INSURABLE INTEREST: A key underlying principle of an insurance contract

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Insurance, IICCBy Ikuomola Adebisi

An insurance contract, like every other contract, is underpinned by valid and tested principles which are the very essence of its wide applicability and growth overtime.

Parties to an insurance contract are expected to have a consensus adidem (meeting of minds) prior to consummation of the contract aside other elements of a valid contract.

One of the key principles of an insurance contract is ‘Insurable Interest’ which must be present in all contract of insurance, otherwise it becomes a wager rendering it voidable abinitio.

Insurable interest is a legal right to insure arising out of a financial relationship recognized at law between the insured and subject matter of insurance.

Under a life insurance policy, a ready example is insurance on human life; for fire insurance, it could be factory, machinery, stocks, building, etc.

In much broader terms, parties to insurance contract must have a definite relationship with the subject matter of insurance, whether it be property or life. In life insurance, a person has an insurable interest in another person when the death of that person would cause a financial, emotional or other types of loss.

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The key features of an insurable interest are: Property, rights, interest, life, limb or potential liability on the insured capable of being covered by an insurance policy and such must be subject matter of insurance.

The insured must bear such a relationship recognized by law to the subject matter of insurance whereby they benefit by the safety or prejudiced thereof by its destruction.

Insurable interest exists amongst owners of property, part owners or joint owners, mortgagor/mortgagees, bailees, carriers, administrators, executors and trustees, debtors and creditors as well as the insurers.

Before the promulgation of related acts by the English Parliament, insurable interest was not made compulsory for an insurance contract to be consummated. But with these Acts such as Marine Insurance Act 1745 and Life Assurance Act 1774, it became imperative for insurable interest to exist in an insurance contract.

Macgillivray, a versed author on insurance law, has this to say on ‘Insurable Interest’: “Where the assured is so situated that the happening of the event on which the insurance money is to become payable would, as a proximate cause, involve the assured in the loss or diminution of any right recognized by law or in any legal liability, there is an insurable interest in the happening of that event to the extent of the possible loss or liability.”

In another decided case of Lucena v Craufurd 1806, the learned judge posited thus:  “A man is interested in a thing to whom advantage may arise or prejudice from the circumstances which may attend it; interest does not necessarily imply a right to the whole or a part of a thing, not necessarily and exclusively that which may be the subject of privation, but then having some relation to or concern in the subject of the insurance, which relation or concern by the happening of the perils insured against maybe so affected as to produce a damage, detriment or prejudice to the person insuring and where a man is so circumstance with respect to matters exposed to certain risks or dangers.”

The business of insurance places value on customers’ interest and therefore, pools risks by protecting policy holders from financial losses. Insurers have deployed many product offerings to pay compensation on losses related to various sources such as automobile expenses, healthcare expenses, loss of income through disability, loss of life and damage to property.

Insurable interest is a type of investment which protects the subject matter of insurance that are susceptible to financial losses.

It applies to people or entities where there is an assumption of longevity or sustainability, barring any unexpected and untoward events. Insurable interest insures against the prospect of a loss to this person or entity. For example, an organization may have an insurable interest in the key man within the organizational space.

Finally, the policy must not create moral hazard, in which a policy holder would have a financial incentive to allow or even cause a loss.

Ikuomola Adebisi is the Executive Director, Technical, Anchor Insurance Company Limited

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