Chapter 4 - Insurable Interest

Question 1

A - What is an Insurable Interest?

1. What is insurable interest?

Answer 1

The legal right to insure arising out of a financial relationship recognized by law, between the insured and the subject matter of insurance.

Question 2

A - What is an Insurable Interest?

A1 Features of Insurable Interest

1. What are the three elements of insurable interest?

Answer 2

Subject matter
Legal relationship
Financial value

Question 3

A - What is an Insurable Interest?

A1 Features of Insurable Interest

2. Name two types of insurable interest.

Answer 3

Insurers’ insurable interest
Anticipated insurable interest

Question 4

A - What is an Insurable Interest?

A1A Subject Matter

1. What are the two ways the subject matter of the insurable interest can be defined?

Answer 4

The subject matter of the insurance (SMI)

The subject matter of the contract (SMC)

Question 5

A - What is an Insurable Interest?

A1A Subject Matter

2. What is the subject matter of the insurance (SMI)? Provide examples.

Answer 5

The item or event insured e.g. cars, houses, valuables, stock

Question 6

A - What is an Insurable Interest?

A1A Subject Matter

3. What is the subject matter of the contract (SMC)?

Answer 6

The financial interest a person has in the SMI.

Question 7

A - What is an Insurable Interest?

A1B Legal Relationship

1. Why is the establishment of a legal relationship important?

Answer 7

The relationship between the insured and the subject matter must be recognized in law.

If there is no legal relationship, there is no insurable interest

Question 8

A - What is an Insurable Interest?

A1C Financial Value

1. Why is it important that there be financial value?

Answer 8

Insurance contracts are always concerned with financial value

Question 9

A - What is an Insurable Interest?

A1D Insurers’ Insurable Interest

1. When does the insurer have insurable interest? Why do they do this?

Answer 9

When they reinsure the SMC with reinsurers.

They do this because they have an insurable interest in the risk.

Question 10

A - What is an Insurable Interest?

A1D Insurers Insurable Interest

2. When insurers reinsure, what is the insurers financial interest in the original insurance?

Answer 10

The subject matter of the contract.

Question 11

B - When must Insurable Interest exist?

1. Generally speaking, when must insurable interest exist with a General Insurance contract?

Answer 11

Both at inception and at the time of loss,

though some connection other than a full insurable interest may be sufficient at inception.

Question 12

B - When must Insurable Interest exist?

2. Generally speaking, when must Insurable Interest exist with a Life Insurance contract?

Answer 12

At inception, but need not exist at the time of loss.

Question 13

B - When must Insurable Interest exist?

3. Generally speaking, when must Insurable Interest exist with a Marine Insurance contract?

Answer 13

At the time of a loss, but need not exist at inception provided there is a reasonable expectation of interest.

Question 14

B - When must Insurable Interest exist?

B1 General Insurance

1. What rules did the Gambling Act 1845 introduce?

Answer 14

Meant more than just Life Insurance contracts require Insurable Interest

Made gambling or wagering contracts null and void as there is no insurable interest

Question 15

B - When must Insurable Interest exist?

B1 General Insurance

2. What did the Gambling Act 2005 do?

Answer 15

Repealed legislation that said that gambling contracts are not enforceable

Question 16

B - When must Insurable Interest exist?

B1 General Insurance

3. Applying the principle of indemnity, what can a party to a general insurance contract recover?

Answer 16

Only the amount of their loss as agreed with the insurer at the time a loss occurs.

Question 17

B - When must Insurable Interest exist?

B1 General Insurance

4. As a general rule, how is a general insurance policy treated if there is no insurable interest at inception?

Answer 17

Void ab Initio

Question 18

B - When must Insurable Interest exist?

B1 General Insurance

5. Give an example of a general insurance policy where there wouldn’t be a need for an insurable interest for the outset.

Answer 18

Car insurance taken out 2 days before the car ownership is transferred.

Question 19

B - When must Insurable Interest exist?

B1A Anticipated Insurable Interest

1. Can the expectation of acquiring insurable interest at some time in the future be enough to create insurable interest in general insurance?

Answer 19

It may not be enough, no.

Question 20

B - When must Insurable Interest exist?

B3 Marine Insurance

1. What status is given to Marine insurance contracts if there is an absence of insurable interest at the time of a loss?

Answer 20

Void.

Question 21

C - How is Insurable Interest created?

1. How may insurable interest be created?

Answer 21

Under common law
Under contract
Under statute

Question 22

C - How is Insurable Interest created?

C1 Common Law

1. How is insurable interest created under common law?

Answer 22

By the right of ownership. If we own something, we stand to lose financially if it is lost or damaged.

Question 23

C - How is Insurable Interest created?

C2 Contract

1. How are contracts different to common law?

Answer 23

Contracts are situations where we accept greater liabilities than those imposed by common law.

Question 24

C - How is Insurable Interest created?

C2 Contract

2. Provide an example of how a contract can create greater liabilities than those imposed by common law?

Answer 24

A landlord is normally liable for the maintenance of the property they own. However, the may make the tenant liable under the terms of the lease.

The imposition of these responsibilities, or potential liabilities, creates an insurable interest.

Question 25

C - How is Insurable Interest created? C3 Statute 1. What is a statute?

Answer 25

An act of parliament

Question 26

C - How is Insurable Interest created? C3 Statute 2. How can statutes create insurable interest? Provide an example.

Answer 26

They can impose a particular duty on, or grant some benefit to, certain groups of people thus creating insurable interest. E.g. statutes can make tenants responsible for the upkeep of buildings, giving them an insurable interest in the building.

Question 27

D - How is Insurable Interest applied? D1 Property Insurance 1. How does insurable interest arise with property insurance?

Answer 27

Generally arises out of ownership. The insured is the owner of the subject matter of insurance

Question 28

D - How is Insurable Interest applied? D1 Property Insurance 2. Do shareholders in a limited company have an insurable interest in the company’s property?

Answer 28

No. Their interest in the company is limited to the value of the shares they own.

Question 29

D - How is Insurable Interest applied? D1 Property Insurance 3. How is the insurable interest of mortgage lenders limited?

Answer 29

Limited to the extent of the mortgage.

Question 30

D - How is Insurable Interest applied? D1 Property Insurance 4. How is the insurable interest of joint or part owners limited? What can they insure?

Answer 30

Extent of interest is the limit to their financial interest. However, as they are considered a trustee for any money that may be paid in the event of a claim, which may exceed their actual interest, they can insure the property for its full value.

Question 31

D - How is Insurable Interest applied? D1 Property Insurance 5. What is a Bailee? What can they insure? Give examples.

Answer 31

Someone who holds property on a temporary basis on behalf of the legal owner. May insure for the full value of the property. e.g. shoe repairer, garage owners, dry cleaners

Question 32

D - How is Insurable Interest applied? D2 Liability Insurance 1. What is Liability insurance? How does it differ from property insurance?

Answer 32

Under common law a person has an insurable interest in any potential legal liability that they may incur for damages awarded by a court. This differs from property insurance as it includes potential liability.