Insurance Contracts: What Is Insurable Interest?

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Insurable interest, except it can be or is waved, is a fundamental requirement of any insurance contract.


The policyholder (the insured) must have a clearly defined relationship with the subject matter of insurance.


The subject matter of insurance can be an event that may lead to the loss of a legal right or the creation of a legal liability.
For example, the subject matter of a life assurance policy is the insured life. the subject matter of insurance specifically refers to the pecuniary (financial) interest a person has in the subject matter of the insurance.


What is insurable interest?


Insurable interest is the legal right to insure borne out of a financial relationship, recognized at law, between the insured and the subject matter of insurance.


Essentially, insurable interest must be a potential liability capable of being insured. Other fundamentals of insurable interest are;

  1. It must be the subject matter of insurance,


2. There must exist a relationship between the insured and the subject matter of insurance, which safety or freedom from liability will benefit the insured. Or the insured will be prejudiced by its damage or the existence of liability and,


3. The relationship between the insured and the subject matter of insurance must be recognized by law.

How is insurable interest applied to the following forms of insurance?

  1. Mortgage:

There are normally two parties to a mortgage contract; the mortgager (the building society or financial institution) and the mortgagor (the purchaser). Both of them have insurable interest.

The interest of the mortgagee (regarded as the creditor) is limited to the extent of the loan.

2. Life Insurance:

The insurable interest in life is unlimited. But this is only in theory. In practice, the cost of the policy limits a person’s capacity to insure their life.

Married couples can also effect policies on the lives on their spouses and on lives of persons to whom they bear relationships, recognized at law, to the extent of a possible financial loss.

3. Executors and trustees:

Executors and trustees are legally responsible for the property under their charge. This bestows on them insurable interest in it.

4. Property Insurance:

Insurable interest arises out of ownership where the insured is the owner of the subject matter of insurance.

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