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CHANGING DIMENSIONS OF INSURABLE INTEREST: A CRITICAL ANALYSIS


INTRODUCTION

The Doctrine of insurable interest requires that an individual who has some kind of gain or benefit out of the insurance policy for the lost or the disadvantage suffered by him. Insurable interest is an essential requirement for a valid and protected legal entity against any kind of intentional harmful acts being done on the part of insurance policy holder. The definition of insurable interest change according to the changing dimensions of subject matter and as created by the statues with the help of case laws backing up their legality.

There are circumstances where the insurer has to demonstrate the matter insured as strict legality and pecuniary interest whereas there are situations it is not even required. It is often related to ownership, relationship by law or blood or possession. The insurance in respect to the life of the insurer cannot be measured in monetary terms, thus there can be no limit imposed on such type of insurable interest and therefore, allowing the person to get insured to unlimited amount of interest in respect to his life.


There is a need for reform in the law on the complexity of the insurable interest. As there are a lot of confusions as to when the policy needs to be implemented, whether in situation of the loss being suffered or when the policy is being taken out there are no valid rules and needs real clarity in the subject matter of insurance.


PRINCIPLE OF INDEMNITY AND INSURABLE INTEREST

The indemnification principle should be designed in such a manner in order to recover the losses that are being suffered by the insured party and the losses are not such to penalize or reward the insured party. This principle of indemnification clearly supports the insurer to formulate such a policy so as to determine the correct and appropriate amount or value of asset at-risk. A poor design of any such policy would provide premiums to the insured and the losses to be suffered by the insurance company.

Insurable interest is necessary in case of life insurance too as the insurance policy is taken strictly taken for the elderly persons so as to get them secured for their imminent death or due to happening of any contingent events. These hardships includes the family members, the spouse, blood relations, creditors and business relatives, thereby the value of the insurance policy should not be more than the face value of the deceased person thereby making the policy violative of the moral hazards with the knowledge and assurance of the insured person.


INDEMNITY INSURANCE AND NON-INDEMNITY INSURANCE

  1. Indemnity Insurance:-

This indemnifies the losses being suffered by the insurer under business insurance, liability insurance and content insurance. Under thus principle, the insurer can only claim the losses that are being suffered by him and have to legally show it so as claim the compensated amount successfully. In 2005, Gambling Act, it was stated that most indemnity contract no longer requires insurable interest to be made enforceable.


  1. Non-Indemnity Insurance:-

Unlike Indemnity insurance policy, this policy, pays a specified amount on the occurrence of the contingent event. Most of the insurance policies and other polices are dependent upon the same non-indemnity insurance principle as the sum amount is paid to the insurer on the happening of the accident or to its heirs as in the case of the death of the insurer. The principle is not connected to the Indemnity Insurance as the amount recovered is not due to the loss that is being suffered rather on happening on the certain event.


A LEGISLATIVE HISTORY OF INSURABLE INTEREST

The concept of Insurable Interest came in mid-eighteenth century as a statutory requirement for English insurance contracts. At that time, there were grave concerns of moral hazards thinking it to be that the insurance might destroy or murder the insured life. As a solution to it there was made a requirement of insurable interest ensuring that policy would only be made out to those who have an independent interest prevailing in the continuing subject matter.


There were even situations concerning distinguish between a valid business insurance and a moral practice of wagering. Insurance contract and wagering both are dependent on the happening of an uncertain event or date, whereby the former contract is where a policy holder requires a insurable interest in respect to any loss in the subject matter of the policy, if it is destroyed or it dies whereas the latter is the one, where neither parties have an interest in the event other than the sum amount of money or the stake they win or lose.

The very first requirement of insurable interest in insurance contract was made in Marine Insurance Act 1745 rendering void marine policies with no such interest which aims to prevent the moral hazards.


Just after the thirty years period, the gamble of insurance policy resulted in Life Assurance Act 1774. The contracts of insurance which were made without the interests were made null and void and all the insurance contracts needs to made with a valid interest and without it the contract would not prevail. This particular contract was only valid on life and other events and excludes goods, merchandises and ships.

Later the Marine Insurance Act 1788, required the interested individuals who wanted to get inserted this interest in the policy which would make it easier to check the validity of this insurable interest who have opted for the same in their policies.

By the end of 18th century, the policy holders under Marine Insurance Act 1745 and Life Assurance Act 1774 of either marine insurance or life insurance need to show their insurable interest in the subject matter of the policy. Later the Marine Insurance Act 1745 was repealed and replaced by Marine Insurance Act 1906.

In the nineteenth century, the further hardening of gambling was seen. In1845, Gambling Act was passed to make wagering enforceable. Further section 18 provided:

All contracts or agreements, whether by parole or in writing, by way of gaming or wagering, shall be null and void; and no suit shall be brought or maintained in any court of law or equity for recovering any sum of money or valuable thing alleged to be won upon any wager.

This section had the effect of making all contracts of insurance unenforceable where no interest could be demonstrated.

The twentieth century saw the Marine Insurance Act 1906. This repealed the Marine Insurance Act 1745 and ‘codified’ the law on marine insurance at that stage. By the early twentieth century, the Gaming Act 1845, created various requirement for policy holders indirectly in respect to the insurable interest in the subject matter of various types of indemnity insurance. After 1909, the legislation remained unchanged for nearly one hundred years, until the Gambling Act 2005.

For most non-indemnity insurance the Gambling Act 2005 has had no effect. The Life Assurance Act 1774 directly requires insurable interest.


THE CURRENT LAW

The position of current law prevailing from the Gambling Act 2005 that came into force in September 1, 2007.

Life insurance:-

In life assurance, insurable interest is only required at inception. In Dalby v Indian and London Life Assurance Company set &own the principle that the interest need only be valued at inception and so there is no requirement for insurable interest at the time of a claim.

Other insurances, being contract of indemnity required the insured to have suffered a loss before there is liability, so that the insured must have insurable interest at the time of loss. The Gaming Act 1745 in effect requires insurable interest at inception, since contracts without it would be wager.

The life Assurance Act, 1774, requires proof of interest only at the date when the policy was affected.


Insurance Act, 2002

This restricts the insurance policy made with no insurable interest and lack of such insurable interest would make the contract as null and void. There is no general rule in Insurance Act, 2002, as to when interest is required to be proved, as it is in common law. The law is itself silent and thus the received laws have to remain in application unless when there has been a local law to replace some of its provision. Common law is no longer a binding law but in case of the empty space in our law reference to common law is relevant.

The social economic structure is very low and is ignorant of the doctrine of insurable interest and such they can affect insurance policy without having insurable interest.


ENGLISH LAW—

  1. Insurable interest in goods:-

Goods and merchandise have always been made excluded from the Life Assurance Act 1774 and where section 18of the Gambling Act 1845 was being made applicable from September 1, 2007 on insurance of the goods, making the wagering contracts as null and void.

Since 1 September 2007, section 335 of the Gambling Act 2005 governs wagering. That section states that “the fact that a contract relates to gambling shall not prevent its enforcement”, resulting and allowing the policyholder as to no longer prove at every state that the insurable interest contract is not a wager.

However, as the contract indemnifies the policyholder for loss suffered, the common law indemnity principle applies. If the policyholder cannot prove loss then the principle of indemnity prevents him from recovering. The indemnity principle therefore continues the distinction between insurance and gambling for purposes other than enforcement.

  1. Insurable interest in land and building:-

Life Assurance Act 1774 was only not applied to life insurance but to all those insurances which were excluded under section 4, and if such principle is being applied to buildings then the policyholder must positively demonstrate the indemnity principle so as to satisfy the common law indemnity principle at the time of loss suffered.

In 1986, however, the Court of Appeal said that, "this ancient statute was not intended to apply, and does not apply to indemnity insurance but only to insurances which provide for the payment of a specified sum on the happening of an insured event".

In the current view, Life Assurance Act 1774, is no more made applicable on land and building insurance though there are jury who are still arguing in the same matter and not yet conclusively decided. The Gaming Act 1845 no longer applies to hold contracts without interest unenforceable. Instead the indemnity principle requires the policyholder to demonstrate a loss.

  1. Insurable interest in Marine Insurance:-

Marine Indemnity Insurance policy is covered under the section 4(1) of Marine Insurance Act 1906, whereby covering and declaring that any marine insurance by the way of wagering and gaming is void. It stated to insert the name of the person so insured on any or person in his behalf. Further it was stated that any contract being made in marine insurance without interest would be an offence.

According to section 1(1) of the Act “deemed to be a contract by way of gambling and the person effecting it shall be guilty of an offence and shall be liable, on summary conviction to imprisonment, for a term not exceeding six months. Therefore, until 1 September 2007, marine insurance contracts required the policyholder to show an insurable interest in the subject matter at the time of loss.


  1. Insurable interest in Liability Insurance:-

This type of policy is being insured by the insurer so as to indemnify the insured on the event or on the liability happening to a third party. For eg: the insurance made in respect to the goods that are being carried in a lorry and due to which a third party suffers a loss, is a liability insurance.


SCOTS LAW--

The various statutory provisions referred to in the discussion of English law above also apply to Scotland. In addition, however, there is a common law requirement of insurable interest. The consequence of this seems to be that the practical effect of section 335 of the Gambling Act 2005 is likely to be negligible. Unless it could be argued that the Act has abrogated the Scots common law, the section has not abolished the requirement of insurable interest in relation to any category of insurance under Scots law. Additionally, where the policy is one of indemnity, the indemnity principle will require loss, and therefore interest, to be shown at the time of claim as well as the time when the insurance was effected.


THE PROBLEM FACED

The Gambling Act appears to have affected contracts of insurance by accident. Under English law it appears likely that there is no longer any need for a policyholder to demonstrate an insurable interest in non-marine indemnity insurance at the time of the loss in order to have an enforceable contract. Agreement has not been reached on whether marine insurance still needs insurable interest at the time of loss. The position in Scotland is clearer; insurable interest is necessary at the time of the contract as a result of the common law.


CONCLUSION

The first Marine Insurance Act 1745 was repealed and replaced by the new Marine Insurance Act 1906, stated and provided that any contract of marine insurance by way of wagering or gaming to be held as void. Any contract of Marine insurance is to be gaming or wagering contract only on the requirement where the assured has no insurable interest in such a marine insurance contract.

The Life Assurance Act 1774, regulates insurance upon life and prohibits all such insurances except as in cases where the person has insurable interest upon the life and death of the insured person.

The Insurance Act, 2002, restricts insurance contracts made by any person on life or lives of any person or persons or any other event in which the person for whose use or benefit or on whose account the insurance made have no insurable interest. Such a contract is rendered null and void ab inito.

SUGGESTIONS

The result of this complicated history is that we are left today with a confusing series of Acts. The law needs to be clarified. We ask whether insurable interest is necessary to identify insurance for regulatory, tax or other purposes and whether the prevention of moral hazard and gambling in the nature of insurance are best achieved by a requirement of insurable interest for either indemnity or non-indemnity insurance.


The current law that is Insurance Act, 2002, does not cover the whole idea of insurable interest. The law does not describe what constitutes insurable interest or when insurable interest is to be provided. The statute only mentions the person who is deemed to have insurable interest in life assurance. The statute also prohibits insurance policy without insurable interest. The law has to be self-independent like English Insurance statutes.

As in the 1708 Marine Insurance Act provides that a person deemed to have insurable interest in Marine adventure where he stands in any legal or equitable relation to the adventure or to any insurable property. The same Act provides for when to prove insurable interest, the assured must be interested in the subject matter of insured at a time of loss however the interest is not required at the time of affecting the policy.


The 1774 life Assurance Act provides for those who are deemed to have insurable interest as well as when insurable interest is required. The statute requires proof of interest at the time of commencing contract unless it is null and void.


By:- Riya Jain, 4th Year, B.com LLB (Taxation laws)

University of Petroleum and Energy Studies

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