Insurable Interest: Definition Types, Example (Explained)

Insurable Interest: Definition Types, ExampleInsurable interest is a part an entity’s value for which an insurance policy is purchased to cover the risk of loss.

Insurable interest is a requirement for the issuance of an insurance policy, making it legal, valid and protecting against intentionally harmful acts.

Entities not subject to financial loss from an event do not have an insurable interest and cannot purchase an insurance policy to cover that event.

‘Insurable Interest’ Insurance is a collection of risk exposure, to protect policyholders from financial losses.

Types of Insurable Interest are;

  • Fidelity Guarantee Insurance,
  • Credit Insurance,
  • Performance Bond.

Fidelity Guarantee Insurance

This type of policy covers the insured in respect of the loss sustained by him arising out of fraud, defalcation or dishonesty caused by the employee of the insured.

Usually, this type of insurance who either handle cash or hold positions of trust covers those employees.

Four types of guarantees are in use depending on the class of employees, viz., Commercial Guarantees, for persons other than below;

  • Court Bonds, for administrators, receivers, and other appointments.
  • Government Bonds, for trustees, customs, and excite people. Guarantees For Local Govt. Officers.

Credit Insurance

The present-day international trade is mainly transacted on credit basis and exporters can sustain heavy losses because of the possible insolvency of the buyers of such goods or because of protracted default in payment on the part of buyers.

The main purpose of credit insurance is to provide financial protection to such exporters arising out of nonpayment.

Payment of the value of the goods may not be possible for the buyers because of the outbreak of war and because of the restrictions imposed on remittances abroad.

In addition, there is always the question of the possible insolvency of the buyer.

Export Credit Guarantee Scheme aims at providing cover to the exporter (insured) arising out of (a) such political risks and (b) insolvency of the buyer.

Performance Bond

These types of policies basically aim at providing protection to those who are responsible under a contract to perform some obligations within a specified time or as per certain pre-determined standard.

If the performance cannot be made as per contract leading to a loss for the principal, then the principal would have a right under the contract for claiming damages or compensation for the default of the contractor or the person who is to perform, a certain obligation under the contract.

The situation may relate to, for example, construction of buildings, roads, bridges, mills, factories etc., or may relate to a loan agreement repayable as per certain terms and conditions.

Such persons, sometimes of their own or sometimes at the direction of the principal, are required to take such Performance Bonds or Surety Bonds when insurance companies stand as sureties or guarantors.

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