Chapter 4 - Insurable Interest

Question 1

What is insurable interest?

Answer 1

The legal right to insure arising out of a financial relationship recognised at law, between the insured and the subject-matter of insurance

Question 2

What are the 3 main features of insurable interest?

Answer 2

• Subject-matter
• Legal Relationship
• Financial value

Question 3

Explain the two types of subject matter

Answer 3

1. Subject matter of insurance: Item or event insured
   - Item: house, car, liability for negligence
   - Event: Event which results in loss of legal right or creation of legal liability
2. Subject matter of contract:
   The financial interest a person has in the subject matter of insurance

Question 4

Explain what is meant by legal relationship

Answer 4

Relationship between insured and subject-matter of insurance must be recognised by law, e.g. ownership. No legal relationship = no insurable interest

Question 5

Explain what is meant by financial value

Answer 5

Must have a financial value (interest or value)

Question 6

What is Insurer’s insurable interest?

Answer 6

Insurers can share risks with other insurers as they have in insurable interest in the risks they have assumed. For reinsurance, the subject-matter is the financial interest in the original insurance.

Question 7

When must insurable interest exist?

Answer 7

1. General insurance contracts - must exist at inception and time of loss. Though some connection other than full insurable interest can suffice at inception
2. Life insurance - must exist an inception but may not exist at time of loss
3. Marine insurance - Insurable interest must exist at time of loss but not an inception, provided there is reasonable expectation of interest

Question 8

Why must general insurance policies that are contracts of indemnity be subject to the rule that insurable interest must exist at the time of the claim?

Answer 8

The compensatory nature of the policies. The claimant has, by definition, not suffered financial loss if they had no legal financial interest at the time of the claim

Question 9

What 3 ways is insurable interest created?

Answer 9

1. Common law - Certain rights and duties under common law such as ownership or injury through negligence
2. Contract - When entering into a contract which gives responsibilities greater than common law. e.g. a leased property
3. Statue - Acts of Parliament which impose particular duties/benefits on certain groups of people. (also can be statues which reduce insurable interest by restricting liability)

Question 10

How is insurable interest applied to property insurance?

Answer 10

Generally arises out of ownership, where the Insured is the owner of the subject matter of insurance. Insurable interest can arise when the insured is not the full owner of the subject matter e.g.
1. Joint or part owners
2. Agents - when principle has insurable interest, agent can insure
3. Bailees - someone holding property on behalf of legal owner
4. Tenant.

Bailees and Tenants also in respect of possible liability

Question 11

How is insurable interest applied to liability insurance?

Answer 11

Person has insurable interest on the extent of any possible liability that they may incur to damages awarded by a court and other costs.