Question

Explain any four essential components of principle of insurable interest.

Hint:

Insurable interest = legal, financial link + actual loss at risk.

Answer 1

The Principle of Insurable Interest is one of the most important principles in insurance.
It means the insured must have a financial or legal relationship with the subject matter of insurance.
Here are four essential components of insurable interest:
1. Existence of Financial Relationship — There must be a clear financial connection between the insured and the subject matter.
For example, a person has insurable interest in their own house, car, or goods in transit.
2. Presence at Time of Contract and Loss — In general insurance, insurable interest must exist when the contract is made and when the loss occurs.
For example, if a person sells the insured property and it is damaged later, they cannot claim because they no longer have an interest.
3. Legal Validity — The insurable interest must be legal and recognized by law.
One cannot insure illegal activities or property.
For instance, a person cannot insure stolen goods as they have no legal right over them.
4. Financial Loss in Case of Damage — The insured must suffer actual financial loss if the subject matter is damaged.
This prevents people from making insurance claims for things that do not cause them any real loss.
For example, a creditor has insurable interest in the life of a debtor to the extent of the loan amount.
These components ensure that insurance remains a contract of indemnity and not a source of profit.