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Insurable Interest in Property Insurance

Insurable interest is a principle of insurance which is applicable to all classes of insurance, including Property Insurance.

Insurable interest is defined by law as a legally-recognised financial relationship with the subject matter, where the insured gains by its preservation and suffers if it is lost. Only real interests qualify as insurable interests, and expectation of obtaining an interest in the future (even if it is certain) does not entitle a person to insure the subject matter. The principle of insurable interest was defined in the United Kingdom Marine Insurance Act of 1906 as:

“In particular a person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due arrival of insurable property, or may be prejudiced by its loss, or by damage thereto, or by the detention thereof, or may incur liability in respect thereof.”

[Refer to the Marine Insurance Act of 1906 - http://www.legislation.gov.uk/ukpga/Edw7/6/41/part/2/data.pdf?view=extent]

The most important case law which highlights the importance of insurable interest in contracts of insurance is the case of Macaura vs Northern Assurance Company of 1925 by the House of Lords. In this case, Macaura sold timber to Irish Canadian Sawmills Ltd for which he was both the sole owner and a creditor, and then insured the timber in his own name with Northern Assurance Company covering the fire peril. Two weeks later, this stock of timber catches fire and is destroyed, and Macaura claims for damages. However, the court established that as the ownership passed from Macaura to the company, and as the company is a separate legal entity, Macaura no longer held an insurable interest in the stock even though he was the sole owner of the company to which he sold the stock of timber. In the sentence, Lord Sumner said: 

“It was not his. It belonged to the Irish Canadian Sawmills Ltd, of Skibbereen, co Cork… He stood in no ‘legal or equitable relation to’ the timber at all… His relation was to the company, not to its goods, and after the fire he was directly prejudiced by the paucity of the company’s assets, not by the fire…”

[Refer to Macaura v Northern Assurance Co Ltd case on Wikipedia - http://en.wikipedia.org/wiki/Macaura_v_Northern_Assurance_Co_Ltd]

With particular reference to property insurance, there are five allowable interests indicated by case law over the years and these are:

  1. Owner of the subject matter: the owner has a legally-enforceable financial interest in his property and in the property of his/her spouse
  2. Part-owner or joint-owner: holds an interest in the full value of the property not only in the part owned. The part or joint owners would benefit from the proportional amount of any claim according to their ownership.
  3. Executors and trustees: people legally responsible for a property have an interest in its preservation and would suffer if it is lost, hence they have insurable interest in it.
  4. Bailee: can insure up to the value of the goods of another person held in his possession for which he has the duty to care and preserve
  5. Mortgagee: he is the person who lends money to a borrower secured by a mortgage on real estate. Buying the same real estate is in many cases the reason why the borrower borrows money from the mortgagee. The mortgagee’s insurable interest stands at the amount of his loan.

The condition to have insurable interest when insuring a property is implied, and policies provide cover until the ownership of property is transferred or until the insurance term lapses, whichever is the earlier. If a person insures a property in which he has no insurable interest, the insurance contract would be void and claims are repudiated by insurance companies.

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