Contribution

The principle of Insurable Interest establishes the right of someone to take out or "effect" insurance.

There is no one universally accepted definition of insurable interest but one which is often used is "the legal right to insure arising out of a financial relationship, recognised at law between the insured and the subject matter of the insurance"

This establishes 2 key elements:

• You must stand to lose financially, and
• You must have a legal right to insure the subject matter.

It is probably worth explaining "subject matter". The subject matter is the thing being insured, e.g. property, life, liability, interest, rights, on which it is possible to place a financial valuation.

So, to take out a policy, you must have insurable interest and for insurable interest to exist there must be a legal relationship between the insured and the subject matter and the insured must stand to lose.

If you borrowed a camcorder to take on holiday, from a friend, and the camcorder was lost or damaged, you would not have actually suffered a financial loss yourself. Your friend has! Therefore you would not have been able to insure the item even though you were temporarily responsible.

Think about the implications, without insurable interest as a principle, we could all insure anybody and expect to be paid out when they died for whatever figure we wanted. But with this principle, as we would not have lost out and we certainly had no legal right to insure, we would have been unable legally to take out the policy.

It was the Life Assurance Act 1774 which established this principle in law

There are three ways that Insurable interest can be created:

• By common law
• By contract
• By statute

Common law

We all have certain rights and duties imposed on us that give rise to insurable interest. We gain insurable interest through ownership. If we own a house and it burns down, we are certainly suffering a financial loss and as long as we legally own the property, we have a right to have it insured.

We also gain insurable interest through our common duty to not cause injury or damage to others through our negligence. This is where our right to insure for liability arises.

Contract

Contract is where the terms of a contract we enter into insist that certain insurances are in place. As a tenant in a part furnished property, the tenancy agreement may insist we take out contents insurance to cover both our own belongings and the landlord's furniture, even though we do not own these.

Statute

Statute is where the law imposes a right or duty to insure which wouldn't have otherwise existed.

There are a couple of important things to remember:

• No insurable interest can arise from a criminal act (setting fire to your own property and making a claim, nor can you insure stolen goods as you do not legitimately own them)
• You cannot insure to cover gambling. If you bet on Michael Schumacher winning every race in the driver's championship and he lost one, you would not have lost financially, apart from your stake, therefore you would have no insurable interest.

Insurable Interest has to exist at different times for different classes of business.

• In Life Assurance, it must exist when the policy is taken out
• With marine cover it must exist at the time of the loss