Insurable Interest
September 29, 2009
The main purpose of Insurance is to cover the risk of loss, and not trying to make a profit. Insurance provides the compensation when the loss occurs due to various reasons. This brings the question as to what one can insure? One cannot insure just about anything. There should be an insurable interest in the thing that the person is trying to insure. This means that when there is damage or loss of that thing, the person directly suffers a loss, whether financial or otherwise.
To make the above point clear, let us take a practical example. If you own a house, and it catches fire, and is damaged or destroyed, you have directly suffered a financial loss, as opposed to someone else’s house burning down. Someone’s house being destroyed does not incur any financial loss to you, and therefore you cannot possibly have an insurable interest in a house that is owned by someone else.
In the above example, even when it is your own house, the insurable interest will be up to what the house was worth. You cannot take a policy on your house for one million when it is worth only a hundred thousand. In case of a house mortgage also, the lender cannot have an insurable interest in the house for more than the amount he has lent, even when the value of the house is much more. From all this we see that the insurable interest cannot be used as a tool to make a profit.
The concept of insurable interest should be properly understood in context with Life Insurance as well. One can have an insurable interest in a person, when his death will affect one, monetarily or emotionally. So a lender has an insurable interest in his debtor’s life, to the extent of the loan given. A company has an insurable interest in the life of an employee or director, when that person is known to have special skills or knowledge, which is crucial to the finances of the company.
Legally, an insurable interest can be based on emotion also, and a husband can take a policy on his wife who does not contribute anything financially. But the insurable interest based on emotional relationship is allowed only for close family members and not for distant relatives and in-laws. Also it is perfectly legal for a person to take an insurance policy on himself and name anybody as a beneficiary to the insured amount. A person has an insurable interest in his own life, as he would want to remain healthy and alive. The person who is the beneficiary, may or may not have any insurable interest in the person buying the policy.
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