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Insurable interest exists when an
insured Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...
person derives a financial or other kind of benefit from the continuous existence, without repairment or damage, of the insured object (or in the case of a person, their continued survival). A person has an insurable interest in something when loss of or damage to that thing would cause the person to suffer a financial or other kind of loss. Normally, insurable interest is established by ownership, possession, or direct relationship. For example, people have insurable interests in their own homes and vehicles, but not in their neighbors' homes and vehicles, and almost certainly not those of strangers. The "factual expectancy test" and "legal interest test" are the two major concepts of insurable interest.


Historical background

The concept of insurable interest as a prerequisite for the purchase of insurance distanced the insurance business from gambling, thereby enhancing the industry's reputation and leading to greater acceptance of the insurance industry. The
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and ...
was a leader in that trend by passing legislation that prohibited insurance contracts if no insurable interest could be proven. Notably the
Marine Insurance Act 1745 The Marine Insurance Act 1745 (19 Geo. 2 c.37) was an Act of Parliament of the Parliament of Great Britain. The Act has been described as "the first significant statutory intervention in substantive marine insurance law". Background The purpose ...
(which introduced the concept of an insurable interest, although it did not use the term expressly), the
Life Assurance Act 1774 The Life Assurance Act 1774 (14 Geo. 3 c.48, also known as the Gambling Act 1774) was an Act of Parliament of the Parliament of Great Britain, which received the Royal Assent on 20 April 1774. The Act prevented the abuse of the life insurance s ...
which renders such life insurance contracts illegal, and the
Marine Insurance Act 1906 The Marine Insurance Act 1906 (8 Edw. 7 c.41) is a UK Act of Parliament regulating marine insurance. The Act applies both to "ship & cargo" marine insurance, and to P&I cover. The Act was drafted by Sir Mackenzie Dalzell Chalmers, who had earli ...
, s.4 which renders such contracts void. In 1806 Lord Eldon LC sitting in English
House of Lords The House of Lords, also known as the House of Peers, is the upper house of the Parliament of the United Kingdom. Membership is by appointment, heredity or official function. Like the House of Commons, it meets in the Palace of Westminst ...
in ''Lucena v Craufurd'' (1806) 2 Bos & PNR 269 sought to define an insurable interest, and although that definition is often used, modern commentators regard it as unsatisfactory. Lord Eldon defined it as "a right in property, or a right derivable out of some contract about the property, which in either case may be lost upon some contingency affecting the possession or enjoyment of the party".


Life insurance

Insurable interest refers to the right of
property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner of property may have the right to consume, alter, share, r ...
to be insured. It may also mean the interest of a
beneficiary A beneficiary (also, in trust law, '' cestui que use'') in the broadest sense is a natural person or other legal entity who receives money or other benefits from a benefactor. For example, the beneficiary of a life insurance policy is the person ...
of a
life insurance Life insurance (or life assurance, especially in the Commonwealth of Nations) is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money upon the dea ...
policy to prove need for the proceeds, called the "insurable interest doctrine". Insurable interest is no longer strictly an element of life insurance contracts under modern law. Exceptions include viatication agreements and
charitable The practice of charity is the voluntary giving of help to those in need, as a humanitarian act, unmotivated by self-interest. There are a number of philosophies about charity, often associated with religion. Etymology The word ''charity'' or ...
donation A donation is a gift for charity, humanitarian aid, or to benefit a cause. A donation may take various forms, including money, alms, services, or goods such as clothing, toys, food, or vehicles. A donation may satisfy medical needs such as ...
s. The principle of insurable interest on
life insurance Life insurance (or life assurance, especially in the Commonwealth of Nations) is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money upon the dea ...
is that a person or organization can obtain an insurance policy on the life of another person if the person or organization obtaining the insurance values the life of the insured more than the amount of the policy. In this way, insurance can compensate for loss. A company may have an insurable interest in a President/CEO or other employee with special knowledge and skills. A creditor has an insurable interest in the life of a debtor, up to the amount of the loan. A person who is financially dependent on a second person has an insurable interest in the life of that second person. Legal guidelines have been established in many jurisdictions which establish the kinds of family relationships for which an insurable interest exists. The insurable interest of family members is assumed to be emotional as well as financial. The law allows insurable interest on the presumption that a personal connection makes the family member more valuable alive than dead. Thus, close relatives are assumed to have an insurable interest in the lives of those relatives, but more distant relatives, such as cousins and in-laws cannot buy insurance of the lives of others related by these connections. A married person has an insurable interest in the life of their spouse, and minor children have an insurable interest in their parents. A person is also presumed to have an insurable interest in his or her own life. Broadly speaking, without an immediate family or a relationship that is recognized by law there is no insurable interest.


Hong Kong

Under Section 64B of the Insurance Ordinance Cap. 41 (IO), insurable interest is required for life insurance, otherwise, the life insurance contract is void. This will be an issue for insurance companies issuing the policy and policyholders, as well as any financier who may have taken a collateral assignment of the policy.


United Kingdom

A person is presumed to have an insurable interest in his or her own life, preferring to be alive and in good health rather than being sick, injured or dead. The unlimited interest extends to the life of spouses (and, since 2004, civil partners), even if there is no financial dependency. Law in the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and ...
does not recognize other classes of so-called 'natural affection' however, thus: *Parents have no interest in the lives of their children *Siblings have no interest in the lives of their fellow siblings *Children have no interest in the lives of their parents (
Scotland Scotland (, ) is a country that is part of the United Kingdom. Covering the northern third of the island of Great Britain, mainland Scotland has a border with England to the southeast and is otherwise surrounded by the Atlantic Ocean to ...
only) No insurable interest is recognized for
cohabiting Cohabitation is an arrangement where people who are not married, usually couples, live together. They are often involved in a Romance (love), romantic or Human sexuality, sexually intimate relationship on a long-term or permanent basis. Such a ...
couples. Although many insurers will accept such policies, they could potentially be invalidated because they have not been tested in court. In recent years, there have been moves to pass clear statutory provisions in this regard, which have not yet borne fruit. In 2008, the
Scottish Law Commission The Scottish Law Commission is an advisory non-departmental public body of the Scottish Government. It was established in 1965 to keep Scots law under review and recommend necessary reforms to improve, simplify and update the country's legal sy ...
and the Law Commission of England and Wales tentatively proposed some reforms to the existing law, hoping to clarify the complex rules. Their preliminary recommendations included increasing the category of 'natural affection' to include dependent children and parents and also cohabitees. Officially this is still under review.Legal basis of insurance: insurable interest
. ''General Insurance Manual''.
HM Revenue and Customs HM Revenue and Customs (His Majesty's Revenue and Customs, or HMRC) is a non-ministerial government department, non-ministerial Departments of the United Kingdom Government, department of the His Majesty's Government, UK Government responsible fo ...
. 16 August 2016.


See also

* Insurability *
Liability insurance Liability insurance (also called third-party insurance) is a part of the general insurance system of risk financing to protect the purchaser (the "insured") from the risks of liabilities imposed by lawsuits and similar claims and protects the in ...
*
Life insurance Life insurance (or life assurance, especially in the Commonwealth of Nations) is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money upon the dea ...
*
Property insurance Property insurance provides protection against most risks to property, such as fire, theft and some weather damage. This includes specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance, or ...


References

{{Insurance Insurable interest