mortgagor has an insurable interest in that
subject matter to its full value and the mortgagee has an insurable
interest on any sum due or to become due under the contract.49 A trustee
who has a legal interest in the subject matter insured may insure in
respect of that interest to the full value of the subject matter, and may
recover the whole amount on the condition that he shall hold the amount
recovered, in trust for the bonafide beneficiary.50

Even captors have an insurable interest over the ship or cargo captured
by them. As they are generally in possession of the captured property and
liable to pay damages if they take possession illegally, it is generally
accepted that they have an insurable interest over such a property.

Chalmers says “…The definition of insurable interest has been

continuously expanding and the dicta on some of the older cases which

43
Stockdale v Dunlop [1840] 6 M & W 224: expectation of profit or commission, to arise out of the
sale of goods, not contracted at the time of their loss, is not an insurable interest under the policy.
44
Section 6(1) of the Marine Insurance Act, 1963
45
Sutherland v Pratt [1843] 11 M&W 296
46
Relevant excerpts from Halsbury’s Laws of England, Vol. 25, 4th Edn. Para 377; Pg. 210
47
[1764] 3 Burr 1512
48
But where the property, which is the subject matter of a contract of sale has completely passed
to the buyer from the seller, then the seller ceases to have any insurable interest in that property
and the buyer acquires the same: Joyce v Swann [1864] 17 CBNS 84; Also see Seagrave v Union
Marine Insurance Co [1866] LR 1 CP 305 and Sparkes v Marshall [1836] 2 Bing NC 761.
49
Section 14(1) of the English Marine Insurance Act, 1906[Section 16(1) of the Marine Insurance
Act, 1963]
50
Ebsworth v Alliance Marine Insurance Co[1873] LR 8 CP 596 @ pg 638 according to Brett J
would tend to narrow it must be accepted with caution…”51 Therefore, any
person can effect a marine insurance policy as long as he has an insurable
interest, which can be attributed to him if he is interested in the
preservation of the subject matter insured and he is likely to suffer a
direct loss upon its damage or destruction.

CONCLUSION

As has been discussed herein above, Insurable interest is a necessary

precondition to all types of insurance contracts, although it is not possible
to give an exhaustive list of the various persons who are said to possess
insurable interest. Whether a person has an insurable interest in the
subject matter or not is a question of facts and circumstances of each
case. In fact, it is the existence of insurable interest which differentiates a
contract of insurance from a wager52, which is void in the eyes of law.
-------------------

51
Chalmers “Marine Insurance”1901 Edn; Also see Walton J’s approval to the above quote in
Morgan Galloway v Uzeilli.(See Footnote No.12)
52
Section 30 of the Indian Contract Act, 1872 defines Wager as :
“Agreements by way of wager are void; and no suit shall be brought for recovering anything
alleged to be won on any wager, or entrusted to any person to abide by the result of any game or
other uncertain event on which any wager is made”