Principles of Insurance

Insurable interest is the legal right to insure, arising from a financially recognised relationship between the insured and the subject matter of insurance. The insured must stand to benefit from the safety or continued existence of the subject matter and to suffer a financial loss if it is damaged, lost or incurs liability. Without it the contract is a mere wager and is void.

The classic essentials (from Lucena v Craufurd and Macaura v Northern Assurance) are: there must be subject matter capable of being insured (property, a life, a potential liability or a legal right); that subject matter must be the actual subject of the insurance; the insured must stand in a relationship to it recognised at law; and that relationship must be capable of financial valuation. In Macaura, a shareholder/creditor had no insurable interest in the company's timber because the assets belonged to the separate legal entity, not to him.

Insurable interest can arise by common law (ownership, possession, potential legal liability), by contract (a tenant contracting to insure), or by statute. It may be full or limited: a creditor's interest is limited to the outstanding debt; a mortgagee's to the loan; an employer's in a key employee to the financial loss suffered.

The critical timing rule differs by class of business.

• •Life insurance — insurable interest need only exist at inception (the time the contract is made); it need not exist at the time of the claim. A person has an unlimited insurable interest in their own life and in the life of their spouse; for anyone else (parent, child, business partner, key employee, debtor) a financial interest must be shown and it is generally limited to the financial loss expected.
• •Marine insurance — insurable interest need only exist at the time of loss (a buyer of goods afloat can insure a cargo they do not yet own, provided they have an interest when the loss occurs).