The doctrine of insurable interest: Insurance Association of Malawi
Insurance is a rapidly expanding sector in the modern day financial world offering a broad spectrum of various innovative products. Generally, it is believed that if you are willing to pay the premium, almost anything can be insured by an insurer. This is not correct! For instance, you cannot insure your neighbour’s car because damage to the car does not result in any financial or legal implications for you. To obtain an insurance policy for a particular subject, every person ought to have an insurable interest on the subject proposed to be so insured.
As illustrated above, this means, in the simplest terms, that the policyholder must be in a position where they will suffer loss if the event which they have insured against occurs.
The basis of insurance is to protect against loss rather than create an opportunity for speculative gain. As such, the underlying principle behind the doctrine of insurable interest is to discourage wagering. Society has often tried to suppress, or at least control wagering (or gambling). Although gambling may provide a useful source of government revenue, its effects can be economically damaging and socially harmful.
In the past, insurance policies were often used as a ‘cloak’ for gambling. This general freedom was often abused and, in particular, the practice of insuring the lives of famous persons. Insuring the life of someone on whom you are not financially dependent, or insuring an asset that does not belong to you (or on which you have no lien in any way) means that you will actually gain if the loss of that person or thing occurs.
The insurable interest doctrine, as recognised today, originated in English statutes designed to remove insurance contracts from the environment of gambling and the misconduct commonly associated with one having the ability to profit from another’s loss.
Further, insurable interest is there to reduce moral hazard. Moral hazard arises when the granting of insurance actually increases the likelihood of a loss occurring, because it changes the attitudes and behaviour of the insured. To cite an instance, the insured may become less careful than he would be if he had no insurance or even cause a loss deliberately in order to collect the insurance money. On the face of it, the right to insure property in which one has no interest (such as a house or car belonging to a neighbour) could have exactly this effect.
At worst, it might tempt the policyholder to commit arson or other destructive acts in order to get the insurance money. The same is true in the case of life insurance, because an unlimited right to insure the lives of other people might provide a motive for murder. Of course, the risk of this happening now is much lower than it might have been in the early years of insurance, when techniques for the detection of crime were far less sophisticated than those of today.
The insurable interest doctrine seeks to safeguard against the aforementioned evils. Otherwise, in the absence of this bulwark, an insurance contract would simply be a mechanism for gambling or a device whereby the insured could unjustly profit from the destruction of insured’s property by the insured himself.
In light of the foregoing, in the absence of the insurable interest requirement, the legislative concern is apparent. That is, insurance law must have some procedure whereby these types of evils are avoided. Accordingly, these are the types of scenarios the doctrine seeks to prevent and thereby simultaneously illustrates the rationale for its existence in terms of public policy.
All in all, insurable interest is a mandatory precondition to all types of insurance contracts, although it is not possible to give an exhaustive list of the various persons who are said to possess insurable interest. In fact, it is the existence of insurable interest which differentiates a contract of insurance from a wager, which is void in the eyes of law. Every contract of insurance, to whichever category it may belong to, shall display an insurable interest and in the absence of such an interest, it shall be void and inoperative.
—This article was submitted by Insurance Association of Malawi
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