Insurable interest
Insurance Law · Unit II · Topic 4 of 17 · 7 min read
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Cases checked to exist. Read the judgment before quoting a holding.
Every case cited here has been checked to exist — the citation resolves and names the right parties. The propositions attributed to each case have not been verified line by line against the judgment. Case names link through to the full judgment: read it before quoting a holding in an examination answer, and never carry a proposition from notes into court on trust.
1. Meaning
A person has an insurable interest in a thing or a life when he stands in such a relation to it that he benefits from its safety or continuance and is prejudiced by its loss, damage or end. In Lucena v. Craufurd (1806) Lawrence J. described it as being so circumstanced with respect to the subject matter as to have benefit from its existence and prejudice from its destruction. The interest need not be ownership; a legal or equitable relation is enough.
Section 7 of the Marine Insurance Act, 1963 states the rule for marine insurance: every person has an insurable interest who is interested in a marine adventure, in particular where he stands in any legal or equitable relation to the adventure or to insurable property at risk, in consequence of which he may benefit by its safety or due arrival, or be prejudiced by its loss, damage or detention, or incur liability in respect of it.
It is important to distinguish the subject matter of insurance (the house, the ship, the life) from the subject matter of the contract, which is the insured’s financial interest in it. The policy protects the interest, not the thing.
2. Why the law insists on it
- To separate insurance from wagering. Without an interest, a policy is a bet on whether the event happens. Agreements by way of wager are void under section 30 of the Indian Contract Act, 1872, and section 6 of the Marine Insurance Act declares every marine contract by way of wagering void, including “interest or no interest” and “policy proof of interest” policies.
- To remove the temptation to cause the loss. A stranger who could insure a neighbour’s house or life would profit from its destruction.
- To measure indemnity. In property insurance the insured recovers only the value of his interest; a part-owner recovers for his share.
3. Insurable interest in life insurance
- Own life. Every person has an unlimited insurable interest in his own life and may insure for any amount, subject to the insurer’s underwriting.
- Spouse. A husband has an insurable interest in the life of his wife and a wife in the life of her husband, presumed from the marriage and not needing proof of pecuniary loss (Griffiths v. Fleming, 1909, Court of Appeal).
- Parent and child. Natural love and affection alone is not enough in English law: a father has no insurable interest in a son’s life merely as father (Halford v. Kymer, 1830). There must be a pecuniary relation, such as dependence or liability for funeral expenses. In practice Indian insurers accept proposals by parents on children’s lives under children’s plans, where the parent is the proposer and pays the premium.
- Creditor and debtor. A creditor has an interest in the debtor’s life up to the amount of the debt.
- Employer and employee. An employer may insure a key employee (key-man insurance) to the extent of the loss the death would cause; an employee may insure the employer’s life to the extent of wages due under the contract.
- Partners in each other’s lives, to the extent of the capital or services at stake; surety in the principal debtor’s life.
When it must exist. In life insurance the interest must exist when the policy is taken; it need not exist at death. In Dalby v. India and London Life Assurance Co. (1854) a policy on the life of the Duke of Cambridge was effected by a person with an interest; the interest later ended, but the policy was held enforceable at the Duke’s death. Life insurance is not indemnity: it pays a fixed sum, and the court does not inquire into the loss at death.
4. Insurable interest in property (fire and general insurance)
- Owner, including a joint owner for his share.
- Mortgagor and mortgagee. The mortgagor has an interest in the full value; the mortgagee to the extent of the debt (s.16(1), Marine Insurance Act states the same rule).
- Bailee (warehouseman, carrier, pledgee) for the goods in his custody, both for his own liability and, by custom, for the owner.
- Lessee or tenant who is liable to repair or would lose his occupation.
- Buyer and seller under a contract of sale, according to who bears the risk.
- Trustee, executor, agent in respect of property they hold or manage.
A shareholder, even the sole shareholder, has no insurable interest in the property of the company, because the company is a separate legal person. In Macaura v. Northern Assurance Co. (1925) the House of Lords rejected the claim of a man who had sold his timber estate to a company he wholly owned, then insured the timber in his own name; when it burned, he could not recover. The same reasoning governs Indian fire policies, which is why the proposal must name the person or entity that actually owns or is responsible for the property.
When it must exist. In fire and other property insurance the insured must have the interest at the time of the loss, and insurers normally require it at the inception too. If the insured sells the property, the policy does not pass to the buyer without the insurer’s consent, because the policy is a personal contract (compare s.17, Marine Insurance Act).
5. Insurable interest in marine insurance
Section 8(1) of the Marine Insurance Act requires the assured to be interested at the time of the loss, though he need not be interested when the insurance is effected. Goods bought while afloat can therefore be insured in advance. The Act also lists particular interests: defeasible and contingent interests (s.9), partial interests (s.10), the re-insurer’s interest in his risk (s.11), lenders on bottomry (s.12), the master and crew in their wages (s.13), advance freight (s.14) and charges of insurance (s.15). These are taken up again in the Unit V note on marine policies.
6. Problem
Rahul takes out a policy on the life of his wife and subsequently divorces her. Does the policy continue to be valid? (February 2025)
Issue. Whether a life policy taken by a husband on his wife’s life remains enforceable after the marriage, the basis of his insurable interest, ends.
Law. A husband has an insurable interest in his wife’s life, presumed from marriage. In life insurance the interest must exist at the inception of the policy; it need not continue until death (Dalby v. India and London Life). Life insurance is not a contract of indemnity, so the insurer cannot reduce the payment on the ground that the beneficiary has suffered no loss.
Application. When Rahul effected the policy he was married to the life insured, so the interest existed and the contract was valid, not a wager. The later divorce removes the interest but does not undo a contract validly made. The policy remains in force so long as Rahul pays the premiums, and on the former wife’s death the sum assured is payable to him as policyholder (or his assignee). Two practical points: the ex-wife may wish to have any nomination or the beneficial arrangement altered, and if the policy was one taken under section 6 of the Married Women’s Property Act, 1874 for the benefit of the wife, different rules apply because a trust arises in her favour.
Conclusion. Yes, the policy continues to be valid. The divorce does not terminate it.
How this is examined
“Define insurable interest. Explain the insurable interest in life insurance” (February 2025) is answered from sections 1 to 3. “Define fire insurance. Explain insurable interest in fire insurance” (January 2026) uses section 4 with Macaura. The divorce problem (February 2025) is set out above; a variation asks about a creditor’s policy after the debt is repaid, which is answered the same way.
Now try the real questions: Insurance Law past question papers.