Another characteristic of a contract of insurance is the
existence of an insurable interest.
This is not a general rule of law but is in fact a statutory
requirement, imposed by the ‘Life Insurance Act’ 1774
(which is not confined to life insurance) and the ‘Marine
Insurance Acts’ of 1746 and 1778, codified in the Marine
Insurance Act 1906 (not in fact confined to marine insurance).
The 1906 Act defines insurable interest as where a person
stands
“in any legal or equitablerelation to the adventure or to any insurable
property at risk therein, in consequence of whichhe may benefit by the safety or due arrival of
insurable property, or may be prejudiced by itsloss, or damage thereto, or by the detention
thereof, or may incur liability in respect thereof”.
In other words, a person who may suffer financial loss from an
event has an insurable interest in the property or interest which
is insured against that event. The event must create upon the
insured a commercial loss or liability, or it must affect a right
of the insured which is recognised and protected by the courts.
A person will therefore have an insurable interest in
property in its possession but cannot have an insurable interest in
its debtor’s property unless a lien or similar right attaches
to it. Neither can a person have an insurable interest against an
event if it does not seek directly to protect the right to which it
is legally entitled. Thus a parent company has an insurable
interest in the shares of its subsidiary but not in the underlying
assets or profits of that company.
A contract without insurable interest is null and void for
all purposes, though in practice void contracts are often performed
as if they had full legal effect.
The requirement for an insurable interest is a feature of
English and Scottish law that is not present in all territories;
even common law ones such as the Isle of Man. Its application to
modern commercial law has been questioned, and it is under review (
GIM1010). One effect of the need for an
insurable interest is to hinder the establishment of a secondary
market in insurance or reinsurance risks. Arbitrage possibilities
are strictly limited and there can be no effective forward trading
of insurance risks in the capital markets. This is one factor
behind the existence of a pronounced insurance (or underwriting)
cycle, see
GIM1240. The absence of derivative
instruments also makes the cycle hard to manage.
