The Many Shades of Insurable Interest

In mid-eighteenth century it was noted that marine and life insurance policies which were the only insurances common then, were used as a form of gambling. Since this issue became a matter of public concern, the English Parliament made insurable interest a necessary requirement in marine insurance, by passing the Marine Insurance Act 1745. Thereafter, bad practices in life insurance such as taking policies on the lives of public figures etc. led to the passing of the Life Assurance Act 1774.?

Further, in the Marine Insurance Act 1788, the requirement for the names of those interested in the insurance had to be inserted into the policy. It applied to non-marine insurance as well: “Any Policy or Policies of Assurance upon any Ship or Ships, Vessel or Vessels, or upon any Goods, Merchandizes, Effects, or other Property whatsoever”. This Act was repealed by the Marine Insurance Act 1906, but only insofar as it affected marine insurance. The Act continues to apply to non-marine insurance on “goods, merchandizes, effects or other property”. By these laws the principle of insurable interest had legal backing.

The timing of the interest

In life insurance, case law has ensured that interest is required at the time of taking the policy. By contrast, section 6 of the Marine Insurance Act states that the assured must be interested in the subject-matter insured at the time of the loss though he need not be interested when the insurance is made. In 1743, in a case involving fire insurance, The Sadler’s Company v Badcock, (1743) 1 Wils. KB 10; it was held that the insured party must hold an interest in the insured property both at the outset of the insurance and at the time of the fire.

The Progress of the concept of Insurable Interest

1) The first celebrated decision in this matter was Lucena v. Craufurd, (1806) 2 Bos and Pul MR 269. In this case Justice Lawrence J. held that an insured could recover if he suffered "factual expectation of loss." Unfortunately, on the Bench there was another Judge Eldon L.C. who sought to improve Lawrence J.'s definition of insurable interest by requiring that, in addition to a loss, the plaintiff (insured) must have a "legal or equitable interest" in the property. Justice Eldon was fearful that a broad definition of insurable interest would motivate an ordinary seaman to insure the ship in which he sailed. The Judge failed to have the basic insight that seamen did not earn enough to do this, and further that insurers would not issue policies to them, because they would deal with the owner or captain of the vessel. Justice Eldon’s imagination is said to have gone further and felt that after having insured the ship in which he had sailed, the sailor would then seek to insure the next ship in which he sailed, and so on, ad infinitum. The Eldon decision prevailed in the Bench and this was the beginning of a series of strict interpretation of the concept of insurable interest. Lord Eldon’s narrow test of insurable interest was codified in section 5(2) of the Marine Insurance Act 1906.

This test was further approved by the UK House of Lords in the case Macaura v Northern Assurance Co Ltd., [1925] AC 619. In this case the plaintiff was the only major shareholder in a company to which he had also sold timber on credit. He took out a fire insurance policy with the insurer to insure the timber and when it was destroyed by fire he claimed under the policy. The insurer repudiated the claim. On appeal to the UK House of Lords, it was held that the insured had no legal or equitable relationship to the company’s stock, that is the timber, and therefore did not have an insurable interest in it. As a result, the defendant insurance company was entitled to repudiate liability under the contract. The court said: “It is clear that the appellant had no insurable interest in the timber described. It was not his. It belonged to the Irish Canadian Sawmills Ltd, of Skibbereen, co Cork. He had no lien or security over it and, though it lay on his land by his permission, he had no responsibility to its owner for its safety, nor was it there under any contract that enabled him to hold it for his debt.?He owned almost all the shares in the company, and the company owed him a good deal of money, but, neither as creditor nor as shareholder, could he insure the company's assets.”

In the USA also insurable interest was accepted early. In the case Pritchet v. Insurance Co. of North America Yeates 458 (1803), the Supreme Court of Pennsylvania stated: “An insurance amongst us, is a contract of indemnity. Its object is, not to make a positive gain, but to avert a possible loss. A man can never be said to be indemnified against a loss which can never happen to him. There cannot be an indemnity without a loss, nor a loss without an interest. A policy therefore made without interest, is a wager policy, and has nothing in common with insurance, but name and form. It is not subservient to the true interests of fair trade and commerce; but is pregnant with as much mischief, both public and private, as can proceed from any species of gaming, which the legislature has hitherto found it necessary to repress.”

Slowly, however, courts in UK, Australia, Canada and USA, were “inching” towards a wider test, principally on the basis that a strict version had the potential to defeat the reasonable commercial expectations of the parties. This view was clearly expressed as early as 1884 in the case Stock v. Inglis [1884] 12 QBD 564, where the court said: “In my opinion it is the duty of a Court always to lean in favour of an insurable interest, if possible, for it seems to me that after underwriters have received the premium, the objection that there was no insurable interest is often, as nearly as possible, a technical objection, and one which has no real merit, certainly not as between the assured and the insurer. Of course, we must not assume facts which do not exist, nor stretch the law beyond its proper limits, but we ought, I think, to consider the question with a mind, if the facts and the law will allow it, to find in favour of an insurable interest.” ?

In the case Feasey v Sun Life Assurance Company of Canada, [2003] EWCA Civ 885, the court commented that the words in sec. 5 (2) of the Marine Insurance Act requiring “legal or equitable relation to the adventure” were “intended to be a broad concept”. Section 26 of the 1906 Marine Insurance Act states that while “the subject matter insured must be designated with reasonable certainty”, the nature of the insurable interest “need not be specified”. This is in line with the practice that insurance contracts do not necessarily set out the required relationship between the insured and the subject matter.

?Hence as time went the application of insurable interest began to be widened to apply to many categories of interested parties who stood to lose by an unforeseen loss.

?Categories of Insurable Interest

1.?????Bailees?

One of the earliest extensions was for bailees, that is, for those who hold other people’s goods in their possession, with a duty to take care of them. Courts recognise that bailees can insure the goods in their possession against all perils. This was justified on technical grounds: that a bailee had a possessory interest. Further, it was commercially convenient, for the bailee holding other people’s goods to insure them for their full value, and pass on the proceeds to the owner.

Courts have permitted bailees to insure the goods against all perils, not simply against losses caused by the policyholder’s negligence. In addition, the proposition that the bailee may insure the bailed goods to their full value also got well established in the case?Waters v Monarch Fire and Life Assurance Co (1856) 5 EL & BL?870. ?A Carrier of goods is entitled to insure for more than their own liability to the owners. Instead, the carrier may insure goods in its possession for their full value against all risks, holding the proceeds in trust for the owner (A Tomlinson (Hauliers) Ltd v Hepburn [1966] AC 451.)

Shareholders

It may be seen that courts will look for ways to find an insurable interest. Unlike Macaura v Northern Assurance Company Ltd [1925] AC 619, in the case Wilson v Jones (1865 - 66) LR 2 EX 139, a shareholder took a policy on property owned by the company – a telegraph cable. In this case, however, the court allowed his claim. The policy was in a standard form, but there was an additional

handwritten clause which stated that cover extended to every risk and contingency “attending the conveyance and successful laying of the cable”. The court concluded that the policy was not on the cable but on the shareholder’s interest in the successful completion of the project to lay the cable. Mr Wilson had insured the right thing in the right capacity and was therefore entitled to claim.

In the case Sharpe v Sphere Drake Insurance (The Moonacre) [1992] 2 Lloyd’s Rep 501 (QB), the insured took out a policy on a yacht owned by his company of which he was the sole shareholder. He was given full use of the yacht by two powers of attorney, granted to him by the company. The court found that the right to use the yacht was a valuable benefit, and the power of attorney founded a sufficient legal interest.

Sale and Purchase

It is held that an insurance contract is essentially personal and does not pass with the property to a buyer (transferee). In the case Rayner v. Preston 18 Ch. D. 1 (1881), held that the purchaser had no right to the claim. In this case the seller received the claim money from the insurer, as it was damaged by fire. The fire had occurred after the contract of sale but before the transfer of title. After paying the purchase money to the seller, the purchaser then filed a bill asking the seller either pay the insurance money or use it to repair the damage to the property. The court ruled that since the contract of insurance was a personal one between the insurer and the seller, it did not run with the property, and, hence the buyer had no claim from the policy. However, it may be noted that later the insurer proceeded against the seller and he was compelled to return the claim money to the insurer because he had suffered no loss.

India

In the case Canara Bank vs M/S United India Insurance Co. Ltd (2020) the Supreme Court examined a fire claim where farmers kept stocks of chillies in a cold store which was burnt when the cold store has a fire. They have duly paid consideration for storage and also the premium component. The SC said that “therefore, the goods were not held in trust per se but the goods were held by cold store as bailee of the goods for consideration. The possession of the farm produce was handed over by the bailor, i.e. farmer to the cold store i.e. the bailee, in terms of the contract. There may be inter se rights and liabilities between the farmer and the cold store but it cannot be said that the goods were held ‘in trust’. The goods were also not held ‘on commission’.” This was in response to insurer stating that Exclusion no. 5 of the fire policy was attracted. It may be noted that the names of farmers were not noted in the policy, but only that of the insurer, the cold store and the bank. The SC felt that the insurer permitted the proposal form to be left incomplete and in any case the names of the concerned farmers were with the bank and the cold store.

Conclusion

Many jurisdictions are veering to a view that the principle of insurable interest is not necessary. Australia was the first country to abolish the principle of insurable interest by section 18 of the Insurance Contracts Act 1984 which is as follows: “A contract of general insurance is not void by reason only that the insured did not have, at the time when the contract was entered into, an interest in the subject-matter of the contract.” This meant that the Australian law shifted the functions of the insurable interest requirement to be met by the indemnity principle. Insurable interest is now a matter considered simply as an underwriting issue, to be considered by an insurer through a simple question in the proposal form.

The Law Commissions of UK and Ireland were veering to this view, but insurers were not in favour of it. The UK Law Commission felt that “insurable interest is a fluid concept, which is difficult to pin down”. Where an insurer has deliberately written a policy in respect of the insured’s circumstances, courts will be reluctant to find that the requirement has not been met. It is also felt that the categories of insurable interest may not be closed, as insurers will develop new products which may require new forms or categories of insurable interest.