Section 2
The application of insurable interest

Insurable interest is applied differently to each of the main forms of insurance.It is important for the students to know these different applications in the following.

2.1 Life assurance

In life assurance,we can say everyone has unlimited insurable interest in his own life.The applicant has insurable interests over himself or herself,his spouse,his children and his parents.Other family members or close relatives,apart from the above mentioned,who have relations of fostering,supporting and maintaining with the applicant exist insurable interest. ⁷

Notwithstanding the foregoing,with the consent of the insured to enter into a contract for the insured,the applicant shall be regarded as having an insurable interest on the insured.In theory,the applicant is entitled to buy a policy for any sum assured he wants,but in practice,the premium of the policy often limits a person's ability to insure his or her own life.A person who is married also has an insurable interest in the life of his or her spouse.Besides,a blood relationship does not imply an automatic insurable interest.For example,in Harse V.Pearl Life Assurance Co.(1904)in UK,an insurance policy by the plaintiff on the life of his mother was held to be illegal for lack of insurable interest,with the consequence that he could not recover the premiums which he had paid . ⁸ In the case,a son or a daughter cannot insure their parents'life,which is forbidden by law.In addition,certain people can insure the life of another person to whom they bear a relationship,recognized at law,to the extent of a possible financial loss.Accordingly,a creditor stands to lose money if the debtor dies before repaying the loan.Therefore an insurable interest is arisen to the extent of the loan plus interest.

2.2 Property insurance

In property insurance,insurable interest often arises out of ownership where the insured is the owner of the subject matter of insurance. ⁹ Therefore the house-owner can insure his house.A shopkeeper can insure his stock.In addition to ownership,some cases involve legal relationship and financial interest.For example,a joint owner having a partial interest in some property is entitled to insure to the full value of that property.If the insured property is destroyed,not only he and but also other owners will benefit all the amount of the claim payment,as he is regarded as a trustee for the other owners.

Another example is that mortgages,which are most common in the area of house purchase,involve the bank(mortgagee)and purchaser(mortgagor).Both of them have insurable interest.The purchaser is regarded as the owner of the house and banks or a financial institution is look upon as the creditor.The interest of the mortgagee is limited to the amount of the loan.For example,if a house purchaser buys a house worthy of 600 000 Yuan,he pays his first sum accounting for 40 percent of the total amount.The insurable interest for the bank is 360 000 Yuan.Therefore the sum insured should be 360 000 Yuan plus the interest about five percent on yearly basis.Besides,the bank insists that the house should be insured by the mortgagor in the joint names of mortgagor and mortgagee.

In addition,a bailee is a person who legally holds the goods of another.These bailees including pawnbrokers,launderers and watch repairs are responsible to take reasonable care of the properties and to look after them just as their own.Therefore a bailee has insurable interest for these properties and he can buy insurance on his behalf.

2.3 Liability insurance

In liability insurance,a person has insurable interest to the extent of any potential legal liability he may incur by way of damages and other costs. ¹⁰ It could be said the extent of a person's interest in liability insurance is without limit.In fact this is so in a theoretical sense,but in a practical situation,liability to pay damages is based largely on legal precedents. ¹¹ This means that whether a case is settled in or out of court,the damages awarded against the insured will be calculated according to similar claims settled by the court in the past.For example,claims for personal injury are different from claims for damages to property because the law cannot place a figure on the value of a particular injury that would be acceptable to everybody. ¹² It is difficult for us to assess the value of the loss of an eye or an arm.Therefore any valuation is bound to be arbitrary. ¹³ The courts have designed a figure of compensation based on previous case law.This figure is not fixed in case of specific injuries being met,for example,10 000 Yuan for an arm and 20 000 Yuan for an eye.The courts simply use previous cases as guidelines so that similar degrees of injury are awarded similar sums in damages. ¹⁴