CHAPTER 2

INSURABLE INTEREST

INTRODUCTION

Insurance is intended to provide the insured with an indemnity against loss

although life assurance does not fit easily with the description. The insurance
moneys should not provide a profit for the insured (see Chapter 9). If an
insured was allowed to insure in situations where he stood to make a profit
from the insurance, this would have the appearance of gambling and there
might also be a temptation to bring about the loss. Various statutes and court
decisions over the last 200 years have struggled to deal with these two
problems.
In English law the result has been to create a narrow definition of what can
be legally insured. So narrow is the definition that it can be argued that the
results do not suit modern conditions, in either domestic or commercial
settings, and it may well be that insurers do not necessarily abide by these
outdated rules. That is not to say, however, that when faced with a claim
which the insurer considers to be unmeritorious on the facts that it would not
choose to fall back on the argument that there was no insurable interest.

DEFINITION

Section 5 of the Marine Insurance Act 1906 (which, it should be remembered

throughout this book, is not restricted merely to marine insurance, many of its
sections apply to all types of insurance policies) provides a definition of
insurable interest, which, if one omits the specific references to marine
matters, reads (s 5(2)):
In particular a person is interested … where he stands in any legal or equitable
relation … to any insurable property at risk … in consequence of which he
may benefit by the safety … of insurable property, or may be prejudiced by its
loss, or damage thereto … or may incur liability in respect thereof.
Ownership of property or goods is clearly sufficient to found an insurable
interest whether it be a house or a factory, personal possessions or commercial
goods. Ownership is not, however, essential. A bailee may be liable for
damage or loss to another’s goods and thus has an interest in insuring his
‘liability in respect thereof’.
Negligently inflicted harm, on the roads or in the work place, would lead
to incurring legal liability and this exposure to liability thus creates an
insurable interest for the potential defendant.
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An early leading case illustrating the application of the definition of an

insurable interest is Lucena v Craufurd (1806) 2 Bos & PNR 269 (Appendix 2.1).
England and France were at war and Holland was neutral, but under threat
from France. Legislation provided that Crown commissioners could take
possession of, and manage the affairs of, ships owned by Dutch nationals, but
only when such ships were brought into a British port. Ships were taken into
possession by British naval vessels but losses were suffered before they
reached a British port. The commissioners had insured the vessels when they
were at sea. It was held that there was no insurable interest vested in the
commissioners at that time. The fact that there was an expectation that
ultimately they would reach the safety of a British port was not sufficient to
create an insurable interest while they were still at sea.

LIFE ASSURANCE

While marine policies are governed by ss 4–16 of the Marine Insurance Act
1906, life assurance is governed by the Life Assurance Act 1774 (Appendix
2.2). The preamble to that Act helps to explain its origins:
Whereas it hath been found by experience that the making insurances on lives
or other events wherein the assured shall have no interest has introduced a
mischievous kind of gaming.
The first thing to comment upon is that the phrase, ‘or other events’, appears
to suggest that areas other than life assurance are covered by the Act. In recent
times, however, the Act has been interpreted as applying only to life
assurance, as one might have expected it to be from the title.
In Mark Rowlands Ltd v Berni Inns [1985] 3 All ER 473 (Appendix 2.3), Kerr
LJ, when dealing with building insurance, stated that the words, ‘or other
event or events’, if applied literally in non-life policies would ‘create havoc in
much of our insurance law’ and he refused to apply the Act to such insurance.
In Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 1 All ER 213 (Appendix
2.4), when dealing with a claim on a liability policy, the Privy Council refused
to apply the Act, Lord Lloyd arguing that ‘by no stretch of the imagination
could indemnity insurance be described as a mischievous kind of gaming’.
Even where a policy is not subject to the 1906 or 1774 legislation, it will still
need to avoid the strictures of the Gaming Act 1845 (Appendix 2.5) in order to
be viewed as an enforceable insurance contract.
A review of a number of cases helps to illustrate the narrowness of the
English rules in relation to life assurance. The cases indicate that, while a
person has an insurable interest on his own life and a spouse has such interest
in the other spouse, other family relationships are not considered sufficient.

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Family relationships

In Halford v Kymer (1830) 10 B & C 724 (Appendix 2.6), a father attempted to

insure the life of his son, naming himself as beneficiary, should the son die
within two years. The court rejected the father’s claim that he had a pecuniary
interest in that he expected the son to reimburse him the cost of his education
and maintenance at some date in the future. Such policies do, today, in fact,
exist and do not appear to lead to litigation which, as suggested above,
indicates that insurers are prepared to ignore the narrowness of the interest
rules.
However, early attempts to avoid the 1774 Act met with no success in
situations where the insurer chose to rely on the Act in his refusal to pay. In
Wainwright v Bland (1835) 1 Mood & R 481 (Appendix 2.7), the assured
appeared to have taken out life policies in her own name. It was clear that she
could not have afforded to pay the premiums from her own modest income. It
was assumed that the plaintiff had in reality provided the sums insured in the
expectation that he would take the insurance money on her death. A later
court found that the policy was void for misrepresentation and concealment
of existing policies, but it is clear that the above facts, if found to be true,
would have indicated no insurable interest.
On the other hand, in Worthington v Curtis (1875) 1 Ch D 419 (Appendix
2.8), a father took out a policy in the name and on the life of his son. He clearly
had no insurable interest. The son died and the insurer, honourably, paid the
money to the father’s benefit. Creditors of the son objected, arguing that the
money should have gone to the estate against which they could have claimed.
This argument was rejected. The 1774 Act provides a defence for an insurer
not to pay when there is no insurable interest. If they choose to pay then the
payment must remain with the person to whom it was voluntarily paid.
It is possible under s 11 of the Married Women’s Property Act 1882 for a
married person to insure their own life expressly intending to benefit the
survivor or children. The advantage of this is that the insurance money does
not then form part of the deceased’s estate and this escapes, for example, the
grasp of any creditors of the deceased. However, the intention of such an
arrangement was surely not to defraud any such creditors.

Creditor-debtor

A case of considerable importance is that of Dalby v India and London Life

Assurance Co (1854) 15 CB 365 (see Appendix 2.9). It showed that a creditor can
insure the life of her debtor, at least up to the limit of the debt and it also
answers the question, in relation to life policies, as to when the insurable
interest must be shown to exist. Two possibilities arise: either it is the date at
which the policy is taken out; or at the date of the death. For life assurance, it

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is the former date. In the case of indemnity policies, for instance, motor
insurance, it is the latter date, for if there is no loss then no indemnity is
required. In Dalby, an insurer had insured the life of X and then reinsured that
exposure with the defendant insurer. The original insurance policy was
terminated, but the reinsurance was continued and was in existence at the
time of X’s death. The reinsurer was held liable.
The implication of the rules as pointed out by McGee, The Law and Practice
of Life Assurance Contracts, 1995, London: Sweet & Maxwell are that:
… divorce has no effect on the validity of a life of another policy affected by
one spouse on the life of the other during the marriage, and the ex-spouse is
perfectly entitled to maintain the policy by continuing to pay the premiums …
In a more straightforward debtor-creditor relationship protected by a life
policy, it would also mean that, even though the debt was repaid, the creditor
could choose to continue to pay the premiums and on the eventual death
would reap a financial benefit.
The facts in Hebdon v West (1863) 3 B & S 579 (Appendix 2.10) raised two
issues relating to insurable interest. The plaintiff worked for a bank at a salary
of £600 a year and was guaranteed employment at that salary for seven years.
He had also received a loan from the bank of £4,700 and the managing partner
had told him that the loan would not need to be repaid during the lifetime of
the partner. The plaintiff, with the partner’s permission, insured the partner’s
life for £5,000 with insurer A and later for £2,500 with insurer B. After six
years, the partner died and the employment ceased. He was paid the £5,000
and then sought to claim on the second policy. The claim was successfully
rejected. It was held that the £5,000 was an enforceable policy as it protected
the agreement as to the security of his employment. However, the promise not
to enforce the loan repayment was a bare promise, unsupported by
consideration and therefore could not form the basis of insurable interest.
Insurer A did not make any objection that the £5,000 exceeded the total salary
by £800, and as insurable interest dates from when the life is assured they
could not object to the fact that he had received six years’ salary before the
death.

Key-man

Again, in a key-man policy, a policy where, usually, an employer insures the

life of an important employee, whose death while in employment might have
serious repercussions on the profitability of a contract in which he was
involved, the policy could be continued even though the employee is no
longer employed by that employer. The cases do not deal with the question of
how a key-man policy is calculated. This, presumably, is a matter for
negotiation and once the figure is agreed the insurer abides by its decision.
For instance, how do you set about calculating the value of a leading

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footballer? It is not unknown for the life of a judge to be insured by the

litigants in a situation where he has been assigned to a trial which is expected
to last a long time (a fraud trial perhaps). If he dies part way through a trial, a
new trial would be required and thus considerable legal fees would have been
wasted by the litigants.

Assignment

Assignment of insurance policies has an important role in commercial life. A

common example is where a mortgagee requires the mortgagor to effect a life
policy to cover the extent of the loan should the mortgagor die before the loan
is repaid. The policy is then assigned to the mortgagee. Assignment can be
made in equity, or under s 136 of the Law of Property Act 1925, or, more
commonly, under the Policies of Assurance Act 1867, which requires that
notice of such assignment be given in writing to the insurer. Under the 1867
Act, the assignment may be made either by an endorsement on the policy or
by a separate document using the wording set out in the Schedule to the Act.
The desire of the courts to make the policy assignable and therefore as
flexible as possible is illustrated in the United States decision in Grigsby v
Russell 222 US 149 (1911). A life policy was taken out by X on his own life. He
paid two premiums and then required money for medical care. He assigned
the policy to Y for value, who in turn continued to pay the premiums. X later
died and the insurer wanted to know whether it should pay the proceeds to Y
or to X’s estate. The Supreme Court of the United States held that it should be
paid to Y. The comments of Mr Justice Holmes are noteworthy:
Of course, the ground suggested for denying the validity of an assignment for
a person having no interest in the life insured is the public policy that refuses
to allow insurance to be taken out by such persons in the first place … the
ground for the objection to life insurance without interest in the earlier English
cases was not the temptation to murder but the fact that such wagers came to
be regarded as a mischievous kind of gaming … On the other hand, life
insurance has become in our days one of the best recognised forms of
investment and self-compelled savings. So far as reasonable safety permits, it is
desirable to give to life policies the ordinary characteristics of property … To
deny the right to sell except to persons having such an interest is to diminish
appreciably the value of the contract in the owner’s hands.
Sales of life policies are now quite common and there are auctions of such
policies. Pension fund managers buy such policies. They continue the
payment of premiums and when the life dies the proceeds go into the fund.

Return of premiums

Section 1 of the 1774 Act states that a contract made in breach of the Act shall
be null and void to all intents and purposes whatsoever. However, s 2 states

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that breach of that section renders the contract unlawful. The question that
confronted the court in Harse v Pearl Life Assurance Co [1904] 1 KB 558
(Appendix 2.11) was whether premiums paid for a policy that was in breach
of the Act could be reclaimed by the proposer. The insurance agent in good
faith represented to the plaintiff that the plaintiff could effect a policy on his
mother’s life and to cover funeral expenses. (Possible actions against
intermediaries are discussed in Chapter 6.) Twelve years later, the plaintiff
was told that the policy was void for want of insurable interest. The Court of
Appeal refused to order a return of the premiums. Only in a case where it
could be shown that one party had deceived, or oppressed the other party into
making the contract would a return of premiums be ordered.

Reform

The narrowness of English law’s definition of insurable interest in relation to

life assurance has been commented on above. Merkin (Appendix 2.12)
presents an overview of the various problems and suggests reform. No
reforms have been forthcoming.
Australia introduced reforms in the Insurance Contracts Act 1984
(Appendices 2.13 and 2.20). Section 16 does, however, retain the requirement
for an insurable interest in life assurance and in personal accident and sickness
policies, which provide health cover as part of the policy. The retention was on
the basis that there should be an incentive against murder committed for
financial gain. The right to assign is mentioned along the lines suggested by
Holmes J in Grigsby and, thus, contra to Merkin’s suggestion. It is in s 19 that
the main difference (that is, a widening of the categories of those who have an
interest) can be seen from English Law (although it should be said that the
advances had already been made by the Life Insurance Act (Cth) in Australia
as early as 1945). The Act specifically abolishes the need to name the
beneficiary in the policy as required by the English Act of 1774 (Appendix 2.2).

PROPERTY INSURANCE

Property insurance, unlike life assurance, is a contract of indemnity. Unlike

life assurance, the interest must exist at the time of loss and not when the
contract is made. Also, unlike life assurance, the courts have often been active
in interpreting interest in a way that meets commercial needs, but not always.

The narrow approach

A leading House of Lords case illustrates a narrow approach. In Macaura v

Northern Assurance [1925] AC 619 (Appendix 2.14), the insured was the sole

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shareholder in a company. He was also an unsecured creditor of the company.

In his own name, he insured the timber of the company, which was its only
asset, against fire. A fire destroyed the timber and his claim on the policy was
rejected. As every student of company law knows, a company has its own
legal personality separate from that of its shareholders. The company should
have insured in its own name. The plaintiff ‘stood in no legal or equitable
relationship to the timber’ (per Lord Sumner).
It is possible, although the wording of the policy would need to be very
carefully drawn, for a shareholder to insure his interest in the value of the
shares which he holds in the company. This was achieved in Wilson v Jones
(1867) LR 2 Ex 139 (Appendix 2.15). Here, the insured held shares in a
company that was attempting to lay the first transatlantic telegraph cable on
the bed of the ocean. If it was an attempt to insure the cable, the insured
would fail, as he had no legal or equitable interest in the cable. It was held that
he had in fact insured his interest in the shares of the expected profit on the
successful completion of the venture.
More than 100 years ago, New York law considered that a factual
expectancy would be sufficient to support an insurable interest. In National
Filtering Oil Co v Citizen’s Insurance Co 106 NY 535 (1887), the insured had
agreed with X & Co that X & Co would use a patent owned by the insured in
X & Co’s factory. From this arrangement the insured would receive royalties
on the production. A certain minimum royalty would remain payable even if
the factory was destroyed or damaged by fire. The insurance was to cover any
shortfall in royalties and it was an insurance on the factory itself. The insured
successfully claimed on the policy, it being held that: ‘... an interest in property
connected with its safety and situation as will cause the insured to sustain a
direct loss from its destruction is an insurable interest.’ A legal or equitable
interest in the property, as would be demanded by English law, was not a
necessary ingredient of insurable interest.
More recently (in 1987), the Supreme Court of Canada has rejected the
narrowness of the Macaura approach. In Constitution Insurance Co of Canada v
Kosmopoulos 34 DLR (4th) 208 (1997) (Appendix 2.16), the insured was the sole
shareholder, director and lessee of a business. He insured in his own name
and when the premises were damaged he was held to have an insurable
interest as a sole shareholder. The Macaura rule was considered to be an
‘imperfect tool to further the public policy against wagering’. Many
jurisdictions in the United States have abandoned the restrictive definition of
insurable interest in favour of the ‘factual expectancy test’.
It is perhaps not surprising that the (Australian) Insurance Contracts Act
1984 (Cth) has taken a similar stance in s 17 (Appendix 2.13). Here, the
requirement is not that there should be a legal or equitable interest but that the
insured has suffered a pecuniary loss by the property damage.

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Damage to goods

The owner of goods obviously has an insurable interest. But, many people
may have a relationship to goods, damage to which may have an adverse
pecuniary effect on them. In such a case there is an insurable interest.
A typical example would be a bailee of goods. He has a lien over such
goods; he may be liable for damage to such goods. In Waters v Monarch Fire
and Life Assurance Co (1856) 5 E & B 870 (Appendix 2.17), warehousemen took
out two floating policies, policies taken out in general terms which leave the
particulars to be later defined, usually because the exact details are
unascertainable at the time the policy is effected. One policy was on goods on
trust or held on commission and the second policy on goods which they
owned or held on commission. A fire destroyed goods owned by others and
the plaintiffs claimed. Some owners did not know that the plaintiffs had
insured the goods and some had taken out their own policies. The insurers
offered to pay only the value of the lien, for warehousing charges due to the
plaintiffs, arguing that the plaintiffs had no insurable interest in the goods not
owned by them. The insurer’s defence was rejected. It was a valid insurance,
not tainted by any illegality and it would be commercially inconvenient if
such an insurance could not be taken out. Obviously, the insured can not be
allowed to make a profit from such insurance. The insurer, however, is bound
to pay the full value of the goods damaged or destroyed. The insured may
then take out the value owed to him and he will be deemed to hold any
balance as trustee for those who have suffered a loss, for example, the owners.
If payment over of the balance fully compensates the owner of the goods, they
would obviously have no claim on their own policies. If there was a shortfall,
then only the shortfall would need to be paid by the insurers. If there was a
payment made by the insurers and the original loss was due to the negligence
of the warehousemen, then the insurers of the goods’ owners would have
subrogated rights against those insurers (see Chapter 9).
Waters was a short judgment, referring to only one earlier decision, but its
commercially sensible approach was endorsed by the House of Lords in A
Tomlinson (Hauliers) Ltd v Hepburn [1966] 1 All ER 418 (see Appendix 2.18).
The plaintiff haulage company insured goods of a third party which were to
be carried on the plaintiff’s lorries. The goods were stolen without any
negligence on the plaintiff’s part. The plaintiffs were bailees of the goods and,
following Waters, were held to have an insurable interest to the full value of
the goods. They could retain a sum to cover any sums due to them and then
hold the remainder of any moneys in trust for the owners of the goods.

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Other situations

What follows is but a selection of certain relationships where insurable

interest has been recognised. Clarke, M, The Law of Insurance Contracts, 1997,
3rd edn, London: LLP, sets out 14 situations: ownership; trust; receivership;
sale of land; sale of goods; leases; security interests; possession; bailment; risk;
liability; company shareholders; debt; and profit.
The above commercially expedient approach to the definition of insurable
interest is also seen in cases other than bailment. A practical application of just
what the expediency might be is provided by Lloyd J in Petrofina (UK) Ltd v
Magnaload Ltd [1983] 2 Lloyd’s Rep 91 (Appendix 2.19), relying on Waters and
Hepburn.
The main contractors on a site took out contractor’s all risk insurance to
include damage to property. The insureds were defined as including main
contractors, sub-contractors, owners and lessees of the site. Serious damage
was caused by the negligence of what was really a sub-sub-contractor. The
owners were compensated under the policy and the insurers sought to
subrogate against the negligent party (see Chapter 9 for issues of subrogation),
who in their defence argued that they were insureds within the policy
definition. In answer to that, the insurers countered that, if the defendants
were insured under the policy, then their interest extended only to their own
property and not to the damaged property. The insurer’s arguments were
rejected and the subrogation claim failed. The court was prepared to extend
the bailee principle found in Waters and Hepburn to cover the situation so that
a head contractor could insure the entire contract works in his own name and
the name of all the subcontractors. The precise wording of the policy will need
to be examined and it may be that it contains words of limitation which would
militate against the commercially convenience approach. In National Oilwell
(UK) Ltd v Davy Offshore Ltd [1993] 2 Lloyd’s Rep 582 (Appendix 9.9), although
two parties were held to be insured under the policy, the coverage, and thus
the protection, offered was not identical. One party had less cover once the
wording of the policy had been construed by the court, and the insurers were
able to subrogate against that party.
The entangling of insurable interest and subrogated rights is also
illustrated by Rowlands v Berni Inns Ltd [1985] 3 All ER 472 (Appendix 2.3). A
landlord under the terms of the lease agreed to insure the building and the
tenant was to contribute towards the premium. The lease stated that should
there be fire damage, the tenant would be relieved from any repairing
obligations and the insurance moneys would be used for such repairs. Due to
the tenant’s negligence, there was a fire, the insurer paid the landlord and

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then sought to subrogate against the tenant. The insurers argued, in part, that
the tenant had no insurable interest. The subrogated claim was rejected. Lord
Justice Kerr was of the view that there was no legal principle, which
prevented a person from agreeing that where an insurance was affected by
one person, which was intended to enure for his benefit to the extent of his
interest in the subject matter, that such insurance could not be for his benefit.
However, as with National Oilwell, the precise interests covered will need to be
carefully considered.
It is important however that attention is paid to the precise wording used.
Thus while one party may be protected by the policy held in the name of
another party the question needs to be addressed as to the breadth of the
protection afforded by that policy (see the Scottish case of Barras v Hamilton
1994 SLT 949) An interesting legal argument was developed in Lambert v
Keymood [1999] Lloyd’s Rep IR 80. The claimant owned a number of adjoining
properties and they were occupied by the defendant. The defendant’s
negligence caused a fire which damaged the properties. The defendant
alleged that the contractual arrangements with the claimant were such that it
was the claimant’s responsibility to arrange insurance and that would provide
for the defendant not to be liable under subrogation (see Chapter 9).
The claimant denied that this was the arrangement. He also argued that
even if it was then any policy would require the defendant to act in a
reasonable way towards the insured property and in the present
circumstances the defendant had acted with wanton disregard to safety and
would have been in breach of any reasonable precautions clause.
The court held the defendant liable. The arrangement between the parties
would be read as requiring the claimant to insure the properties. But even if
this was to be assumed it was not always the case that a policy is intended to
exonerate the tenant. That question could only be decided by looking at the
wording of the lease and/or the insurance policy. There was no intention
here. If there had been a policy which covered the tenant then the reasonable
precautions argument would also have worked in the claimant’s favour. In
the Berni Inns case the policy covered acts of negligence but no policy would
cover the acts of recklessness that had occurred in Lambert.
As with the landlord and tenant comparisons, above, care must be taken to
check that the wording said to cover the interests of one party do in fact cover
every eventuality to which that party might be exposed. Deepack Fertilisers etc
v ICI Chemicals etc [1999] 1 Lloyd’s Rep 387 was a complicated case of a
construction contract wording including who was insuring whom and for
what. A completed factory in India exploded. Following an earlier line of
cases the Court of Appeal held that the second defendants, who were
providing technical know-how for the construction, would have an insurable
interest in the plant itself while under construction on the grounds that if it
was damaged they would lose the opportunity to continue the work and thus

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lose profits. After completion however the only losses that they could suffer
would be any liability that they might face in contract or in negligence. This
type of liability would be expected to be covered by liability insurance or,
where relevant, professional indemnity insurance. But what the second
defendants could not do, after completion of the project, was to argue that
they still had an insurable interest in the property insurance.
Thus the moral of the story, as seen in earlier cases, is that the policy under
which one party has been told it is insured, may not necessarily extend to the
particular losses that later occur. Therefore the ‘insured’ and his adviser must
take great care to test the wording of that particular cover against the full
range of liabilities to which it might be exposed.

Reform

In the non-life section, it can be seen that the English courts have made efforts
to find an insurable interest, often to avoid the need for overlapping insurance
policies and to prevent subrogated insurance litigation. We have seen,
however, that Macaura is still part of English law although it has been rejected
in Canada and Australia and that the United States had taken the factual
expectancy route more than 100 years ago.
More than 50 years ago, an article by Harnett and Thornton critically
exposed the weakness in the perceived underlying assumptions behind the
need for insurable interest (Appendix 2.21). It is worth quoting a paragraph
from that article here:
The term insurable interest is manifestly a misnomer; the proper term is
insurable relationship. Factual expectation of damage should be the exclusive
test of an insurable relationship. To those who cling to strict property
delineations in fear of the process of drawing the line between a genuine
factual expectation of damage and a wager, it can be said not only that judicial
wisdom is equal to the task, but that a just line drawn with difficulty exceeds
in value a simple line which works disproportionate injustice.
Insurers and insureds in England would benefit from legislation that reflected
the advances made elsewhere in the definition of insurable interests.

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