Meaning of Insurable Interest in Marine Insurance Policy

It is a type of investment that protects anything from a financial loss. It is the basis of all insurance policies. You have an insurable interest in an item, event or action when damage or loss to them would result in financial loss or hardships for you.

To exercise this interest, you need to buy insurance for the item in question so you get a payout when a loss occurs. You must also not intentionally cause a loss to happen just to receive an insurance payout.

Insurable interest in marine insurance is essentially ‘your reason’ for buying the marine insurance policy. It can be an object, action or event that you have a financial interest in. Any loss regarding your insurable interest should result in a direct loss for you.

For example, if your financial interests lie in the safe shipment of your cargo, your insurable interest would be safe delivery and you would most likely insure the vessel. In other words, your interests and profit relate directly to the safe arrival/delivery of the cargo.

Moreover, similar to other insurance plans, you must ensure you have taken the necessary precautions against potential losses to be eligible for the marine insurance payout when a loss inevitably occurs, i.e., the loss should be accidental or out of your control.

Insurable interest plays a pivotal role in marine insurance. This is because ships, cargo and other marine vessels/assets face significantly more risk when out at sea – Piracy, collisions, mechanical failures and natural disasters like storms, hurricanes, typhoons, etc.

Without it, your policy would be meaningless and you may feel the need to take unnecessary risks since you are not financially exposed to any consequences. Hence, you can say that insurance interest serves three main purposes in marine insurance:

It prevents insurance fraud by ensuring that you only purchase insurance for property/assets in which you have a financial stake.

It provides an incentive to take care of your insured property since it directly correlates to your financial well-being.

Your entitlement to compensation is ensured if you suffer a loss/damage (subject to policy terms) to the insured property since you have a financial stake in it.

Also Read: Principles of Marine Insurance

Insurable interest under marine insurance may or may not exist when the policy was affected but must always be present at the time of loss under marine insurance. If you no longer have an interest in the insured asset, the policy may become void.

This is the case for a marine open policy where insurable interest may not exist at the time of policy purchase but may eventually come into the picture during the policy’s term.

This is a necessary modification when you consider the mercantile practice (import/export) of maritime businesses, i.e., there is always a possibility of the sale and purchase of assets during transit. Hence, there are two main types of insurable interest in marine insurance:

Insurable Interest in Marine Insurance

Under the Marine Insurance Act (MIA) of 1906, insurable interest is clearly defined as a marine adventure (transit) or physical object that must be exposed to marine perils and the policyholder must have a legal/equitable relationship with the insured asset.

They must benefit from its preservation and be prejudiced by its loss/damage, where it may incur liability or detention. Here, partial interest also falls under insurable interests.

Contingent and Defeasible Interest in Marine Insurance

This is when the insured interest is defeasible, i.e., liable to rejection by the buyer/importer under the terms of their sales agreement.

For example, an importer can reject a consignment and treat it as the seller’s risk if the delivery is overdue/delayed.

Since contingent and defeasible interests are insurable under the MIA for “lost or not lost” insured goods, the assured can recover this loss, even if they have not acquired the insurable interest until after the loss.

Another way to circumvent this loss would be through contingent insurance that comes into effect when the buyer rejects the consignment, so the risk reverts to the seller.

Case 1:

Company A is a major exporter delivering raw materials to a US buyer worth millions of dollars. In this case, Company A has an insurable interest in the safe delivery of the raw materials.

Upon safely reaching their destination, the insurable interest will not transfer to the buyer. However, if the goods have been damaged after the transfer, the US buyer can file a claim to the insurer to get reimbursed for any losses.

Case 2:

A logistics company that deals with the shipment of fragile items would have an insurable interest in the safe delivery of said fragile cargo. Hence, they would need to insure the vessel carrying the goods – ships, trucks, trains or planes.

If the vessel or inland transport has been financed/loaned through a bank, they would need insurance. When this is the case, both parties have an insurable interest.

For the banks, it will be the vessel/transport and for the logistics company, it would be ensuring a safe delivery. Hence, the insurable interest can be covered by:

The logistics company can buy marine insurance for the vessels and can cover all the costs in case of a loss. So. they will repay the bank in case of a total loss.

The bank and the logistics company could take out separate insurance policies to insure their interests separately.

The logistics company could buy insurance and assign it to the bank. In case of a loss, the logistics company will still be reimbursed after the loan has been settled.

• Insurable interest is the basis of all insurance contracts. It is proof that you will suffer financial loss and hardships in the event of damage/loss. Without it, your marine insurance policy would be meaningless.

• You must have a vested financial interest in the insured property in order to define it as an insurable interest under your marine insurance policy.

• Partial, defeasible and contingent interests are all insurable under the Marine Insurance Act.

• In order to exercise or claim reimbursement for losses on insurable interest, you must have a valid marine insurance policy in effect.

• Several parties can be involved under a marine insurance policy since there is a constant change in the ownership of goods.

Insurable interest is a key component of all insurance policies. However, it plays an especially pivotal role in marine insurance due to the risks involved in maritime transport.

Hence, in a cargo policy, the insurable interest should exist to ensure the policyholder has a financial stake in the insured marine asset, thereby aligning their interest with the purpose of a marine insurance policy – to provide financial coverage for damage and loss.

Tata AIG offers several types of marine insurance for this purpose to ensure your maritime assets stay safe.