General Principles of Insurance

Course 🔐 Insurance Law

Faculty Ms. Divya Singh Rathore

Resources 📔 Modern Law of Insurance (Murthy), Introduction to Insurance and Insurable Interest

Status Class Notes Only

Topic No 3

General principle in common law is that a contract entered into b/w. parties irrespective of its subject-matter must
NOT be illegal, immoral or contrary to public policy - insurance also being a contract wasn't required to fulfil any
additional condition.

💡 Roche J
"there is nothing in the common law of England which prohibits insurance even if no interest exists."

The concept of insurable interest is a subsequent development of insurance practice.

Meaning & Background

Insurable interest means an interest which can be or Problem: In life insurance: the contract is to pay a
is protected by a contract of insurance - it is certain sum of money to the insured on the
considered as a form of property in the contemplation happening of an event and so the contract does not
of law. require an insurable interest - it led to the practice of
insuring the lives of public men in whose life the
In Indemnity insurance: UNLESS there is some
insured had NO interest -
proprietary interest which is sought to be covered by
the policy there is no loss suffered - the contract by its To condemn this practice the Life Assurance Act
very nature requires some interest to be involved in 1774 was passed under which it is said that the
the subject matter and this is called contractual insured must have an insurable interest in the life
insurable interest. insured.
e.g. a fire insurance contract is a contract to BUT the act did NOT define insurable interest - it
indemnify the insured subject to the policy amount - dealt with life and accident assurances.
and if the assured has no interest in the property, by
Gambling Act 1845 was passed, applied to all
its damage, he suffers no loss and so he cannot
insurances not covered by the 1774 act and Marine
recover anything - the contract is perfectly valid
Insurance Act 1906.
though nothing is recoverable under such a contract.
Thus these acts demanded that an insurance be
supported by an interested, termed statutory insurable
interest.

As a contract of insurance is a contract of indemnity - insurable interest (whether contractual or statutory) is a

necessary element.

The presence of insurable interest differentiates a contract of insurance from a wagering agreement and thus,

💡 Insurable interest is a sine qua non for the validity of the contract of insurance

Thus an insurance contract without insurable interest = wagering agreement and in effect - illegal, void and
unenforceable.

Definitions
E. W. Patterson Castellian v.

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 Preston (1883)
“ Insurable Interest is a relation between insured and the event insured against such as the
occurrence of events will cause substantial loss or injury of some kind to the insured”
"an
insured’s
It is any interest which the assured is deemed to have in the subject matter of insurance if insurable
in the event of its loss, damage, or destruction that person will be subject to the risk of interest is
losing some economic benefit or advantage. the object
In other words, if on the loss/damage/destruction of subject-matter, a person will suffer of the
economic harm, then the law deems that the person has an insurable interest in such insurance
subject matter. and that
only those

💡 The test laid down: whether the insured stands in such a relation to the subject
matter that by happening of the event insured against he will sustain some pecuniary
who have
an
insurable
loss.
interest
can
It is AN interest or right which the law will recognise in the preservation of the thing or the recover".
continuance of the life which has been insured - it need NOT be a legal interest.

Lucena v Craufurd (1806); Lawrence J

"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 prejudice
from its destruction"

Facts and Judicial history:

England and France were at war and Holland was neutral, but under threat from France - legislation provided that
Crown commissioners could take possession of, and manage the affairs of, ships owned by Dutch nationals, but only
when such ships were brought into a British port.

Concerned ships were to be brought into British ports but had been lost during the voyage - Commissioners had
been appointed by the King to oversee the venture - he had insured the vessels when they were at sea.

House of Lords sought the advice of the judges (one of whom is Lawrence J) on the following question of law.

Issue:
Whether the Commissioners had a sufficient interest in the ships to insure them?

Held: Tests laid down:

Lawrence J noted; "to be interested in the preservation Classic definition: narrow test: given by Lord Eldon, -
of a thing is to be so circumstanced with respect to it as insured must show a legal or equitable interest in the
to have benefit from its existence, prejudice from its insured property or a right under a contract.
destruction".
Factual Expectation test: given by Lawrence J didn't
Lord Eldon, who gave the leading opinion in the case just look into the legal relationship b/w. the insured
difference from the above opinion to give a narrow and the property - he emphasised that the expectation
test for insurable interest; "A right in the property, or a of benefit or loss must arise “according to the
right derivable out of some contract about the property, ordinary and probable course of things”.
which in either case may be lost upon some contingency
Focus of the inquiry is the pecuniary loss the
affecting the possession or enjoyment of the party"
claimant has suffered as a result of the damage to
or destruction of the insured property.

Judgment: Significance (of Lawrence J definition):

There was no insurable interest vested in Meaning: Interest means if the event happens, the party will gain
the commissioners at that time - the fact advantage, if it is frustrated, he will suffer a loss.
that there was an expectation that
ultimately they would reach the safety of a

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 British port was not sufficient to create an Emphasis: on benefit AND detrimental aspects of the legal interests
insurable interest while they were still at that the assured must necessarily possess to be a rightful party to
sea. take out a valid policy of insurance.

English law Indian Law

The Insurance Act 1938 does not contain a definition
Sec. 5, Marine Insurance Act, 1906 of insurable interest.

A passing reference to insurable interest is made

(1) Subject to the provisions of this Act, every under section 68 of the act AND
person has an insurable interest who is interested
in a marine adventure. the same is repeated by section 48 of the
(2) In particular a person is interested in a marine Insurance Amendment Act 1950.

adventure where he stands in any legal or Section 7 of the Marine Insurance Act, 1963 gives the
equitable relation to the adventure or to any same definition of insurable interest as section 5 of
insurable property at risk therein, in consequence Marine Insurance Act, 1906.
of which he may benefit by the safety or due arrival
of insurable property, or may be prejudiced by its
loss, or by damage thereto, or by the detention
thereof, or may incur liability in respect thereof.

This was the first time the concept of insurable

interest was introduced in English law.

Note that neither the section nor the act use the
phrase 'insurable interest'.

Nature of Insurable Interest

Enforceability of Law
The court in Lucena v Craufurd pointed out that;

💡 Insurable interest must be enforceable at law and a mere hope, however strong it may be, is NOT sufficient.

e.g. You go to purchase a car - the forms are filled and the e.g. if a person is drug dealer, he cannot obtain insurance
down payment has been made - BUT the title is yet to be for his drugs as the subject-matter is illegal in law - here
transferred in your name, being subject to approval - NO insurable interest is created on the drugs in favour of
irrespective of your strong hopes that the car is yours, it the dealer.
hasn't transferred yet - thus no insurable interest has e.g. Ram is married to Ria under Hindu Marriage Act - if
been created - until completion of transfer the insurable Ram marries again - under Hindu law, the 2nd marriage is
interest is with the dealer. void - so even if they claim to live together, there is no
insurable interest created in each other's favour.
In the same scenario, if Ram were to divorce Ria, but the
papers aren't signed yet - irrespective of Ram's strong
belief that the papers will be signed no insurable interest
is created b/w. Ram and his 2nd wife.

Points for consideration (Older position as in above discussed cases)(not taught)

The interest should not be a mere sentimental right or interest, for example, love and affection alone cannot
constitute insurable interest.

It should be a right in property or a right arising out of a contract in relation to the property.

The interest must be pecuniary, that is, capable of estimation in terms of money - peril must be such that its
happening may bring upon the insured an actual or deemed pecuniary loss.

Mere disadvantage or inconvenience or mental distress cannot be regarded as an insurable interest.

Claim for damages for mental agony and inconvenience is not maintainable

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 The interest must be lawful, that is, it should not be illegal, unlawful, immoral or opposed to public policy

💡 However, a study of modern cases on insurable interest we can find that meaning of the term insurable
interest is liberally interpreted - NOT always necessary that there be a legal interest or a full interest - BUT it
should be such that it would be sufficient if it is recognised by court of law or equity as such interest.

Creation of Insurable Interest

There are 3 ways in which an insurable interest will arise or be created;

By Common Law By Contract By Statue

Where the essential elements of In some contracts a person will Sometimes an act of parliament will
insurable interest are automatically agree to be liable for something, create an insurable interest either by
present, the same can be described as which he or she would not granting some benefit or imposing a
having arisen at common law. ordinarily be liable for. e.g. duty.

Most common instance of insurable A landlord is normally liable Statute may create insurable
interest under common law is for the maintenance of interest where none would
Ownership. property he owns rather than otherwise exist, or

The owner of a house is entitled the tenants - a lease may,

an restrict liability and thereby
however, make the tenant
to insure it. also restrict insurable interest.
responsible for the
Use or driving of a motor vehicle maintenance, repair etc. of the e.g. Like compulsory insurance of the
in a public place, is sufficient building. employees by the employer of a
insurable interest for the purpose company.
Such a contract places the
of effecting insurance in favour of
3rd party. tenant in legally recognized
relationship to the building.

These kinds of special contractual

relationships give arise to the
insurable interest on something on
which otherwise one does not have
any kind of insurable interest.

US & India UK
Matter of public Policy By statue - Life Assurance Act,
1774
Warnock v. Davis (1881)

Facts:

The policy for $5,000 was procured by one Crosser upon his own life,
payable to his assigns.

On the next day the policy was, by a written assignment executed by

Crosser, made payable, as to nine-tenths of the proceeds to the Scioto
Trust Association (a partnership composed of Davis and others), which
had no interest in Crosser's life, and as to one-tenth to Crosser's widow.

The policy was procured by Crosser, it would seem, and was certainly
assigned by him, as a result of an agreement whereby the Trust
Association agreed to pay all the premiums on the policy, and Crosser
agreed to pay to the association $6 at once and $2.50 annually during
his life.

Held:

Association could retain out of the proceeds of the policy only enough to
reimburse itself for premiums paid.

Crosser was presumably a man of small means - it is a reasonable

inference that the association induced him to procure the policy - it it
were so then the court was right to call it a wager.

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 💡 In all life insurance cases there must be reasonable ground,
founded upon the relations of the parties to each other, either
pecuniary or of blood or affinity, to expect some benefit or
advantage from the continuance of the life of the assured.
Otherwise the contract is a mere wager, by which the party taking
the policy is directly interested in the early death of the assured.

The aim is primarily to discourage 'wagering as a vocation' - court will

always condemn a life insurance contract where the beneficiary is
engaged in the business of paying premiums upon policies upon lives in
which the beneficiary has no interest.

Theories in Insurable Interest

Insurable interest in a life may be founded on one of two broad categories:

Love and Affection theory Pecuniary Benefit theory

For persons closely related by blood or affinity. For all "other persons, a lawful and substantial
economic interest in the continued life, health and
bodily safety of the person insured.

A non-family member must have a "lawful and

substantial economic interest" in the continued life of
another - such an interest is similar to that created in
property insurance.
e.g. Debtor and Creditor; Partner and Co-partner;
Bailor and bailee; Mortgagor and Mortgagee; Lessor
and Lessee, etc.

Here the value of insurance is limited only to the

value of debt/liability/economic interest.

Insurable interest in Life Insurance

Difficult to ascertain insurable interest in life insurance policies - BUT it is certain that in life insurance contracts,
just like other types of insurances, there MUST be an insurable interest.

The English statue (18th century; after insurable interest was recognized) read: In every contract of insurance, the
insured or the person for whose benefit the insurance was effected must have an interest in the subject matter.

I. Blood Relationship
To be understood in the following heads

1. Ones own life

Every person is presumed to have insurable interest in his own life without ANY limitation.

Every person is entitled to recover the sum insured whether it is for full life OR for any time short of it - if he dies, his
nominee or dependents are entitled to receive the amounts.

2. By Husband or Wife 3. Parent and Child

England
Huebner, “Life Insurance”, (1960) Parent has no insurable interest in the life of the child
- because mere love and affection is NOT sufficient to
Life insurance is a husband’s privilege, a wife’s constitute an insurable interest - BUT if the person
right and a child’s claim has ANY pecuniary interest in the life of the child

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 With the development of insurance law, it is now a (including adopted) he can take out an insurance
well settled principle that husbands have and policy on the life of such child.
insurance interest in the life of the wife and vice-
On the other hand a child (including adopted)is
versa.
presumed to have an insurable interest in the life of
This forms an exception to the general rule: interest the parent because it depends on the life of the parent
necessary to support the insurance of another persons for support.
life must be capable of expression in terms of money or
Governing legislations (on insurable interest):
pecuniary interest.
Marine Insurance Act 1906; Life Assurance Act 1774
The rule that wife has an insurable interest on the and Gambling Act 1845.
husband was recognized earlier on for the supposed
USA
reason that she was dependent on him - thus for a
long time the question remained whether a 'husband In most close relations, sentimental interest has been
has an insurable interest in the life of his wife' with held to be sufficient ground of presuming insurable
diverging opinions. interest - presumed in case of parent and child.

The position was settled with the passing of the Step brothers and sisters, a foster child and an
English Married Women's Property Act, 1882 - illegitimate child have been held to have insurable
the section 2 of the act provides that a husband is interest without proof of any pecuniary interest.
presumed to have an insurable interest in the life India
of his wife.
There is no statute in India corresponding to the
Griffiths v Fleming [1909] English Assurance Act - hence we must draw on the
Facts: decisions of foreign courts including those in England
and America on the principles of justice, equity and
Griffith and his wife each signed a proposal from
good conscience.
for a joint life policy on their life and both
contributed towards the premium. After the Follow those which are in conformity with our
policy was taken, the wife committed suicide and social, economic and religious background.
the husband claimed the sum assured - the American decisions seem to be more adaptable to
insurer alleged that at the time of taking the
India as in both these countries the reason for the
policy the husband had no insurable interest in requirement of insurable interest is public policy or
his wife’s life as required by the Life Assurance contractual and not any enactment of legislature as in
Act, 1774. England.
Held:
Therefore even in India, sentimental interest based
‘The husband has an interest in his wife’s life on any close family relationship besides that of
which ought to be presumed’. husband and wife may be held to constitute
Current position: husband and wife presumed to sufficient insurable interest.

have insurable interest in the life of one another. In India it may be concluded that persons other than
This presumption arises only during the subsistence of husband and wife and close relations, legally entitled

the marriage - i.e. only those policies taken (on to claim maintenance can take out insurance on such
spouse) during marriage are valid - however, a valid other persons life without proof of insurable interest.
policy which was taken during marriage continues to
be operative even after dissolution of marriage.

4. Other Relations
The relationship by itself may not create an insurable
interest.

Condition: When one relation effects an insurance

on the life of the other, there must be actual
dependence on the person whose life is assured, that
is, there must be a reasonable expectation of benefit
from the continued existence of such person and in
such a case, there will be an insurable interest.

Insurable Interest does NOT exist in the life of:

1. Aunts and Uncles

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 Liberty National Life Insurance Co. v. Weldon
(1957)

Facts: An aunt-in-law obtained several life

insurance policies on her 2 1/2-year-old
niece, paid the policies' premiums, and
named herself the beneficiary of each policy -
she then poisoned the child to collect the
insurance proceeds
Held:

Aunt-in-law did not have an insurable

interest in the life of her niece.

An insured is placed in a position of

extreme danger where a policy of
insurance is issued on his life in favour of
a beneficiary who has no insurable
interest.

Such policies are unreasonably dangerous

to the insured because of the risk of
murder and for this reason are void.

2. Counsins

3. Nieces and nephews

4. Step-children and Step-parents.

II. Contractual Relationship

Debtor and Creditor
A creditor has an insurable interest in the life of the debtor - interest is limited to the extent of the values of the
debt.

Immaterial whether the debt is secured or unsecured.

Rationale: the chance of obtaining repayment materially depends upon the continuance of the life of the debtor.

This principle is not applicable vice-versa, i.e. debtor cannot have interest in the life of the creditor.

Creditor has also an insurable interest in the life of the surety

Rationale: surety is only a favoured debtor.

Along the same lines the surety has an insurable interest in the life of the principal debtor.

Note: policy on the life of the debtor will NOT cease to be operative even though the debt has been satisfied or the
debt becomes time barred before the debtor dies.

Similar contractual relations where insurance policy can be taken: surety can insure the life of a co-surety and a
mortgagee, the life of his mortgagor.

Employer and Employee

The employer employee insurance policy is taken by the employer on the life of his employees - it is not only an
insurance product but an arrangement.

Employer has an insurable interest in his employees -especially true where employee is considered to be a
particularly important one (key man policies)

Rationale: employer spends a considerable amount of time and money to hire and retain an employee - upon
their exit, an employer may lose some trained personnel - also if the employee makes important contributions
to the operation of the business and future of the company will be in doubt in the event of the employee’s death
= an insurance policy will provide resources to cover losses from his or her absence and provide money to hire a
replacement.

Interest of Bailor

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 A bailor has an insurable interest in the property bailed to the extent of possible loss.

Possible loss to bailor may encompass;

1. Loss of compensation to be received

2. Loss of property bailed.

III. Live-in Relationship (Cohabitation)

Position in UK
The law does NOT recognize insurable interest for cohabiting couples.

This problem is circumvented by people assigning their policies or placing them in trust with named
beneficiaries - if a person takes life insurance on his own life there is no requirement that the beneficiary must
have a proven insurable interest in the life of the insured.

Position of India
Although there is no statue governing the legality of cohabitation - the legal framework is making a shift from an
English viewpoint to an American one - cohabitation hasn't been defined under law but through precedent the
following can be held;

💡 A kind of arrangement where 2 consenting people are living with each other without entering into a formal
setup of marriage.

Note: current position unclear.

Cases recognizing live-in relationships

Badri Prasad v. Dy. Director of Consolidation (1978) Indra Sarma v. V.K.V. Sarma (2013)

A landmark case as SC for the first time "A live-in relationship will fall within the expression
recognized live-in relationships. J Krishna Iyer 'relationship in the nature of marriage' under section 2(f)
held; of the Protection of Women against Domestic Violence
Act 2005.'"
"A strong presumption arises in favour of wed-lock
where the partners have lived together for a long
spell as husband and wife. Although the
presumption is rebuttable, a heavy burden lies on
him who seeks to deprive the relationship of legal
origin. Law leans in favour of legitimacy and frowns
upon bastardy."

Deductions under Section 80C of the Income Tax Act.

Premium paid towards all life insurance policies are eligible for tax benefits u/s. 80C - deduction can be claimed for
premiums paid towards insuring self, spouse, dependant children, and any member of HUF.

Insurable Interest in Property Insurance

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

Interest of the Bailee Mortgagor and Mortgagee

A bailee is a person to whom goods are delivered for A mortgagor as the owner of the property has an
some purpose under a contract that they shall be insurable interest and he can insure for the full value
returned or otherwise disposed of according to the of the property.
directions of the person who delivered them.
The mortgagee also can insure for the full value of the
An ordinary bailee is in possession of the goods, property if it is intended for the benefit of the
therefore he is entitled to insure them for full value mortgagor also - mortgagee can't insure where
mortgagor has already insured.

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 because he will be liable for loss or damage to the
owner and also he has a lien over the goods.

Time or Duration of Interest - what stage insurable interest

should exist
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 discharged'.

In Life insurance In Fire and Motor Marine Insurance

Insurable interest is necessary at
Insurance Presence of insurable interest is
the commencement of the policy Insurable interest is necessary necessary only at the time of the
BUT it is NOT necessary at the time of commencement loss - immaterial whether he has
afterwards - it need not exist of policy AND at the time of or has not an insurable interest at
when the loss takes place or when loss. the time when the policy was
the claim is made under the taken - BUT at such time of
Rationale: it is a personal
policy. accepting the policy the insured
contract and a contract of
must at least have an expectation
Rationale: As life insurance indemnity
of acquiring such interest.
contracts are NOT contracts of e.g. if a house is to be insured
indemnity in the strictest sense. against risk of fire, the person
e.g. When a husband insures the effecting a fire policy must have
life of the wife or vice versa, an interest in the house as it is
notwithstanding the dissolution a personal contract.
of the marriage the policy Also if the owner of a house
subsists, as here the subject takes out a fire insurance policy
matter of insurance is the life of and later on sells the house, he
the other spouse and not the loses the insurable interest and
marriage. he cannot claim under the
policy

Insurable Interest in Marine Insurance Act, 1963

New India Assurance Company Ltd vs Shri G.N. Sainani (1997)
Parties
1. M/s. New India Assurance Company Ltd. - Insurer

2. Shri G.N. Sainani - Responded - Complainant or Assigned

3. M/s Ajanta Paper and General products Ltd - Consignee or Assured.

Facts
Shri G.N. Sainani (hereinafter assigned/complainant) had placed an order with a company in France - M/s. Ajanta
Paper & General Products Ltd. (hereinafter consignee) was transporting the said order by a ship "SS Irish Mapel"
from Antwerp to Bombay.

The Consignee requested the New India Assurance Co. Ltd. (hereinafter Insurer) to issue insurance policies covering;

1. 244 bales of the value of Rs. 5,87,000/- and

2. 170 bales for the value of Rs. 4,04,000/-

Two policies were issued by the Insurer in their name covering the consignments against all risks from Port Antwerp
to Bombay - they were assigned to the assigned/complainant.

There was a strike at the major ports in India around the time of arrival of "SS Irish Mapel", she was diverted to
Muscat - this was intimated to the Insurer, which in turn acknowledged it, and informed the consignee to see that

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 both the consignments are re-shipped from Muscat to Bombay within 60 days from the date they were discharged at
Muscat.

The consignee informed the Insurer that they were arranging to bring this cargo from Muscat to avoid any further
delay, pilferage (minor theft) and damage so as to minimise the financial loss and further stated that additional
expenses, if any, in this regard would have to be borne by the Insurer - consignee also requested the Insurer for
endorsing the insurance certificate to cover the risk of forced reshipment from Muscat to Bombay.

The insurer however, refused to bear the expenses of any extra freight and warehousing etc., on this account and also
reiterated that the risk under these policies will cease on the expiry of 60 days.

The consignee informed the Insurer that the aforesaid two consignments were loaded per M.V. MICHEL' VC and the
same were expected at Bombay Port shortly.

However, on landing at Bombay, it was found that the consignment was short of what was despatched and the
consignee obtained a short landing certificate from the Port authorities of Bombay - the shortages were intimated to
the Insurance Company.'

Claim was filed by G.N. Sainani - case under Consumer Protection Act.

Issue
To claim protection under the Consumer Protection act, one must prove that he is the consumer of the service (of
insurance) for which you are claiming deficiency - to prove that you are an interested party (under CP Act), need to show
that you have purchased the insurance - BUT when the interest of the policy is likely to be transferred to you in the near
future can you be considered to be a consumer? To answer the same it was necessary to determine;
'Whether the assigned has insurable interest in the consignment or not?'

Held
The interest of the insured must exist in the case of marine insurance at the time of loss and the assured MUST have
some relation to or concern in, the subject of the insurance - the service which the insurer offers is with reference to
the goods and the insurable interest has to be in respect of the goods - insurable interest in property would be such
interest as shall make the loss of the property to cause pecuniary damage to the assured.

To come under the scope of the word "consumer" under the act - it should be possible for the assured to assign his
insurable interest in the goods (subject matter of the policy) to the assignee as a consumer to enjoy the benefit of the
policy wrt. goods insured.

BUT what has been assigned in the present case is the amount of loss suffered by the assured on account of short
handing of the goods, meaning thereby that right to recover the loss is assigned to the assignee.

It is difficult to see as to how it could be said that the assignee, is the beneficiary of any service under the policy - he
may, however, have right to recover the loss from the insurer by filing a suit in a civil court but certainly to seek
remedy under the Act he must be a consumer.

If the policy had been assigned (as to the insurable interest in the goods) during the course of its validity and
before the goods were appropriated after their arrival at the port of destination, it could perhaps be said that the
assignee had beneficial interest therein but not otherwise

Thus in the present case, as the complainant has ONLY been assigned amount of loss suffered by the assured and
NOT the insurable interest of assured, he does NOT have an insurable interest in the consignment.

Section 6 to 16
Direct explanations from sections - referred to Revathi Notes.

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