DAMODARAM SANJIVAYYA NATIONAL LAW

UNIVERSITY
VISAKHAPATNAM, A.P., INDIA

INSURABLE INTEREST IN FIRE INSURANCE

LAW OF INSURANCE

SUBMITTED TO:

MR. ARPIT JAIN

SUBMITTED BY:

SANJANA SINGH
2014102

PIYUSH KUMAR MISHRA

2014078

SEMESTER – IX

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 ACKNOWLEDGEMENT

I have been taught the subject of Law of Insurance by our respected professor Mr. Arpit Jain
who helped us all through in the accomplishment of this project. I sincerely thank to the
respected professor, who helped us to gather the various sources which we could give final
shape to the topic under study. He not only provided us a platform to compile but also guided
us at all levels.

I, also thank the members of the library staff and computer section for the cooperation in
making available the books and accessing the internet even during their free time.

I hope that the project in its present form shall be received by all.

Thank You:-

Sanjana Singh

Piyush Kumar Mishra

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 TABLE OF CONTENTS

1. INTRODUCTION …………………………………………………………………….4

2. DEFINITION OF INSURABLE INTEREST ………………………………………...5

3. INSURABLE INTEREST AS PUBLIC POLICY OF LAW………………………… 6

4. TIME OR DURATION OF INTEREST……………………………………………... 6

5. INSURABLE INTEREST ARISES WITH OR WITHOUT OWNERSHIP …………7

6. INSURABLE INTEREST IN FIRE INSURANCE………………………………….. 8

7. OWNERS OF THE PROPERTY ……………………………………………………..9

8. CO-SHARERS OF THE PROPERTY ………………………………………………10

9. POSSESSORS OF THE PROPERTY……………………………………………… 10

10. CONCLUSION……………………………………………………………………... 14

11. BIBLIOGRAPHY…………………………………………………………………... 15

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INTRODUCTION:

It has been said that it is a general principle of common law that every contract entered into by
the parties is enforceable at their instance irrespective of its subject matter provided it is not
either illegal, immoral or contrary to public policy.1So in the beginning an insurable interest
was not a requirement for the validity of a contract of insurance and Roche] observed that there
is nothing in the common law of England which prohibits insurance even if no interest exists.2It
is in fact a principle of public policy that persons who enter into contractual engagements
should be required to fulfil them,3 and contracts of insurance are no exception to it. The concept
of insurable interest is a subsequent development of insurance practice and in this branch of
law it has a double meaning.

Insurable interest means an interest which can be or is protected by a contract of insurance.

This interest is considered as a form of property in the contemplation of law. It is assimilated
to an actionable claim transferable to the same extent and within the same limitations. The two
meanings of the term insurable interest in insurance law are, firstly in indemnity insurances,
unless there is some proprietary interest which is sought to be covered by the policy there is no
loss suffered and in such types therefore the contract by its very nature requires some interest
to be involved in the subject matter and this is called contractual insurable interest' and in other
cases of insurance where loss is not necessary to be proved this is not necessary. For example,
a fire insurance contract is a contract to indemnify the insured subject to the policy amount and
if the assured has no interest in the property, by its damage, he suffers no loss and so he cannot
recover anything. The contract is perfectly valid though nothing is recoverable under such a
contract.

A contract of insurance being primarily a contract of indemnity, insurable interest, contractual

or statutory, is a necessary element in every contract of insurance. It is only the presence of
insurable interest that distinguishes a contract of insurance from a wagering contract and hence
it is a sine qua non for the validity of the contract of insurance. All the statutes say that an
insurance contract will become a wagering contract and hence void if it is affected without an
insurable interest. Every contract of insurance, to whichever class it belongs, shall show an
insurable interest and without it, it is illegal or void and hence unenforceable.

1
Fender v St Iohn Mildmay [1938] AC 1
2
Williams a Baltic Ins Asson of London [1924] 2 KB 282
3
Bcrcsford 1) Royal Insurance Co [1938]AC 586

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DEFINITION OF INSURABLE INTEREST:

In the words of Riegel and Miller, “An insurable interest is an interest of such a nature that the
possessor would be financially injured by the occurrence of the event insured against.”

It is the words of Meher and Cammack, “In property insurance, insurable interest is any
financial interest based upon some legal right in the preservation of the property.”

Rodda Says:

Insurable interest may be defined as an interest of such a nature that the occurrence of
the event insured against would cause financial loss to the insured.4
Thus it is any interest which the assured is deemed to have in the subject matter of insurance if
in the event of its loss, damage or destruction that person will be subject to the risk of losing
some economic advantage.

In Lucena v. Craufaurd5, Lawrence J defined insurable interest as,

The having some relation to, or concern in, the subject of the insurance, which relation or
concern, by the happening of the perils insured against may be so affected as to produce a
damage, detriment or prejudice, to the person insuring and where a man is so circumstanced
with respect to matters exposed to certain risks or dangers, he may be said to be interested in
the safety of the thing with respect to it as to have benefit from its existence and prejudice from
its destruction.

Even in India it is strange that the Insurance Act 1938 does not contain a definition of insurable
interest. The only section, namely S. 68 which makes a passing reference to the words insurable
interest' stands repeated by S.48 of the Insurance Amendment Act 1950. Briefly stated there is
no legislative guidance in Indian Law on the subject. The definition in S.7 of the Marine
Insurance Act 1963 is not exhaustive.

In very recent case of New India Assurance Co. Ltd. v. M/s T.T. Finance Ltd6., the High court
of Delhi has explained the concept of insurable interest quoting some significant definitions
given in the earlier decided cases. In this case the High court has thrown a significant light

4
WH Rodda, Fire and Property Insurance, p22
5
(1806) 2 B & P 269, 301 (NR)
6
AIR 2011 Del 121

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saying that even a financer under the hire-purchase agreement will also have interest in the
property of the loanee.

INSURABLE INTERSET AS A PUBLIC POLICY OF LAW:

The case of Macaure v. Northern Insurance Company7 is a good Illustration. In this case one
Macaure insured timber in his estate against fire He sold the timber to a company of which he
was the sole substantial shareholder. Thereafter, most of the timber was destroyed by fire and
he demanded that he should be indemnified. The insurer succeeded in refusing to comply with
the demand. The insured had no statutory interest because as a shareholder he had no insurable
interest in the assets of the company though he too would suffer loss on the company losing its
property, nor had the contractual interest under the policy because he could not ever and prove
interest at the time of loss. Though the insured had no statutory interest, the policy was held to
be not a wagering contract. “No gaming contract was ever made, but this was a contract of
indemnity under which the assured must ever and prove interest at the time of the loss. This is
part of the law of insurance, quite independently of the Gaming Act, though the consequence
of failure to prove interest is the same namely, that the policy is unenforceable by uninterested
assured" said Lord Sumner. A shareholder has no insurable interest in the property of the
company hence contract will not be effective.

TIME OR DURATION OF INTEREST:

The time when the insurable interest must be present varies with the nature of the insurance
contracts. The question is whether insurable interest should exist at the time when the contract
is formed or should it also continue to exist until it is discharge.

In fire insurance it is required both at the commencement of the policy and at the time when
the risk occurs. In a sense, therefore, it may be said that insurable interest is doubly insisted
upon in fire insurance law. The insurable interest is necessary at both the times because it is
treated as a personal contract and also a contract of indemnity; example, if a house is to be
insured against risk of fire, the person effecting a fire policy must have an interest in the house
as it is a personal contract. Again, if the owner of a house takes out a fire insurance policy and
later on sells the house, he loses the insurable interest and he cannot claim under the policy if
a fire takes place and damages the house as he has no insurable interest as fire insurance is also

7
(1925) AC 619

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an indemnity contract. In a marine insurance contract, the presence of insurable interest is
necessary only at the time of the loss. It is immaterial whether he has or has not an insurable
interest at the time when the policy was taken.

INSURABLE INTEREST ARISES WITH OR WITHOUT OWNERSHIP:

The relevant judgement is the Division Bench decision of the Andhra Pradesh High Court in
the case reported as United India Insurance Company Ltd. v. Sri Balaji Dental Laboratory8.
Following observations of the said judgement are relevant:

"The next question is whether the respondent has an insurable interest in the property. The
admitted fact is that the respondent is a lessee and he has mortgaged the leasehold interest to
the Corporation. Learned counsel for the appellant contended that he being not the owner of
the property has no insurable interest in the premises insured; therefore, they are not entitled
for the insured amount. In this context reference may be made to the judgement of the Gnana
Sundaram v. Vulcan Insurance Co. Ltd. The said judgment explains the meaning of "Insurable
interest". The said judgment reads as follows:

"A man is interested in a thing to .whom advantage may arise or prejudice happen from the
circumstances which may attend it and whom it imported that its condition as to safety or other
quality should continue. Interest does not necessarily imply a right to the whole or part of the
thing nor necessarily and exclusively that which may be the subject of privation, but the having
some relation to, or concern in the subject of the insurance, which relation or concern by the
happening of the perils insured against may be so affected as to produce a damage detriment
or prejudice to the person insuring. And where a man is so circumstanced with respect to
matters exposed to certain risks of dangers as to have a moral certainty of advantage or benefit
but for those risks and dangers, he may be said to be interested in the safety of the thing. To be
interested in the preservation of a thing is to be so circumstanced with respect to it as to have
benefit from its existence, prejudice, from its destruction.

Only those can recover who have an insurable interest, and they can recover only to the extent
to which that insurable interest is damaged by the loss. In the course of the argument, it has

8
103 (2001) Com Cas 58, 2000 AIHC 932

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been sought to establish a distinction between a fire policy and a marine policy. It has been
urged that a fire policy is not quite a contract of indemnity, and that the assured can get
something more than what he has lost. It seems to me that there is no justification in authority,
and I can see no foundation in reason for any reason, for any suggestion of that kind. What is
it that is insured in fire policy? Not the bricks and the materials used in building the house, but
the interest of the assured in the subject matter of insurance not the legal interest only, but the
beneficial interest."

From the passages referred to above, it is clear that the interest need not be an interest of
ownership. It can be an interest other than the ownership also. The facts of the said case are
that a suit was filed for recovery of an amount under an insurance policy in respect of a house,
and the objection that was raised by the insurance company was that the plaintiff is only an
agreement holder and since he has no right of ownership he is not entitled to claim the amount
insured. In that context, it was held that an interest need not necessarily be a right to the whole
but can be a part. A person is interested in the preservation of a thing and such interest can be
insured. The learned Judges also held that the insurer can recover an insurable interest and they
can recover only to that extent to which that insurable interest is damaged by the loss and not
the amount insured as such. In other words, the insurer is entitled to the actual loss or damages
sustained and not the amount insured. This judgment is an authority for the proposition that
insurable interest need not necessarily be whole interest; it can also be a part of the interest. In
our considered view, the right to enjoy the property is transferred and the lessee has interest in
part in the lease-hold property and he is entitled to continue in possession as long as the lease
subsists. His possession should to be disturbed so long as the lease subsists. To enjoy peaceful
possession of the premises which he has taken on lease is an interest and it can be said that he
has insurable interest in the property. We therefore, are of the view that the leasehold interest
of a lessee is an insurable interest in the property that is insured.

INSURABLE INTEREST IN FIRE INSURANCE:

A fire insurance contract is considered as a personal contract. It is only an agreement with a
particular person to pay a certain sum of money if he suffers any loss or damage due to fire
with reference to the property insured.

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In Saldar’s9 case it was observed that what is insured in a fire policy is not the bricks and
materials but the interest of the assured in the subject matter of insurance. Therefore, it is not
necessary that the assured must have full ownership in the property and any special interest or
entitlement to a particular property in the subject matter is sufficient to enable a person to take
out a fire policy.

A person who is so interested in a property as to have benefit from its existence and prejudice
by its destruction is said to have insurable interest in that property and such person can insure
the property whether he is owner or not.

The most important thing as to insurable interest is that such interest must exist both at the
commencement of the contract as well as at the time of loss. If it is does not exist at the time
of commencement, their contract will be without subject matter hence ineffective and where
such interest does not exist at the time of loss, he suffers no loss, hence no indemnity. Thus,
where insured property has been sold and it is damaged thereafter, insurer suffers no loss and
therefore, no indemnity. In England it has been held that an insurable interest is not
synonymous with a legal interest. A person is presumed to have an insurable interest in the
property if he has a pecuniary interest in the continued existence of the property.

The following classes of persons have been held to possess insurable interest and they can
insure the property against fire.

1. OWNERS OF THE PROPERTY:

The first class of persons are the owners of the property concerned whether sole or joint owner
partners in the firm owning the property or having possession may affect insurance. It is not
necessary such person must have possession also. Thus, a lessor and lessee of the property can
both affect such contract jointly or severally. Husband and wife both have mutual insurable
interest on each other’s property either being owner or possessor of the property. Trustees are
legal owners and beneficiaries the beneficial owners of trust property and each can insurer it.

9
(1743) 7 AK 554

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 2. CO- SHARER OF THE PROPERTY:

In United India Insurance Co. Ltd. v. Parmeshwari Sawhney10, the respondent holding ¼
share in the insured property made insurance of whole property ¾ were held by her two
daughters and a son. The appellant company accepted the premium and insured the property
for an amount of Rs. 70, 68,000. The court held that it is equally settled that a person having
partial interest in the property is entitled to ensure to extent of full value of the property rather
than to the extent of his actual interest. It is also not necessary that all the co-sharers should
become a party to the insurance policy. Once the insurance company receives premium for the
whole property from the insured, it makes itself liable to indemnify the loss to the property and
not to the extent of share of co-sharer who steps forward to ensure the property. One or more
co-sharers may obtain the insurance policy not necessarily restricted to their share in the
building and may obtain an insurance policy for whole of the building property. What is
important is not number of co-sharers who have come forward to obtain insured property but
extent of property that has been brought under insurance cover.

3. POSSESSOR OF THE PROPERTY:

Any person having possession of the goods irrespective of ownership may effect a valid
insurance the following class of persons:

(i) Vendor and purchaser of the property:

Both vendor and purchaser have right to insure. The vendor’s interest continues till the transfer
is completed and even thereafter if he is an unpaid seller. A purchaser of the property may also
affect insurance whether property or possession or any of them is with him.

The case of Collingridge v. Royal Exchange Assurance Corporation11 is leading case on the
point. The owner had insured the premises which was compulsorily acquired by the
Metropolitan Board and agreed to purchase it. Before the vendor could execute the transfer,
the premises was destroyed by fire and the insurer was held liable to indemnify the vendor as
legally the premises was still his.

10
AIR 2010 J&K 138
11
(1877) 3 QBD 173

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Likewise a purchaser if he becomes a full owner can insure the property; but if it is merely a
contract for sale and not a contract of a sale of immovable or movable property, the purchaser
has an insurable interest because he is an equitable owner. An interest under an agreement to
purchase was held to be an insurable interest.

An interest under an agreement to purchase was held to be an insurable interest12. In India S.54
of the Transfer of Property Act 1882 lays down that a contract for the sale of immovable
property does not by itself create an interest in the property, just because he is the legal owner
of the property. , This is followed in England too. Likewise a purchaser if he becomes a full
owner can insure the property; but if it is merely a contract for sale and not a contract of sale
of immovable property, the purchaser in England has an insurable interest because he is an
equitable owner. While in India, he does not get any property and therefore has no insurable
interest. If the property is destroyed by fire before the completion of the sale and if the seller
received the insurance amount the buyer has no right against the seller. Therefore, a special
provision has been made in s 49 of the Transfer of Property Act which lays down that the
purchaser has a right to demand the reinstatement of the property from out of the insurance
money received by the seller.

(ii) Mortgagor and Mortgagee:

A mortgagor as the owner of the property has an insurable interest and he can insure for the
full value of the property13. The mortgagee also can insure for the full value of the property if
it is intended for the benefit of the mortgagor also14. If the property is destroyed and if he
receives an amount of full value, the excess must be paid over to the mortgagor. Section 72 of
the Transfer of Property Act lays down certain restrictions on this right of the mortgagee.
According to this section he is not entitled to insure the property to a greater amount than that
specified in the mortgage deed or if no amount is fixed he cannot insure for more than two-
third of the value of the property, that is two-third of the amount required to reinstate the
property. The section prohibits insurance by the mortgagee if there is already insurance by the
mortgagor.

12
Giana Sundaram v. Vulcan Insurance Co. Ltd. AIR 1931 Rang 210
13
North British & Mercantile Insurance Co. v. London, Liverpool and Globe Insurance Co. (1877) 5 Ch D 569
14
Westminster Fire office v. Glasgow Provident Investment Society [1888] 13 AC 699

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A mortgagor as the owner of the property has an insurable interest and he can insure the full
value of the property. The mortgagee can also insure full value of the property, if it is intended
for the benefit of the mortgagor also.
In Small v. UK Marine Insurance Association, it has been held that the mortgagor and
mortgagee have both distinct interests with mortgaged property But Section 72-A, the Transfer
of Property Act lays down following restrictions on this right of the mortgagee.

(a) he is not entitled to insure the property to a greater amount than that specified in the
mortgage deed, and
(b) Where mortgage deed does not mention the amount, in that case he cannot insure for
more than two-third of the value of the property, that is two-third of the amount required
to reinstate the property.
(c) This section also prohibits insurance by the mortgagee if there is already an insurance
by the mortgagor.

(iii) Lessor and Lessee:

In the case of a lease, both the lessor and lessee are entitled to have the insurance effected as
both have an insurable interest. The lessor can insure for the full value of the property because
generally he is the owner of the property; but in certain cases, the lessee can insure for the full
value, for example, if he is liable to keep the property in repair or if he is liable to the owner
for loss by fire. In Castellain v. Preston15 it has been held that a tenant of premises has an
insurable interest founded upon the beneficial enjoyment of the premises, which he loses in the
event of its destruction. Again, a tenant who has taken on rent a furnished house has an
insurable interest in the furniture16.

(iv) Interest of the Bailee:

A bailee is a person to whom goods are delivered for some purpose under a contract that they
shall be returned or otherwise disposed of according to the directions of the person who
delivered them. An ordinary bailee is in possession of the goods, therefore he is entitled to
insure them for full value because he will be liable for loss or damage to the owner and also he

15
(1853) 11 Q.B.D 380
16
Trotter v. Watson (1869) LR 4 CP 434,444

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has a lien over the goods17. If the bailee insures for full value and if he receives the same from
the insurer, he must hold the excess amount in trust for the bailor.

(v) Interest of an Agent:

An agent is in possession of goods and to the outside world he is in the position of his principal
and therefore he has an insurable interest in the goods. He can take out a policy in his own
name and for full value of the goods. An agent without possession of the goods has no insurable
interest. If the agent has a lien on the goods he has insurable interest to the extent of his claim.

(vi) Shareholder of a company:

A shareholder in a company cannot insure the property of the company as he has no insurable
interest in any assets of the company even if he is the sole shareholder.

Macaura v. Northern Insurance Co. Ltd.18 is leading case on the point. Macaura was the sole
shareholder of the company. He sold some timber belonging to him which he had insured to a
company. The timber was there after destroyed in fire and he claimed for the loss. It was held
that he had no insurable interest in the timber at the time of loss, as it was an asset of the
company. Neither as a simple creditor nor as a shareholder had he any incurable interest in it.

Lord Buckmaster said "no shareholder has any or equitable insurable interest therein ...... “Lord
Sumner said,..."his relation was to the company, not to its goods, and after the fire he was
directly prejudiced by the paucity of the company’s assets, not by the fire."

In this case one Macaura insured timber in his estate against the He sold the timber to a
company of which he was sole substantial shareholder. Thereafter most of the timber was
destroyed by fire and he demanded that he should be indemnified. The insurer succeeded in
refusing to comply with the demand. The insured had no statutory interest because as a
shareholder he had no insurable interest in the assets of the company though he too would
suffer loss on the company losing its property nor had he contractual interest under the policy
because he could not prove interest at the time of the loss. Though the insured had no statutory
interest the policy was held not to be a wagering contract. "No gaming contract" was ever made,

17
Vijaya Kumar v. New Zealand Insurance Co. AIR 1954 Bom 347
18
(1925) AC 619

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but this was a contract of indemnity under which the assured must ever and prove interest at
the time of loss. This is the part of the law of insurance, quite independently of the Gaming Act
though the consequences of failure to prove interest is the same namely, that the policy is
unenforceable by an uninterested assured. Lord Sumner’s judgment in this case still holds good.
In this case the assured had neither insurable interest at the time of insurance or at the time of
loss.

CONCLUSION:

Insurable interest is not limited to absolute ownership of property but may arise in other ways
also. It may be based on ownership whether absolute, partial or limited, legal or equitable, for
example, in joint owners, mortgagor and mortgagee, trustee or beneficiary, even mere ' lawful
possession alone such as that of lessee, bailee or carrier of goods or ware-house man, can give
insurable interest.

A person who is as interested in a property as to get benefit from its existence and prejudice by
its destruction is said to have insurable interest in that property. Such a person can insure the
property against fire. The interest in the property must exist both at the time of inception of the
policy as well as at the time of the loss. If it does not exist at commencement of the contract it
cannot be subject matter of the insurance, and if it does not exist at the time of loss he suffers
no loss and so needs no indemnity. Thus, where he sells the insured property and it is damaged
by fire thereafter, he suffers no loss.

BIBLIOGRAPHY

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BOOKS

1. R.N. Chaudhary, General Principles of Law of Insurance ( 3rd ed. of 2018)

2. Avtar Singh, Insurance Law (6th ed. of 2017)

3. Rajiv Jain, Insurance Law and Practice (1st ed. of 2006)

4. M.N Mishra, Theory and Practice of Insurance (3rd ed. of 2017)

ARTICLES

1. Tellford F. Hollman, The Doctrine of Insurable Interest, 1978 Ins. L.J. 160 ( 1978)

STATUTES

1. The Transfer of Property Act, 1882

WEBSITES

1. [Link]

2. [Link]

3. [Link]

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