Insurable interest

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Russian: Страхуемый интерес


Insurable interest, in the context of international logistics, is understood as an interest in the preservation of a thing, recognized by law. So, they can have an insurable interest only when they would stand to benefit financial by the continuance of the object insured otherwise financial loss would result. A person/entity has an insurable interest in a marine venture when he/it stands to benefit from the safe arrival of the goods or be prejudiced by their loss. Unlike other insurance, however, this interest needs not to exist at the time a policy is written. Most cargo policies are written on an open basis (open-end policy [1]) that will cover all future shipments of an insured when it is his responsibility to provide cargo insurance. Although the most common form of insurable interest is ownership, the point at which title passes from seller to buyer can be complex. In order to determine insurable interest, it is necessary to look at the terms of sale or Incoterms governing the contract. From the point of view of the parties involved in an international marketing transaction – the seller and the buyer – a deciding factor in the question of who needs transportation insurance, and then to insure, is insurable interest. Generally speaking, insurable interest depends upon whether a company will benefit from the safe arrival of the carrier and its cargo or whether the firm will be injured by its loss, damage, or detention. This covers a wide range of situations in that not only do the owners of the carrier and cargo have such an interest, but so may certain no owners.[2] For instance, in some situations the seller can have an insurable interest as a nonowner even though the buyer already has become the legal owner of the goods.

The main objective of every insurance contract is to give financial security and protection to the insured from any future uncertainties. Insured must never ever try to misuse this safe financial cover. The principle of insurable interest, along with other basic general insurance principles[3], - principle of uberrimae fidei (utmost good faith), principle of indemnity, principle of contribution, principle of subrogation, principle of loss minimization, and principle of causa proxima (nearest cause), - is the most important for the marine transportation. The principle of insurable interest states that the person getting insured must have insurable interest in the object of insurance. A person has an insurable interest when the physical existence of the insured object gives him some gain but its non-existence will give him a loss. In simple words, the insured person must suffer some financial loss by the damage of the insured object. For example :- The owner of a cargo has insurable interest in the cargo because he is getting income from selling it under the contract terms and conditions. But, if the cargo is sold (the corresponding contract is executed), he will not have an insurable interest left in that cargo sold. From above example, we can conclude that, ownership plays a very crucial role in evaluating insurable interest. Every person involved into international trade (and into marine transportation, especially) has an insurable interest, the seller as well as the buyer. A merchant has insurable interest in his business of trading. Similarly, a bank-creditor has insurable interest in his debtor.

Other insurance principles considered as making substantial contributions into marine insurance are [4](1) principle of indemnity (2) principle of uberrimae fidei and (3) principle of causa proxima.

Principle of indemnity. Indemnity means security, protection and compensation given against damage, loss or injury. According to the principle of indemnity, an insurance contract is signed only for getting protection against unpredicted financial losses arising due to future uncertainties. Insurance contract is not made for making profit else its sole purpose is to give compensation in case of any damage or loss.In an insurance contract, the amount of compensations paid is in proportion to the incurred losses. The amount of compensations is limited to the amount assured or the actual losses, whichever is less. The compensation must not be less or more than the actual damage. Compensation is not paid if the specified loss does not happen due to a particular reason during a specific time period. Thus, insurance is only for giving protection against losses and not for making profit.

Principle of uberrimae fidei. According to this principle, the insurance contract must be signed by both parties (i.e insurer and insured) in an absolute good faith or belief or trust. The person getting insured must willingly disclose and surrender to the insurer his complete true information regarding the subject matter of insurance. The insurer's liability gets void (i.e legally revoked or cancelled) if any facts, about the subject matter of insurance are either omitted, hidden, falsified or presented in a wrong manner by the insured.

Principle of causa proxima. This principle means when a loss is caused by more than one causes, the proximate or the nearest or the closest cause should be taken into consideration to decide the liability of the insurer. The principle states that to find out whether the insurer is liable for the loss or not, the proximate (closest) and not the remote (farest) must be looked into. For example :- A cargo ship's base was punctured due to rats and so sea water entered and cargo was damaged. Here there are two causes for the damage of the cargo ship - (i) The cargo ship getting punctured beacuse of rats, and (ii) The sea water entering ship through puncture. The risk of sea water is insured but the first cause is not. The nearest cause of damage is sea water which is insured and therefore the insurer must pay the compensation.

References

  1. http://www.allbusiness.com/glossaries/open-end-policy/4951442-1.html#axzz20Idhp1Q5 - accessed 07/10/2012
  2. Sales Contract and International Logistics | http://www.contabilizat.ro/file/cursuri_de_perfectionare/management_si_marketing/international_business/cap6.pdf
  3. Principles of Insurance - 7 Basic General Insurance Principles - http://kalyan-city.blogspot.com/2011/03/principles-of-insurance-7-basic-general.html
  4. Bennett, H.N. The Law of Marine Insurance, 1996, Oxford University Press
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