GIM1050 - Legal basis of insurance: insurable interest

Another characteristic of a contract of insurance is that there should be 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 1778 and 1906 (which are not confined to marine insurance).

There is no authoritative definition of insurable interest but as a generalisation 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 legally binding 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 his own property but he cannot have an insurable interest in his debtor’s property over which he has no lien or similar right. Neither can a person have an insurable interest against an event if he does not seek directly to protect the right to which he 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 technically null and void for all purposes. In practice this is an academic point, since void contracts are frequently acted upon as if they had full legal effect.

It should be noted that 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.