Chapter Three The Principle of Insurable Interest Contents 1. The meaning of insurable interest 2. The significance of insurable interest 3. The application of insurable interest 4. When does insurable interest begin to exist? 5. Common features of insurable interest 1. The meaning of insurable interest “the legal right to insure arising out of a financial relationship, recognized at law, between the insured and the subject matter of insurance.” ---CII textbook “an insurable interest refers to the interest which the applicant has in the subject matter of the insurance and is recognized by laws. The subject matter of the insurance refers to either to the property of the insured and related interests associated therewith, or to the life and body of the insured, which is the object of the insurance.” ---Insurance Law 2. The significance of insurable interest Significance Guarding Controlling Avoiding against moral sum insured gambling hazard 3. The application of insurable interest in life assurance The his His his applicant spouse parents children Insurable interest in property insurance • it often arises out of ownership where the insured is the owner of the subject matter of insurance. • house-owner can insure his house • A shopkeeper can insure his stock Insurable interest in liability insurance • a person has insurable interest to the extent of any potential legal liability he may incur by way of damages and other costs. 4. When does insurable interest begin to exist? • In marine insurance contract, the insured must be interested in the subject matter insured at the time of loss. • Insurable interest in life insurance is only required at inception. 5. Common features of insurable interest 5.1 Insurer’s insurable interest Insurance companies have insurable interest in their liability to pay claims to insureds. This interest gives them the right to seek reinsurance. 5.2 Insurable interest being enforceable at law If a policy is taken out without insurable interest, it means the insurance is unenforceable. If it is a life insurance policy taken out as a gamble on someone’s life, such policy would be void and illegal. 5.3 Insurable interest in possession Lawful possession of property normally has insurable interest if that possession is accompanied by responsibility. 5.4 Financial valuation Generally speaking, the amount of insurable interest must be capable of financial valuation. 5.5 Assignment of insurable interest • Assignment of policy referring to transfer of rights can be carried out. But in the case of personal contracts, it requires the consent of the insurer. Case study Example 1. A visitor came to Shanghai for sightseeing. After he visited the Tower of Eastern Pearl, he wanted to pay premium to insure the Tower in order to protect the property. Do you think the Insurance company agrees to accept his offer? Case study 2. John and David are businessmen and friends in the same company. In July, 2000, John wanted make his own way. He resigned from his job and became a self-employed man. When he began to open his business, he was in great of need of circulating funds, so he asked David for help, promising to pay more interest higher than that of the bank and pay his money after one year on time. In order not to let David have worries, John mortgaged his Honda to him. With the consent of John, David bought one- year motor vehicle insurance in his own name from the insurance company. Six months later, When John drove the car to work, an accident occurred, the car was overturned and damaged totally. He was seriously wounded. On hearing the bad news, David reported the case to the insurance company and made claims to it. Discuss: Do you think the insurance company should pay the claims or not? Why?