Insurance policies make reference to and our dependent on the existence of insurable interest, but what it insurable interest and how does it arise?
The basic principles of insurable interest
The principle of Insurable Interest was first established to prevent people effecting life assurance policies on persons who they believed may have an increased prospect of early death and as such they were gambling upon their life.
To deal with this situation it was determined that the person taking out the policy must have a financial interest in the life of the person whose life was being assured. In life assurance this remains the case, and the person effecting the policy must have such an interest at the time the policy was taken out. This enables family members, employers, creditors to insure the lives of those in whose survival they have an interest. The maximum benefit under life policies is limited to the pecuniary interest the policyholder has in the life assured, the exceptions to this are a policyholders interest in their own life and that of their spouse who are deemed to have an unlimited interest, albeit insurers will raise query on “excessive” sums insured.
Insurable interest in general insurance policies
In general insurance, insurable interest must exist at the time of the loss or claim and not necessarily when the policy was effected.
This is by far more appropriate for property damage and marine classes, where property changes ownership on a regular basis. The policyholder must have an insurable interest in the happening of the insured event. Demonstrating the need for an insurable interest at the time of loss is easy, if you arranged insurance on a house, then sold the house in the absence of an insurance interest requirement you would be entitled to a claim settlement when the property was destroyed although you have suffered no loss. In insurances in respect of liabilities, it may seem more difficult to show insurable interest, yet it is actually much more straight forward. Liability policies cover you for your legal liabilities, if you are legally liable for something, then you automatically have an insurable interest.