On 21-02-2014 a sale deed was executed between Srivastava and Kulwant and Srivastava sold his house to Kulwant and the ownership was transferred by registration in the name of Kulwant. Just before selling the property Sr

CS Professional · Insurance - Law and Practice · PYQS · December 2020
On 21-02-2014 a sale deed was executed between Srivastava and Kulwant and Srivastava sold his house to Kulwant and the ownership was transferred by registration in the name of Kulwant. Just before selling the property Srivastava had taken a fire insurance cover for his house taken with insurer XYZ Ltd. and the period of insurance was 18-8-2013 to 17-8-2014. Kulwant and Srivastava came to mutual understanding and according to that 75% of the sale money was paid by the former to the latter at the time of execution of the sale deed and the balance was to be given within one year, which was agreed by means of a promissory note executed by Kulwant in favour of Srivastava. On execution of the sale deed, Kulwant obtained a fire insurance cover for the house in his name from his insurer ABC General Insurance Co. A fire accident took place on 13-5-2014 in which the whole house was destroyed by fire. When Kulwant filed a claim for the loss of the house with his insurer ABC General Insurance Co. and after insurance surveyor investigated the whole case, the insurer agreed to pay the loss to the extent of 75% of the value of the house only saying that as on the date of loss Kulwant has not paid 25% of the value of the house to Srivastava, so the claim cannot be paid to that extent and that the same has to be recovered by Srivastava under his policy. Define the principle of Insurable Interest and also explain how the same ensure legality to an Insurance contract.

Answer & Explanation:

A person is said to possess an insurable interest in a property if he has a legal relationship with the said property by which he would stand to lose financially if the property is lost or destroyed. The principle of insurable interest adds legal validity to an insurance contract without which such contracts would be wagering or gambling in nature according to the Indian Contract Act 1872. Presence of insurable interest prevents fraudulent practices. In the absence of insurable interest, an unconcerned person can purchase policies on someone else's property and inflict loss on it deliberately to get the proceeds of the insurance settlement. Insurable interest provides the right to secure insurance and claim compensation to the insured based on the principle of indemnity. For example, people have insurable interests in their own homes and vehicles, but not in their neighbors' homes and vehicles, and almost certainly not those of strangers. An insurance contract must meet four conditions in order to be legally valid: it must be for a legal purpose; the parties must have a legal capacity to contract; there must be evidence of a meeting of minds between the insurer and the insured; and there must be a payment or consideration.

Topics: General Insurance

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