Insurance Law: Insurable Interest

It is not an exaggeration to state that insurance plays a crucial role in commerce as well as the day to day life of the common folk. Insurance coverage has been such a necessity that permeates into every sector of economy, which sometimes we just take for granted. Insurance provides the safety net to people so that they can go about their businesses or life with the comfort of knowing that in the event something bad might befall upon their businesses or persons, they can look towards their insurance company for indemnity.

Nevertheless, despite its importance, an insurance policy will only be useful if it is enforceable. It is, after all, a contract just like any other and would be dependent on the ingredients which make up the contract before it could be deemed enforceable. There are many factors which determine whether an insurance policy is enforceable but one of the most fundamental of all would be the requirement that the person who took out the insurance policy has a certain interest in the risk to be insured.

This interest which the person who took out the insurance policy must possess is what is known as an insurable interest. In essence, this is brought about by the workings of law which distinguished contracts of insurance from contracts of wager. Contracts of wager are contrasted from contracts of insurance because in contracts of wager, the parties to the wager do not have any real consideration for the making of such a contract other than the sum or stake he will win or lose. In contracts of insurance, the policy holder is required to have something much more in the risk being insured.

Insurable interest may be legal or equitable. A moral certainty of loss arising from the destruction of the insured property is insufficient to give rise to an insurable interest in the property. Therefore, the person taking out the insurance must show that he has either a legal interest in the property or an equitable interest in the property.

Legal interest in a property would be a much easier interest to prove. This may be the ownership of the motorcar that you are insuring. Your registration card for the motorcar which shows that you are the legal and registered owner would be proof that you have a legal interest in the property to be insured. Likewise, a house which is registered in your name would give you an insurable interest in the form of legal interest when you prove such interest through production of the land title.

Equitable interest being an insurable interest in an insurance policy can best be demonstrated in immovable properties such as a house. In a sale and purchase transaction for a house, the vendor is the legal owner of the property and thus has the legal interest which is insurable whilst the purchaser is the equitable owner of the property and thus has an equitable interest which is insurable when he places a deposit for the house. Another scenario would be for properties held on trust. Here, the trustees are the legal owners and thus have legal interests which are insurable whilst the beneficiaries to the trust are equitable owners with equitable interests capable of being insured.

In the absence of an insurable interest capable of being insured, the insurance policy issued may be declared null and void as if it had never existed. In most cases and by reason of insurance contracts being contracts of good faith, the insurance company is not put to enquiry on the insurable interest which a person who proposes the insurance has. The onus lies upon the person who wishes to take out an insurance to ensure that he has an insurable interest in the subject to be insured. Otherwise, he risks losing everything.