The test of a valid insurance contract is the existence of the insurable interest. Insurable interest is nothing but an interest of such a nature that the concurrence of the event insured against would cause financial loss to the insured and such an interest which can be or protected by a contract of insurance.

1) What is Life Insurance?

            Life Insurance is a Contract in which the insured agrees to pay certain sums, called premiums, at specified times, and in consideration, thereof the insurer agrees to pay certain sums of money on certain conditions and in a specified way, upon happening of a particular event contingent upon the duration of human life.

2) What is Insurable Interest?   

              Insurable Interest is another necessary aspect to form a life Insurance Contract. The "Insurable Interest" means an interest that insured must possess in the subject-matter of the insurance and which can be protected by a contract of insurance. In other words, the policyholder suffers loss or damage on the happening of a contingency and is benefited when it happens. Insurable Interest is Pecuniary in nature. No emotional are sentimental loss would be the ground of the insurable interest.

3) Classification of Insurable Interest in Life insurance -

Insurable interest in life insurance may be classified into two categories which are as follows -

 (a) Insurable Interest in One's Own Life -

           Dalby Vs India and London Life Insurance Company,  in this case, it was held that a creditor may insure debtor's life and the policy remains valid even after the debtor has paid off the creditor.
          A person can take a policy to any unlimited amount on his own life as many times as he likes for his own benefit,  even though at the time he has the intention of assigning the policies to another person.

 (b) Insurable Interest in other's Life

        (1) Husband and Wife

                    In Reed Vs Royal Exchange Assurance Company,  in this case, it was observed by Lord Canyon C.J.  That " it must be presumed that every wife has interest in the life of her husband and vice-versa is equally true.  Another case,  Griffith's vs Flaming C.J Farwell observed that the interest in this statute means general pecuniary interest.  The interest in of a father in the life of a child is not sufficient alone to support insurance on the child's life. But a wife may insure a husband's life and the husband his wife's.
        (2) Parent, Child and Relatives - 

                     In Halford Vs. Kymer (1795)  Peak Add Cas 70 in this case, the court observed that a father can insure his son's life in the name of the Son and for his benefit.  There is no law to prevent it.  It is, in essence, an assurance by the son on his own life.  The only thing is that premiums are being paid by the father.  Similarly,  where A son does not depend upon his father,  he cannot effect an insurance on his father's life.  Such a policy would be a wagering policy and ever the premium already paid under it would not be recoverable. Thus a son can insure his father's life only when he is dependent on him and the father can take an insurance policy on his life only when he is dependent on his son.  Sisters have on insurable interest in each other's lives.

        (3) Debtor and Creditor - 
                Dalby Vs India and London Life Insurance Company (1854) 15 BC  365: ER  465,  in this case, it was here that a creditor may insure his debtor's life and the policy remains valid even after the debtor has paid off the creditor.  In the same way a Trustee has insurable interest in respect of the interest of which he is trustee, a surety in the life of his principal, a partner in the life of each partner, an employee in the life of his employee.

See Also...

Meaning and definition of Premium (Insurance Law)

Mode of Payment of Premium (Insurance Law)

Amount recoverable under Life Insurance policy (LIC)

What is Hundi/Poorja in Business Law, Kinds of Hundies

Insurance Regulatory and Development Authority


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