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Source: Insurance, Banking & Negotiable Instruments Law Teaching Material
Consistent with the concept of insurance as a means of indemnifying an insured against a loss, is the corollary that insurance should not provide an insured with the means of showing a net profit from the event insured against. One rather rough-hewn method of enforcing that corollary is the doctrine of insurable interest.
The Ethiopian Insurance Law does not sufficiently incorporate the principle of insurable interest. Art 675 of the commercial code, which is applicable to property insurances, is the only provision that deals with the subject. According to this provision any person who has a direct economic interest arising from property rights, such as ownership, usufruct or use right or indirect economic interest, arising out of contracts such as mortgage or pledge may insure such property to protect his interests.
However, the rules governing liability insurance and insurance of persons fail to incorporate rules on the principle of insurable interest which is considered as a mandatory requirement for the validity of contracts of insurance. Hence, we shall try to discuss the principle based on the law and experience of other countries.
Throughout the development of the insurable interest doctrine in case and statutory law, two primary purposes have captured the attention of law-makers, both rooted in public policy. The first is the elimination of insurance as a vehicle for gambling, an activity to which has been attributed idleness, vice, a socially parasitic way of life, increase in impoverishment and crime, and the discouragement of useful business and industry. The second is the removal of the temptation provided by a prospect of a net profit through insurance proceeds to deliberately bring about the event insured against, whether it is the destruction of property or human life.
Insurable interest means some proprietary or pecuniary interest. The object of insurance is to protect the pecuniary interest of the insured in the subject matter of the insurance and not the material property as such. A person is said to have an insurable interest in the subject matter insured where he will derive pecuniary benefit from its existence or will suffer pecuniary loss from its destruction. Insurable interest is thus a financial interest in the preservation of the subject matter of insurance. A purely sentimental interest or a non-monetary benefit will not cause an insurable interest. Accordingly, a creditor has an insurable interest in the life of the debtor but a son has no insurable interest in the life of his mother who is supported by him.
Insurable interest‘ is an essential pre-requisite in effecting a contract of insurance. The insured must possess an insurable interest in the subject matter of the insurance at the time of contract. Otherwise, the contract of insurance will be a wagering agreement which shall be void and unenforceable.
In the case of marine insurance, it is not essential for the assured to have an insurable interest at the time of effecting the insurance but the assured must have insurable interest at the time of loss of the subject matter insured.
To take the case of fire or marine insurance, it is not only the owner who has an insurable interest but also all those other persons who run a risk, i.e., all those persons who have something at stake or something to lose because of the loss or damage to the property or goods insured. For example, a person who has advanced money on the security of a house has an insurable interest in the house. Similarly, a bailee has an insurable interest in the goods bailed. The charterer of a ship has insurable interest in the ship because he runs a risk of losing his freight if the ship is lost or damaged.
In the case of Life Insurance, insurable interest must be present only at the time of contract (i.e., when the insurance is effected). It need not exist at the time of death or when the claim is made because it is not a contract of indemnity. Thus, a life insurance policy is freely assignable.
In the case of Fire Insurance, insurable interest must be present both at the time when the insurance is concluded and at the time of loss. Being a contract of indemnity, a fire insurance policy can be assigned only to one who has acquired some interest in the subject matter as a purchaser, mortgagee or bailee because unless the assignee has interest at the time of loss, he cannot be indemnified.
In the case of Marine Insurance, insurable interest must be present at the time of the loss of subject matter and it is not essential for the assured to have an insurable interest at the time of conclusion of the contract of insurance.