Principle of insurable interest says that only the person who has insurable interest on a subject-matter of insurance can insure that particular subject matter. It is not possible to affect an insurance policy on a subject matter by someone who has got no insurable interest on that subject matter. But what is the difference between subject matter of insurance and subject matter of insurance contract?
Subject matter of insurance is nothing but the property that is being insured. For example:
- In life insurance- it is life
- In fire insurance- it is factory, machinery, inventory, house, building etc.
- In marine insurance it is, ship, cargo etc.
But the subject matter of insurance contract is indeed not the property as such but the insurable interest of a man in that property. For example, a fire policy it is not the bricks or materials or the house itself that a man insures, in fact it is the interest of the man in that house that he insures.
Insurable interest is almost a legal right to insure. It is the legal financial interest of a man on a property, the interest being such that by the safety of the subject-matter he is benefited, by the loss, damage or destruction thereof he is prejudiced. In fact, before the promulgation of certain Acts by English Parliament, it was not necessary to have insurable interest for the purpose of affecting a policy of insurance.
The notable Acts are The Marine Insurance Act, 1745, The Life Assurance Act, 1774 & the Gaming Act, 1845 which necessitated the presence of insurable interest. Before that anybody could insure anybody’s life or property and the business of insurance became more of gaming and wagering.
- The Marine Insurance Act, 1745 prohibited effecting policies of insurance on British ships or cargo without having insurable interest.
- The Life Assurance Act, 1774 clearly provides that no insurance shall be allowed to be made by a person for his own benefit on the life of another unless the person affecting the policy of insurance shall have insurable interest on the life of that another.
- The Gaming Act, 1845 has made all contracts of gaming or wagering null and void.
Before the promulgation of Life Assurance Act, 1774 it was not necessary for an insured to have insurable interest on the subject-matter of insurance. Anybody could affect life insurance on any life, the result being that it became a common practice amongst the judges and juries of the English judicial system to effect life policies on the lives of the suspected criminals brought for trial, where the maximum penalty could be death sentence.
There are three essentials of insurable interest:
- There must be property, rights, interest, or potential liability devolving upon the insured capable of being covered by a policy of insurance.
- Such property, rights, interest, or potential liability must be the subject matter of insurance.
- The insured must bear such relationship, recognized by law; to that subject matter of insurance whereby he benefits by the safety of that subject matter and is prejudiced by the loss, damage or destruction thereof.
When a person fulfills the above criteria or when a person has such a relationship with the subject-matter, it is said that he has insurable interest and it is only then that he can insure.
One point is very clear from the above requirement and that is this that if the presence of such an insurable interest would not have been required and if anybody would have been allowed to effect a policy of insurance on anybody’s life or property in the absence thereof, then there would have been created intentional or deliberate losses solely for making gains without losing anything at all. It is actually this principle which is keeping the business of insurance absolutely free from gaming or wagering, or from creation of such a situation.