What is Insurable Interest?

As there's a high risk of life, trade, and commerce, the need for insurance also increases. Insurance helps an individual to protect themselves from unexpected events that cause them financial harm. People consider buying insurance to be prepared for unexpected situations like loss of life or property damage and to get a financial claim from the insurance company.

However, many people face the issue of submitting a claim by any authorized person. This is where Insurance Interest becomes a crucial factor.

What if anyone could take out insurance on your car or home just to wait for something to happen and get claimed? That's not right. Insurable interest makes sure to provide financial claims to only those people who truly suffer a loss.

Because insurance is to protect against the unexpected, not to make profits, it's very important to know about insurable interest and its role.

In this article, we will learn everything about insurable interest, including its types, how it works, and its importance. Let's dive in!

Insurable Interest: Overview

Insurable Interest refers to having a financial stake in something that can help financially support if something unexpected happens, leading to damage or loss of life. Insurance interest helps to make the insurance valid for only authorized people, those who truly suffered from an unexpected situation, and the money only claimed by them or their genuine family members. For example, if you own a car or a house, you can have an insurance interest because you will lose money if the property is damaged.

Working Principle Of Insurable Interest

Insurable Interest is not something that earns interest after the investment. It is not a money-making option or investment option. It mainly focuses on providing financial support if something unexpected happens, like financial loss or loss of life. Insurable interest ensures that the financial claim is provided only to those who face the loss and need support. For example, if your car or property is damaged, it's a financial loss, and insurance helps provide financial support.

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A Typical Requirement

Before issuing any insurance policy, whether life, health, or automobile, you must show these insurance companies that you've insurable interest. You need to prove that if something happens to your property or car's financial loss, you will suffer financially. This requirement prevents those people from planning to make a profit from the loss of their connection.

Need Of Insurable Interest In An Insurance Contract

Insurable interest is very important for an insurance contract to be valid and claimed by authorized people only. To make an insurance contract legitimate, there are several factors to consider such as:

• Both parties must be capable of entering into a contract
• They agree willingly
• The contract must be lawful
• For an insurance contract to be valid, both parties must agree willingly and the contract must be lawful. To understand more about the Essentials of a Valid Contract, you can explore this article.

However, the person who is buying insurance must have an insurance interest in the item or person. If someone who doesn't have an insurable interest asks for a claim, then it's not allowed.

To get a claim settlement, the person must have a real connection with the item or insured person. Showcasing this connection ensures that a person would suffer financial loss or harm if the insured item or person loses.

For Example, if your car gets into an accident and you need to pay for repairs, then it's a financial loss, and you can only get a claim if you're the real owner of the car. There's a strong and valid reason required for the settlement.

Types Of Insurable Interest

There are two main types of insurable interest that you can consider when you're buying a policy:

1. Contractual Interest

A contractual interest happens when you already have a direct connection with the item or person you are ensuring. For example, if you buy insurance for your own home or car, then you're the owner, and there's a clear reason why you'll get an authorized claim.

2. Statutory Interest

This is considered in situations where you didn't have a connection before the insurance but could be responsible for something in the future. For example, a Liability enhancer covers accidents or damage you might cause to someone else if someone gets hurt because of your business.

Time Or Duration Of Insurable Interest

The timing for insurable interest depends on the type of insurance:

1. Life Insurance: Insurable interest is required only when you buy the policy but not afterward.
2. Fire Insurance: Insurable interest must be required both when you buy the policy and when you claim because of fire or damage.
3. Marine Insurance: Insurable interest is needed only at the time of the loss.

Insurable Interest and India

In India, the Insurance Act of 1938 doesn't clearly define insurable interest. Since there's no specific law, the court often refers to English and American Judgements that align with Indian society's norms.

In India, you can buy life insurance for someone if you have a legal right or relationship with them. This could be family members like your spouse, children, or others you support. Even without providing insurable interest, a family connection often suffices.

Insurable Interest also applies to certain financial relationships. For example, a lender can take out life insurance on a borrower for the amount of the loan. If someone guarantees a loan, the guarantee's life can also be insured. However, business partners can't insure each other's lives unless one owns the other money.

Is Insurable Interest Required For Insurance Policies?

Yes, insurable interest is needed for all insurance policies. When someone buys insurance for a person or asset, they must show that they would face a financial loss if something happened to that person or asset. Without the insurable interest, the insurer or the policyholder can't enforce the insurance contract.

Conclusion

The world is filled with risks and uncertainties, and it's important to be prepared earlier for unexpected things that can lead to financial loss, including losing life, health, or possessions. Insurance is one of the fastest ways to prepare for uncertainties and ensure financial support during financial loss. We hope this guide helps you understand insurable interest, its importance, and why you should ensure it for all your policies.