INSURANCE, NEGOTIABLE INSTRUMENTS

AND BANKING ASSIGNMENT

“INSURABLE INTEREST”

Name: Mohd.Ovais
Semester: 10th Semester
Section: A
Submitted to: Mr. Sukesh Mishra

Acknowledgment
 Insurable Interest 2

I am using this opportunity to express my gratitude to everyone who supported me

throughout the course of this assignment. I am thankful for their aspiring guidance,
invaluably constructive criticism, and friendly advice during the project work. I am
sincerely grateful to them for sharing their truthful and illuminating views on a
number of issues related to the project.

Firstly, I would like to thank my Insurance, Negotiable Instruments and Banking

professor, Mr Sukesh Mishra, for giving me the opportunity to take on this
assignment, imparting valuable knowledge about the subject, and paving the way
towards the completion of the assignment.

Secondly, I would like to thank my parents whose constant support helps me through
everything I do and who are there to appreciate what is right and rightfully criticize
what needs to be improved.

Lastly, I would like to thank my friends for helping me sort out any confusion I had
during the course of this assignment.

This assignment would not have been possible without the help and support of the
aforementioned people.

Table of Contents
 Insurable Interest 3

Table of Cases................................................................................................................4
I. Introduction..............................................................................................................5
II. Concept of Insurable Interest.................................................................................6
III. Nature of Insurable Interest...................................................................................7
IV. Importance of Insurable Interest............................................................................7
V. Kinds of Insurable Interest......................................................................................9
VI. Time or Duration of Insurable Interest................................................................10
VII. Scope of Insurable Interest.................................................................................11
VIII. Insurable Interest in Life...................................................................................11
IX. Fire Insurance......................................................................................................13
X. Insurable Interest in Goods...................................................................................13
XI. Marine Insurance Contract and Insurable Interest...............................................14
XII. Case Laws...........................................................................................................15
XIII. Conclusion........................................................................................................17
Bibliography.................................................................................................................18
 Insurable Interest 4

Table of Cases

 Lucena v. Crawford
 Wilson v. Jonesthe
 Macaura v. Northern Assurance Company
 Halford v. Khymer
 Griffith v. Flemming
 Tomlinson v. Hepburn
 Monarch v. Water Fire and Life
 North British and Mercantile Insurance Co. v. Moffat
 Insurable Interest 5

I. Introduction

It is said that none of the statutes have ever attempted to provide a comprehensive and
simple definition of insurable interest. In India also, no legislative statute has provided
any definition regarding Insurable Interest. S. 38 of the Insurance Act, 1938 had a
passing reference to Insurable Interest that got repealed by S. 48 of the Insurance Act,
1950. Marine Insurance Act, 1963 has somewhat defined it but it is not
comprehensive enough to cover each and every type of Insurance.

Therefore, it is a concept to be described rather than be defined. Insurable Interest is

interest which insured has in the subject matter of insurance. But what is the subject
matter of Insurance has always been a matter of explanation in legal and economic
philosophy both at the bench and bar. It is the interest that the insured has in the
subject matter of insurance, if the subject matter is destroyed due to risk bearing event
insured against. It may be punitive/financial/monetary/pecuniary loss. It is the right or
title that is legally recognised in the subject matter of insurance which is protected and
not subject matter itself for if subject matter is to be destroyed then it will be
destroyed and no one can save it.

The test followed by court is that whether the insured stands in such relation to the
subject matter of insurance that he will derive economic or pecuniary benefit out of
his continuing existence and will lose that economic/pecuniary benefit out of
destruction of the subject matter.We find that insurable interest is always identified
with pecuniary/economic interest. So it can be said that mere expectation unattended
by pecuniary interest shall not be considered as insurable interest.

It was observed in a case, Lucena v. Crawford1 that an insurable interest must be

enforceable at law, by law and what law generally enforces right and title in the
subject matter. So this expression that it must be enforceable by law means insurable
interest must be subsisted with right and title in subject matter.

1
(1806) 2 Bos & PNR 269 (Appendix 2.1).
 Insurable Interest 6

Lord Eden said: “Mere expectation though founded on the highest probabilities is not
interest and it is equally not interest whatever might have been the chance in favour of
that expectation. If moral certainty is a good ground of insurable interest, there are
hundreds, perhaps thousands who would be entitled to interest.”

Modern study of case reveals that it is not always necessary that there must be vested
interest/proprietary/owned interest in the subject matter of insurance. Rather mere
inchoate, physical, equity interest is enough to constitute insurable interest provided
all of them are subsisted with some economic right or title in the subject matter on
insurance. So mere expectation of profit will not constitute an interest if legal right
does not attend/ that expectation. It is to be noted that love or affection however
strong, will not constitute right or title.

II. Concept of Insurable Interest

A person or entity has an insurable interest in an item, event or action when the
damage or loss of the object would cause a financial loss or other hardships. To have
an insurable interest a person or entity would take out an insurance policy protecting
the person, item or event in question. The insurance policy mitigates the risk of loss
should something beset the asset.

Insurable interest is an essential requirement for issuing an insurance policy that

makes the entity or event legal, valid and protected against intentionally harmful acts.
People not subject to financial loss do not have an insurable interest. Therefore a
person or entity cannot purchase an insurance policy to cover him or herself in the
event of a loss.

Insurable interest is the basis of all insurance policies.An insurable interest is an

object that, if damaged or destroyed, would result in financial hardship for the
policyholder.To exercise insurable interest, the policyholder would buy insurance on
the person or item in question.The policy must not create moral hazard, in which a
policyholder would have a financial incentive to allow or even cause a loss.
 Insurable Interest 7

Insurance is a method of pooled risk exposure that protects policyholders from

financial losses. Insurers have created many tools to cover losses related to various
factors 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 that protects anything subject to a financial

loss. It specifically applies to people or entities where there is a reasonable
assumption of longevity or sustainability, barring any unforeseen adverse events.
Insurable interest insures against the prospect of a loss to this person or entity.

Insurable interest is defined as the reasonable concern of a person to obtain insurance

for any individual or property against unforeseen events such as death, losses, etc. A
person is expected to have reasonable interest in a longer life for himself, his family,
business, and hence is in need of acquiring insurance for these. Therefore, insurable
interest is often related to ownership, relationship by law or blood and possession.
However, it is not an important element of life insurance contracts under modern law.

III. Nature of Insurable Interest

1. Insurable interest must be right bearing interest recognised by law or not whether
arising out of contract or out of status recognised by statutes.
2. Right must always be pecuniary, financial, or monetary. So, mere disadvantage, in
convenience or mental disturbance is not enough to constitute insurable interest.
3. Insurable interest must not be sentimental right or interest. Moral right and mere love
and affection in subject matter does not constitute insurable interest.
4. Insurable interest must be foreseeable by law means not illegal, immoral, unlawful or
opposed to public policy.
 Insurable Interest 8

IV. Importance of Insurable Interest

For the contract of insurance to be valid it is not only necessary that the parties to the
contract are competent to contract, it is made with free consent and the consideration
is lawful, beside all this it is also necessary that the insured has insurable interest on
the subject matter of the insurance. If there will be no insurable interest then contract
will amount to wager. Insurable interest in broad term means that the party to the
insurance contract who is insured or policyholder must have a particular relationship
with subject matter of the insurance, whether that be a life or property. The concept of
insurable interest is of particular importance in marine and life insurance.

The definition of insurable interest has been continuously expanding. The most
commonly quoted definition of insurable interest is that of Lawrence J, in Lucena v.
Crawford, in which it was said that “A man is interested in a thing to whom
advantage may arise or prejudice may happen, from the circumstances which may
attend it…to be interested in the preservation of a thing, is to be so circumstanced
with respect to it as to have benefit from its existence, prejudice from its destruction”

Broadly it could be said that a person has an insurable interest in something when loss
or damage to it will cause that person to suffer a financial loss or some other kind of
losses. For example, if the car you own meets with an accident, you have to incur
costs to repair the car before you can ply it again or you have to sell it in scrap and be
content with getting too small a sum in return to replace your car. Here, you suffer a
financial loss and, hence, have a strong reason to insure your car. If the accident
happens with a car not owned by you, you do not suffer any financial loss. You do not
have a reason to insure such a car. If a 'reason' exists, you are said to have an
insurable interest in the subject of insurance.The governing principle is that the
interest must be an enforceable one. The mere hope of acquiring is not enough. it has
been said that party has interest in an event if he will gain advantage if it happens and
suffer a loss if it does not happen. But the advantage or loss must depend upon some
right, whether contractual or proprietary, legal or equitable, which is enforceable in
court of law. Although the insurable interest has to be enforceable by law, the
enforceability is not the sole criterion, howsoever strong it might be.
 Insurable Interest 9

A husband who is living with his wife has an insurable interest in her property, for he
is by law entitled to share her enjoyment in it, and she, no doubt, has a similar
insurable interest in his property as their rights and duties are largely reciprocal. On
the same principle a shareholder has no insurable interest in the assets of the
company. While the sole shareholder in one man company will suffer a certain
detriment in the event of loss of company’s property, he has no insurable interest in it
even if he is in possession of it, as his possession is not coupled with any legal right to
enjoy the use of property, and in his capacity as a creditor he is merely unsecured
creditor of the company.

Mere probability of detriment is not enough, and one cannot insure a thing merely
because there is a chance that some collateral benefit may arise should it not be lost.
A shareholder can however insure his own share, in which he has a insurable interest,
against loss suffered owing to the failure of an adventure in which the company is
engaged, and in Wilson v. Jonesthe2 adventure of laying down a submarine cable was
insured by shareholder in that way.

Thus a personal accident policy may be affected by the assured against the loss which
he may suffer by reason of an accident to a third party. To render such insurance valid
assured must have an insurable interest in such person’s safety, and this interest must
be of pecuniary nature. A son, therefore, whose father is a pauper and dependent on
him, has not a sufficient insurable interest to support insurance upon his father against
personal accident.

V. Kinds of Insurable Interest

2
(1867) LR 2 Ex 139 (Appendix 2.15).
 Insurable Interest 10

There are basically two types of insurable interest

(1) Contractual
(2) Statutory.
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. As we have
seen in some cases that interest in the subject matter of insurance is required by law
itself for the validity of the policy, whether by express statutory law as in the Marine
Insurance Act 1906 or as by section 30 of the Indian Contract Act which merely
declares that all contracts by way of wager is void. This is the interest required by
statue or the statutory shareholder. If this agent is absent, the insurance is illegal or
void and no agreement between the parties dispensing with this requirement can be
effective. In an action upon such a contract if the insurer does not raise the plea of
want of interest nevertheless the court of its own motion may refuse to enforce the
contract.

A case law in detail that will clear the picture of the difference between these two
kinds of insurable interest in the case of Macaura v. Northern Assurance Company 3
one Macaura insured timber in his estate against fire. He sold timber to a company of
which he was the sole substantial shareholder. Thereafter most of the timber was
destroyed by fire and he demanded that he should be indemnified. The insurer
succeeded in refusing to comply with the demand. The insured had no statutory
interest in the assets of the company although he would suffer loss on the company
losing its property, nor he had any contractual interest under the policy because he
could not prove interest at the time of the loss. Though the insured had no statutory
interest the policy was held to be not a wagering contract because even being the sole
shareholder he had an interest or better call insurable interest in the property.

3
[1925] AC 619.
 Insurable Interest 11

VI. Time or Duration of Insurable Interest

The time when the insurable interest must be present varies with the nature of the
insurance contracts. The question is whether insurable interest should exist at the time
when the contract is formed or should it also continue to exist until it is discharged but
as we have seen in life insurance the presence of insurable interest is necessary at the
commencement of the policy although it is not necessary afterwards, not even at the
time of occurrence of risk. So it should be there in life policies at the time of taking
the policy it need not exist at the time when the lose take place or even when the
claim is made under the policy. Life insurance contracts are not strictly speaking
contracts of indemnity.

In fire insurance it's required both at the commencement of the policy and at the time
when the risk occurs. In a sense, therefore it may be said that insurable interest is
doubly insisted upon in fire insurance. The insurance interest is necessary at both the
times because it is treated as a personal contract and also a contract of indemnity. And
even the onus that the fire was intentional is on the insurer not on insured. In a marine
insurance contract the presence of insurable interest is necessary only at the time of
the loss. It is immaterial whether he has or does not have any insurable interest at the
time when the marine insurance policy was taken.

VII. Scope of Insurable Interest

Scope of risk is identified with liability of insurer to pay insured for damage done to
subject matter. Here, the scope of insurable interest is identified with time of
existence of insurable interest. So, time of insurable interest varies with kinds of
insurance contract.

VIII. Insurable Interest in Life

 Insurable Interest 12

In order to affect 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, the Life Assurance Act, 1774 while in America, mandates insurable
interest and in India; it is required as a matter of public policy.

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 Bland an executor, suing on a policy affected by his testator on two
years of his life, was not required to show any significant reason for making insurance
for such a limited time period. As regard 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.

As far as children are concerned, in England, the rule, which was recognised in the
case of Halford v. Khymer4, 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. Therefore, under English law, insurable interest is
limited to statutory insurable interest.

The Insurance Act, 1938 of India does not contain any provision that 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
4
IO B. & C. 724 (1830).
 Insurable Interest 13

legal 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.

Another set of relations that acquire insurable interest for affecting a life insurance,
are relations that originates from contractual transactions. Therefore a creditor has an
insurable interest in the life of the debtor to the extent of his interest and where a
surety, then on the life of the surety, has guaranteed the debt too. In Powell v Dewy 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.

IX. Fire Insurance

Fire insurance deals with contract of indemnity. Here, it is proved that at the time of
formation of contract, he was having an interest in property. But if later on the
property is sold to someone else and has no interest, then he shall not be paid policy
amount, as he shall suffer no loss by risk bearing event. Interest is doubly insured as
he has to prove his interest twice – 1) at the time of formation and 2) happening of
risk bearing event insured against.

X. Insurable Interest in Goods

Insurable interest is not confined to legal ownership only. The legal liability of
common carriers to make good the loss or damage to the goods in transit to the bailor
of goods is also an insurable interest A person with a limited interest in a property
may insure recover his interest only or so as to cover the interest of others as well who
are interested in 'the property. For instance, a carrier or bailee may insure to cover his
own loss or personal liability to the owner of the goods or up to the full value of the
goods entrusted to him that includes the owner’s interest as well. What interest the
assured intended to coyer under the policy must be determined by construction of the
policy itself. Thus, where the subject-matter of the insurance is described as 'Goods
 Insurable Interest 14

his own, in trust or on commission' the intention is to insure beyond his own personal
interest and he will be entitled to recover the full value of the goods in case of loss.

Where it is described as 'goods held in trust for which they are responsible' by the
assured wholesalers who purchased and resold parcels of tea, etc., lying in bonded
warehouses and had sold and received the value of some chests of tea before a fire
broke out and damaged them, it was held that the words goods for which they were
responsible showed that they did not~ intend to cover the proprietary interest of other
persons in the goods insured.

Where it is described by the commercial trustee, i.e., a bailee to whom goods are
entrusted for safe keeping as an insurance ''on goods', it would not cover the interests
of others in the property. It will cover his personal insurable interest in the goods
including his lien and his liability to the owner of the goods arising from his
responsibility for their safety as a person entrusted with the goods.

A person without any interest at all can insure as trustee for the person having interest,
provided interest in such insurance is not required by statute He will then have to hold
the claim amounts received as trustee for the interested person. This is under the
principle that a party to a contract can constitute himself a trustee for a third party of
rights under a contract and thus confer rights on the third party.

ill cover his personal insurable interest in the goods including his lien and his liability
to the owner of the goods arising from his responsibility for their safety as a person
entrusted with the goods.

A person without any interest at all can insure as trustee for the person having interest,
provided interest in such insurance is not required by statute He will then have to hold
the claim amounts received as trustee for the interested person. This is under the
principle that a party to a contract can constitute himself a trustee for a third party of
rights under a contract and thus confer rights on the third party.

XI. Marine Insurance Contract and Insurable Interest

 Insurable Interest 15

Insurable interest is a special requirement of the marine insurance contract and person
can enter onto any valid contract of marine insurance only if he has insurable interest
in the marine adventure. 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. Every person who has an interest in a marine adventure has
an insurable interest 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.

It is important for insurable interest that (1) there should be a physical object which is
exposed to the marine perils and (2) the assured must have some legally recognized
relationship with that object in consequences of which he benefits by its preservation
and is prejudiced by its loss or damage. 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 affecting the policy. The policy will be considered valid if the insured
insures the subject matter without being interested in it, at the time of affecting the
policy and if he acquires an interest in it after it has been lost, he can recover under
the policy.

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. In Reed v Cole it
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.

XII. Case Laws

 Insurable Interest 16

In case of Griffith v. Flemming5, Griffith and his wife each signed a proposal form
for a joint life policy on their lives for £500 and both contributed towards the
premium. After the policy was taken, the wife committed suicide and the husband
claimed the sum assured. The insurer alleged that at the time of taking the policy the
husband had no insurable interest in his wife's life as required by the Life Assurance
Act, 1774. Decreeing the claim Vaughan Williams L.J. held that 4the husband has an
interest in his wife's life, which ought to be presumed, and that “it is unnecessary to
go into the evidence to show any pecuniary interest of the husband…”

In case of Monarch v. Water Fire and Life6, plaintiffs, merchants and ware
housemen had goods of third persons deposited in their warehouse in the way of their
trade as warehousemen. They had taken floating policies against fire with the
defendants 'on goods the property of the assured or held by them in trust or on
commission'. Some goods were destroyed by fire and they claimed their full value and
not limited to their lien on the goods to the extent of their charges for warehousing,
landing and cartage. The insurers contended that plaintiffs had no insurable interest in
the goods. It was held that the words in trust' meant goods of customers which the
assured held and not merely goods of which they might be trustees in the strict legal"
sense, that the insured must make good the value of the whole of the goods destroyed
which the plaintiffs must apply to cover there own interest and for the balance they
will be trustees for the owners of the goods.

In case of North British and Mercantile Insurance Co. v. Moffat7, the assured were
wholesale tea merchants who purchased and resold parcels of tea lying in bonded
warehouses where they had been deposited by the importer. They took out two
insurances to cover 'merchandise (jute; petroleum and its products excepted), the
assured own, in trust or on commission for which they are responsible…’ at certain
wharves described in the policies. Fire occurred at one of these warehouses and
certain chests of tea were damaged. The assured claimed payment of the full value of
the chests of tea destroyed. It was found that the assured had resell some of the teas

5
1909 1 KB 805.
6
(1856) 5 El & Bl 870 1856.
7
(1871) LR7 CP 25.
 Insurable Interest 17

before the fire occurred and that the purchase money had been paid. Consequently,
the assured had no longer any responsibility to the purchasers in respect of that part of
the tea destroyed and they were not covered by the policy.

In case of Tomlinson v. Hepburn8, plaintiffs who were road haulers and carriers,
insured tobacco and cigarette consignments which they had contracted to carry to the
customer's depot by a Lloyd's 'Goods in Transit Policy, with the defendant who was
an underwriter. This they did as they were required by their contract with the tobacco
owners to 'insure and keep insured with a full comprehensive cover against loss of
goods in transit or otherwise. The policy insured the goods in transit including loading
and unloading' against all risks' of loss or damage however arising'. Before the goods
could be unloaded at the owner's depot, the lorries and the tobacco were stolen
without plaintiffs fault. Plaintiffs claimed the value of the goods under the policy. The
insurer resisted on the ground that the policy did not cover the owner's interest but
only the carriers’ interest in respect of their negligence. In appeal the House of Lords
said that
(1) this was a policy on goods and not merely in respect of the carriers negligence,
and
(2) the earners had an insurable interest in the goods the value of which was
recoverable under the policy, but that
(3) the carrier must account to the owners for their share of the loss after deducting
what was due to them as carriers.

XIII. Conclusion

To prevent gambling insurable interest is necessary. If insurable interest is not

required, the contract would be gambling contract and would be against public
interest. For example you can insure the property of another and hope for an early

8
[1966] 1 QB 21.
 Insurable Interest 18

loss. One can similarly insure the life of another person and hope for an early death.
These contracts would be gambling contracts and would be against public interest and
public policy and so need to be checked and stopped.

If insurable interest is not required, a dishonest person could purchase a property's

insurance belonging to someone else and then deliberately cause a loss to receive the
proceeds; but if the insured stands to lose financially nothing is gained by causing the
loss. Thus moral hazard is reduced. In life insurance, insurable interest requirement
reduces the incentive to murder the insured for the purpose of collecting policy claim
or anyone can set fire his home to claim the fire insurance claim or one can kill any
third person insured by him.

The concept is also important to measure the amount of the insured's loss in property
insured. Most of the property insurance is contracts of indemnity and the measure of
recovery is the insurable interest of the insured. In the event of loss, payment cannot
exceed the amount of one's insurable interest, as the principle of indemnity shall
apply. Thus it can be finally concluded from whole discussion that the insurable
interest is very important ingredient of the insurance and it could be said that without
insurable interest in subject matter of the insurance there can be no insurance.

Bibliography

Books
 Insurance Laws – Meenakshi Lekhi
 Insurable Interest 19

 B.N. Singh’s New Insurance Law – S.K. Sarvaria

 Modern Law of Insurance in India – K.S.N. Murthy and K.V.S. Sarma

Websites
 https://www.investopedia.com/terms/i/insurable-interest.asp
 https://economictimes.indiatimes.com/definition/insurable-interest
 http://www.legalservicesindia.com/article/1924/Insurable-Interest-in-insurance-
contract.html