INSURANCE LAW CLASS WEEK NO: 5 Lecture # 4 FEBRUARY 17, 2021

In our previous classes, we had been looking at the issue of material facts. We have
learnt that what is a material fact is a question of Law but whether a fact is material in
any given set of circumstances is a question of fact. We have seen that material facts
may be classified according to the special circumstances in which the question arises.
Classes include the following:
1. Any fact indicating an exposure to more than normal danger;
2. Facts suggesting that the assured is motivated by special motive.
3. Facts showing that the liability of the insurer might be greater than would
normally be expected.
4. All facts relating to ‘moral hazard’.
5. All facts which to the knowledge of the assured are regarded as material by
the insurer.
We have also seen that there are certain facts which are not material. It hopefully will
be clear that whereas all material facts must be disclosed by the proposed assured, if a
fact is deemed NOT MATERIAL, then, by definition, it need not be disclosed. So, in
practical terms, the issue would arise where an insurer purports to avoid a policy on the
basis that the assured breached his or her duty of utmost good faith by not disclosing a
material fact. The defence put forward by the assured would be it was NOT material as
it falls among those fact that do not have to be disclosed, for example, the fact lessened
the risk, or the insurer was presumed to know. Alternatively, the assured may argue
that it is not material because it related to a “spent conviction” or is just too far removed
from the risk being contemplated to be considered material; for example a child who at
age twelve (12), thirty (30) years ago, had stolen his friend’s pencils. Another defence
may be that the insurer through its agent had already been made aware of the fact.
Remember, however, that subject to the limitations just referred to, a conviction even
from a dim and distant past, may need to be disclosed, as it may indicate “moral
hazard”.
Having mentioned the question of agency which we covered last time in the
decision of Diamond Q.C. in Simner v New India Assurance, I just want to
state again something which I had mentioned but just glossed over without
developing the point. The basis for imputing knowledge to an insured is
found in the law of agency. In this regard, in an Australian case, Con-stan
Industries of Australia Pty Ltd v Norwich Wintarthur
Insurance (Australia) Ltd (1986) 64 ALR 481 the court declared that
that "under the general principles of the law of agency, a broker is the
agent of the assured, not the insurer …there will be rare circumstances in
which a broker may also be an agent of the insurer, but the courts will not
readily infer such a relationship because a broker so placed faces a clear
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conflict of interest…The agent must have acquired the knowledge in the
course of his employment as agent and in pursuance of his duty to his
principal, it is not sufficient that he acquired the knowledge before the
employment began, or in some other capacity, unless it was his duty to
place his knowledge, however acquired, at his principal's disposal.

As pointed out by Mohammed Zaidan in the article, “The duty of disclosure”

which I have sent you previously:
“It is the duty of the agent, as representing the proposed
assured in the negotiations, to disclose to the insurers all
material facts which are within his knowledge, however
acquired, or which ought to have come to his knowledge in the
ordinary course of business. Thus, the Marine Insurance Act,
1906, provides in Section 19 that: ". . . where an insurance is
effected for the assured by an agent, the agent must disclose
to the insurer (a) every material circumstance which is known
to himself and an agent to insure is deemed to know every
circumstance which in the ordinary course of business ought
to be known, or to have been communicated to him . . ."

Thus, a broker must not misrepresent his client's claims history to the
insurer, and the failure to exercise reasonable care in presenting proposals
to insurers is a breach of the broker's duty of care to his client.  Information
regarding criminal convictions of employees or partners must likewise be
disclosed to the insurer when required, otherwise the insurer will be entitled
to repudiate the policy and the client may recover his loss from the broker
who failed to correctly complete the proposal form on his behalf.
Since the proposed insured appoints the agent to represent him in the
negotiations and to perform the duty of disclosure on his behalf, it is his
duty to place the agent in possession of all the material facts which the
proposed insured would have been bound to disclose to the insurers, if he
himself had been conducting the negotiations. An omission or mis-
statement on the part of the agent which, if judged solely from the agent's
state of knowledge, would have no effect on the validity of the policy when

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the proposed insured's knowledge is imputed to the agent, amount to non-
disclosure entitling the insurer to avoid the policy.

I want to emphasize the fact that the duty of good faith applies to both the
insurer and the assured although it more often is considered in relation to
the failure of the assured to disclose material facts. See the case
of Banque Financiere De La Cite Sa V. Westgate Insurance Company
Ltd, [1991] 2 A.C 249, where the HOL accepted that there was a duty of
good faith on the part of the insurer but the breach of which simply entitled
the insured to avoidance of the contract and return of premiums and not
damages.
Also See: Aldrich V. Norwich Union Life Insurance Co. Ltd, [2000]
Lloyd’s Rep Ir 1
We had also seen that there is no clear answer to the question whether the
individual history of individuals before they entered into partnership is
material, or only the history after entry into the partnership. See
Glicksman v Lancashire & General Insurance Co where the House of
Lords did not give ruling on that question. But this case is also authority for
the proposition that a previous refusal in marine insurance is NOT
MATERIAL.
We had noted that previous refusals may be material as falling within the
purview of moral hazard. Recall that in Ewer v National Employers’
Mutual and General Insurance Association, [1937] 2 All E.R. 193, the
court (per MacKinnon J.) rejected the notion that there was, as a matter of
law, a wide proposition that it would in any event be material. Compare
that view with the situation in Locker & Wolf Ltd. v Western Australia
Insurance Co. [1936] 1 K.B. 408, where the Appellants when applying for
fire insurance in respect of their premises failed to disclose that a previous
proposal for insurance on their new motor cars had been refused by
another insurance company on the grounds of misrepresentation and non-
disclosure. It was held that the Respondents were entitled to avoid the
policy as the non-disclosed previous rejection was a “material fact” in the
proposal for fire insurance though the rejection referred to an entirely
different type of insurance from that which was being sought. Critically, we
had seen that the duty relates to facts which are known or presumed to be
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know in that they are within the constructive knowledge of the assured. See
Joel v Law Union [1908] 2 KB 863 at page 885. (Can’t disclose what you
don’t know). In this regard, the knowledge of the agent may be critical. We
had already dealt with this case but I am setting out the facts below so that
you’ll have one less case to go and look up.
One R. M. effected with the defendants an insurance upon her own
life in pursuance of a proposal in which she made certain statements,
the truth of which was not disputed. She signed a declaration that the
statements so made were to the best of her knowledge and belief
true, and by which she agreed that "this proposal and declaration"
should "be the basis of the contract" between her and the defendants.
Subsequently to the proposal, but before the execution of the policy,
certain questions contained in a printed form were put to her by a
doctor, who was instructed by the defendants to put these questions
with any necessary explanation and fill in her answers thereto, and to
report upon her health, and these questions were answered by her.
Many of these questions related to matters of health, the answers as
to which could only be matter of opinion, even if given by a medical
expert. Among these questions she was asked to give the names of
any medical men consulted by her, and to state when and for what
she consulted them; and whether, among other complaints, she had
ever suffered from mental derangement. The answer to the last-
mentioned question was in the negative, whereas in fact she had,
though not aware of the fact, been in confinement for acute mania;
and, in the answer to the first-mentioned question, as filled in by the
doctor, the name of one Dr. K. M., whom she had consulted for
nervous breakdown following influenza, was not mentioned. She
signed a second declaration, contained in the before-mentioned form,
wherein she declared, "with reference to the proposal for assurance"
on her life and her previous declaration, that the answers to the
foregoing questions were all true. This declaration did not state that
the answers were to form part of the basis of the contract. The policy
did not refer to the proposal or either of the declarations. The assured
subsequently committed suicide.
An action having been brought on the policy by the executrix of the

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 assured, the defendants resisted the plaintiff's claim upon the ground
that the accuracy of the answers to the above-mentioned questions
was made a condition precedent to the validity of the policy, and upon
the ground of misstatement and non-disclosure of material facts by
the assured. The doctor who put the questions to the assured was not
called as a witness at the trial. The jury found in answer to the
following questions as follows: - Did the assured fraudulently conceal
from the defendants that she had consulted Dr. K. M. for nervous
depression? Answer: - She foolishly but not fraudulently concealed
the fact. Was the fact that she had consulted Dr. K.M. for nervous
breakdown material for the company to know in considering whether
they would insure the assured’s life? Answer- Yes. Upon these
answers, judgment was entered for the defendants.
Held, on appeal, that, although the terms of the first declaration
signed by the assured did not exclude the possibility of the truth
of her answers to the questions referred to in the second
declaration being material to the validity of the policy, yet, having
regard to the nature and purpose of those questions, the truth of
the answers to them was not, on the true construction of the
documents, made part of the basis of the contract.
Held, further, that under the circumstances of the case, without the
evidence of the doctor who put the questions to the assured as to
what took place when he put the questions to her, and what
explanation of them he gave to her, the second declaration signed
by the assured as above mentioned was not per se sufficient
evidence to prove that there had been any such non-disclosure of
material facts by the assured as would, in the absence of fraud,
render the policy voidable.

Consequences of a policy being avoided for Non-Disclosure

Return of premium:

MacGillivray on Insurance states as follows:

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Premiums, like any moneys paid in return for a promise of a service or
benefit, are recoverable when paid for a consideration which has wholly
failed. This principle was expounded in typically clear language by the
progenitor of modern insurance law, Lord Mansfield in the early Maritime
Insurance case of Tyrie v Fletcher, [1777] 2 Cowp. 666, 668.
I take it there are general rules established, applicable to this question.
The first is; That where the risk has not been run, whether its not having
been run was due to the fault pleasure or will of the assured, or to any
other cause, the premium shall be returned; Because a policy of insurance
is a contract of indemnity. The underwriter receives a premium for running
the risk of indemnifying the insured, and whatever cause it be owing to, if
he does not run the risk, the consideration for which the premium or money
is put into his hands, fails and therefore, he ought to return it. Another rule
is that, if the risk of that contract of indemnity has once commenced, there
shall be no apportionment or return of premium afterwards. For though the
premium is estimated, and the risk depends upon the nature and length of
the voyage, yet, if it has commenced, though it be only twenty-four hours or
less, the risk is run; the contract is for the whole entire risk and no part of
the consideration shall be returned.

Thus, if a day after the risk has attached there is a breach of warranty, or
the assured’s interest ceases, the whole premium is earned and there can
be no return. These principles may be reflected in or modified or by the
express or implied terms of the contract.

Note that where the insurance is illegal for example there is no interest,
(statutory) an insured can recover nether the policy moneys, nor the
premiums paid. It is no excuse that he did not know the law or that he was
induced by the innocent misrepresentation of the insurer.

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ACCEPTANCE
What constitutes Acceptance?
What are the normal legal principles of contract governing acceptance of
an offer? For example, what of acceptance by post?
There cannot be an acceptance so long as the terms of the contract of
insurance are still under discussion: See Sickness and Accident
Assurance Association v General Accident Insurance Corpn. [1892] 19
R 977; 29 S.L.R. 836; where, notwithstanding the issue of a policy the
negotiations continued:
A policy was issued on November 16, 1888, to a tramway company against
third party liability for accidents for a year from November 17, 1888 to
November 17, 1889. The insurance contained the clause: “No insurance
shall be held to be effective until the premium due thereon shall have been
paid”. The secretary of the tramway company on November 19, 1888,
wrote to the insurers’ agent:
“I am duly in receipt of this policy and will send you a cheque for the
premium in the course of the next few days. There are one or two points
upon which I must confer with my directors. The date from which I desire to
be covered is from the 24 inst. Inclusive, and not the 17 th instant as stated
herein”.
He also requested that a particular firm of solicitors be given the conduct of
all legal business bearing upon the policy. The agent replied on November
20, “I shall be pleased to make the alteration in the policy required by your
directors”. On November 24, before the premium had been paid or a new
policy issued, an accident in respect of which the tramway company was
liable. On November 26, a meeting took place between representatives of
the two companies at which the accident was made known to the insurers’
representative who said they would not issue a policy “except from the
twenty-fourth”. The same day the tramway company’s secretary sent a
cheque for the premium to the insurers’ agent who replied:
I am much obliged for your favour enclosing the cheque for the third-party
risk from the 24 instant. Please return policy for alterations..
The question was whether the insurers were liable for the accident
occurring on the November 24, itself.

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The Inner House of the Court of Session affirmed the judgment of the Lord
Ordinary but on other grounds.
Held: no liability on the part of the insurer.
Nor is there complete acceptance while the premium remains to be fixed.
See Allis-Chalmers Co v Maryland Fidelity and Deposit Co [1916] 114
LT 433 (HL).
There is no contract until complete agreement has been reached and
nothing remains to be done by either party except to perform what has
been agreed.
The offer must be complete on its face and the acceptance must be in the
very terms of the offer. If the acceptance departs from the offer by
introducing a new term or the acceptance comes from insurers other than
those to who the offer was made, no contract arises even though a policy
may have been issued.
This really amounts to a counter-offer which in turn must be accepted to
complete the contract.
Note that Professor Birds in his text “Modern Insurance Law” suggests at
page 73 of the 4th Edition that despite the dicta in Allis Chalmers above,
that if certain critical material facts are agreed this would be sufficient to
bring an agreement into being. These he suggests are the amount of the
premium, the description of the subject matter, the nature of the risk and
the duration of the risk. This is because the proposed assured is deemed
to have applied for the usual form of policy issued by the insurer. See
General Accident Insurance Corp v Cronk [1901] 17 T.L.R. 233. (Proposal
form did not contain terms set out in the policy when it was received, and
the insured refused to pay premium. HELD: He was liable for the premium
– Policy is deemed to have been issued on insurer’s normal terms.
This problem is not likely to arise in practice as proposal forms invariably
say that the proposer’s offer is to the usual terms and conditions of the
insurer.
Methods of Acceptance
A. By formal acceptance: But even here there may be imposed a
condition which delays the formal acceptance; Thus, in Canning v
Hoare, [1885] 1 TLR 526, in a life insurance case, a letter formally

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 accepting the proposal contained a condition that no insurance was
to be effective until the premium had been paid.
B. By the issue of the policy: This generally indicates an irrevocable
acceptance of the offer. It is conclusive intimation that the insurers
have accepted the proposal. The insurer is bound by his acceptance
and cannot renege from it. See McElroy v London Assurance Corpn.
[1897] 24 R Court of Session and Pearl Life Assurance Co v Johnson
[1909] 2 KB 288 where the insurers were estopped by the issue of
the policy and the receipt of premiums from alleging that there was no
contract on the ground that no proposal form had ever been signed.
Note that notwithstanding the issue of a policy however, there is no
acceptance if
a. The assured does not treat the policy as accepted for example
by continuing to negotiate for the purpose of achieving an
alteration in the terms of the policy; or
b. Where the policy, as issued, departs from the terms of the
proposal by introducing a fresh term which therefore would
amount to a new offer.. The introduction of a fresh term shows
that the agreement is not yet complete since something still
remains to be done.
C. Where no policy has been issued before the loss, the receipt of the
premium and its retention by the insurer raises the presumption that
there has been a definitive acceptance of the offer.
D. By conduct of the Insurers. Here, although no policy has been issued
and no premium has been paid, if the facts show that the offer has
been accepted and there is a binding agreement, then the contract is
complete, and the insurer will be liable for the loss. Insurer cannot
then repudiate the contract or refuse to accept the premium and the
proposed insured cannot refuse to pay the premium. In the McElroy
case referred to above, Lord McLaren stated: “The company are not
bound to deliver a policy without payment of the premium. If they
accept a premium before delivering a policy, I should be disposed to
hold that the acceptance of the premium and the delivery of the
receipt therefor was sufficient to create the obligation to issue the
policy”.
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Effect of Acceptance Negotiations are complete: Parties are bound: Once
given, cannot be withdrawn except by mutual consent.
In the case of Canning V. Farquhar (1886) 16 QBD 727, where a proposal
for life insurance was accepted on December 14, on the terms that no
insurance was to take effect until the first premium was paid. The premium
was tendered on January 9, but four days previously, the insured had fallen
and suffered serious injuries from which he subsequently died. The court
observed that the insurer was not bound.
LOOKER AND ANOTHER V LAW UNION Non-Disclosure and No
complete acceptance. Per Acton J.
Insurance (Life) - Contract - Conclusion of - Proposal - Acceptance -
Intervening illness of Assured - Increase of Risk - Non-disclosure.

In a proposal to an insurance company for an insurance on his life the

proposer stated that he was free from disease or ailment, and declared that
the particulars in the proposal were true and that the proposal and
declaration should be the basis of the contract. The insurance company
wrote to the proposer stating that the proposal was accepted and that if his
health remained meanwhile unaffected, the policy would be issued on
payment of the first premium, and that the risk would not commence until
receipt of the first premium. Five days after receiving that letter the
proposer became ill, two days later his illness was diagnosed as
pneumonia, and four days later he died of that disease, no notice of his
illness having been given to the company. The day before the proposer's
death the company received by post a cheque which had been signed by
him three days before for the first premium, and they then sent him a
certificate, stating that the proposal had been accepted, and that a policy
would be delivered in due course. Owing to the insufficiency of the
proposer's bank account the cheque was not honoured. In an action by the
proposer's representatives against the insurance company for payment of
the insurance money or in the alternative for delivery of a policy:-

Held, that the plaintiffs could not recover, inasmuch as no contract had
been concluded between the proposer and the defendants, first,

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because, between the proposal and the alleged acceptance there had been
by reason of the illness of the proposer a material alteration in the risk, and,
secondly, because no notice of the proposer's illness which caused a
material change in the risk had been given to the defendants.

In Harrington v Pearl Life Assurance Company Ltd., (reported at) [1914]

Times Law Reports Vol. xxx, at page 614, one Mr. Bentley signed
proposals for the insurance of his life with the defendants an insurance
company and their medical officer certified that his life was a good one.
The proposals were accepted but came to an end owing to the premiums
not being paid within the prescribed time. Subsequently, on October 1
1912, Bentley made fresh proposals on the same terms, the policy to begin
from October 18, the applicant declaring that there had been no material
change in his health since examination. The fresh proposals were accepted
by the defendants who stated that the policies would be forwarded if the
premiums were received within 30 days. On November 4th Bentley
purported to assign one of the policies to the plaintiff and on November 6
was taken ill. On November 8 the plaintiff paid the first premium and later
on the same day Bentley died. On November 12, the plaintiff handed the
assignment to the defendant's agent. In an action on the policy, it was
submitted for the defendants that until the first premium was paid the
warranties as to the health of the insured remained in force.
It was held that there was no real assignment by Bentley to the plaintiff;
that the policy, if issued, would have been Bentley's and that as the
defendant would never, with knowledge of the facts, have issued the policy,
the action must fail,
This was an appeal by the plaintiff from a decision of A.T Laurence J. in an
action tried by him with a special jury. In this case the plaintiff Mr. Vijay
Harrington sued the defendants to recover 300 pounds alleged to be due
under a policy of insurance upon the life of R.W. Bentley. The plaintiff who
was an agent of the defendant company claimed an assignment of the
policy.
The defendants denied that any agreement was made to insure the life, or
that if it was, it was assigned to the plaintiff. They also pleaded that there
had been a concealment of material facts in regard to the health of the
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insured which rendered the contract of insurance void and further that the
plaintiff was himself an agent of the defendant and under their rules was
not entitled to be interested in the assignment of a policy prepared by him
procured by him. The plaintiff's case was that he had been acquainted with
Mr. Bentley for some time and also with a Mr. Goodwin who was an agent
for the defendants. In May 1912, Mr. Bentley through Mr. Goodwin, signed
a proposal for an insurance upon his life for £300 with the defendants. The
proposal having been made, Mr. Bentley was examined by one of the
defendant’s medical officers who certified that his life was a perfectly good
case and was he was placed in the first class. The proposal was accepted
by the defendants in a letter in which they stated that the policy would be
sent on receipt of the premium, provided that the latter was received
within ,30 days. A further proposal for an insurance for 200 pounds was
afterwards made by Bentley but eventually both these proposals came to
an end as the premiums had not been paid within the prescribed 30 days.
Subsequently, on October 1 1912 fresh proposals for insurance is for 300
pounds and 200 pounds were made by Mr. Bentley on precisely similar
terms, the policies to begin October 18, Upon the making of these
proposals there was no necessity for a further medical examination but the
applicant had to declare that there had been no material change in his
health since examination. That was done and the proposals were accepted
by the defendants who stated that the policies would be duly forwarded on
receipt of the premium, provided that it was received within 30 days. In the
early part of November, the plaintiff who had lent various sums of money to
Bentley was approached by him for a further loan and on November 4 an
assignment was drawn up by which Bentley assigned all his interest in the
policy for 300 pounds to the plaintiff, it being arranged that the premium
would be paid by him. On November 4, Goodwin called on the plaintiff for
the amount of the premium and it was paid by the plaintiff on that day.
Later, during the same day Bentley died. On November 12, the plaintiff
handed the assignment to the defendant's agent. The plaintiff's case was
that Bentley having died after the contract was made and after the premium
had been paid there was a binding contract with defendants.

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 The Concept of “Insurable Interest”.
What is meant by “Insurable Interest”?
I turn now to consider the topic “Insurable Interest”.
One characteristic of a contract of insurance is the existence of an
insurable interest.  What is an “insurable interest”?
An insurable interest is the most important feature of the insurance
contract. Essentially it means that the party to the insurance policy who is
the insured must have a particular relationship with the subject matter of
the insurance contract to which he/she is exposed. Absence of this
relationship renders the contract illegal, void or simply unenforceable. The
insurable interest varies depending on the nature of the risk and category
of insurance which can be assessed at the stage where the insurer is
prepared to give temporary cover by issuing what is known as a “Cover
Note”.
One definition of the concept is in the following terms:
“True, valid, determinable, and direct economic stake of an insurance
policy holder (or of the beneficiary of the policy) in the continued existence
or safety of the insured property or person”. Often stated as "an interest in
the outcome of a contingency other than that arising under the contract of
insurance," an insurable interest means that the policy holder (or the
beneficiary) must stand to suffer a direct financial loss if the event (against
which the insurance cover was bought) does occur. A tenant may not
necessarily have a direct insurable interest in the rented property but the
landlord may. An employer may not necessarily have such claim in the life
of an employee, but a married couple may in one another's life. To an
insurance company, an insurable interest is the basic reason for issuing a
legal insurance cover, to an insured (or beneficiary) it gives the legal right
to enforce an insurance claim.
This concept of insurable interest is not a general rule of law but is in fact a
statutory requirement, imposed by the ‘Life Insurance Act’ 1774 (which is
not confined to life insurance) and the ‘Marine Insurance Acts’ of 1746 and
1778, codified in the Marine Insurance Act 1906 (not in fact confined to
marine insurance). 
The 1906 Marine Insurance Act defines insurable interest as where a
person stands “in any legal or equitable relation to the adventure or to any
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insurable property at risk therein, in consequence of which he may benefit
by the safety or due arrival of insurable property, or may be prejudiced by
its loss, or damage thereto, or by the detention thereof, or may incur liability
in respect thereof”. In other words, a person who may suffer financial loss
from an event has an insurable interest in the property or interest which is
insured against that event. The event must create upon the insured a
commercial loss or liability, or it must affect a right of the insured which is
recognised and protected by the courts. 
NOTE 1: The requirement for an insurable interest is a feature of English
and Scottish law that is not present in all territories; even common law ones
such as the Isle of Man. Its application to modern commercial law has been
questioned, and it is under review). One effect of the need for an insurable
interest is to hinder the establishment of a secondary market in insurance
or reinsurance risks. Arbitrage possibilities are strictly limited and there can
be no effective forward trading of insurance risks in the capital markets.
This is one factor behind the existence of a pronounced insurance (or
underwriting) cycle. The absence of derivative instruments also makes the
cycle hard to manage.
Note 2: In the United States, the requirement for insurable interest is not
strictly observed. So, you can purchase someone’s life insurance pay them
cash now and collect the insured sum on their death. In fact, there seems
to be a growing market for such policies and the question may be asked
whether this is anything more than an assignment of the policy, (a chose-
in-action?) for consideration in the form of a present payment.
Question: How might this be affected where there was material non-
disclosure or misrepresentation?

Insurable Interest in Property Insurance

 For an insured to be deemed to have an insurable interest in property
insurance contract, therefore, he/she must a proprietary interest in the
subject matter in the form of a right to a legal or equitable interest or a right
under contract. Persons with contingent interests and beneficiaries of
property under a will are not deemed to have an insurable interest.
A person will therefore have an insurable interest in property in his
possession but cannot have an insurable interest in his debtor’s property
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unless a lien or similar right attaches to it. Neither can a person have an
insurable interest against an event if it does not seek directly to protect the
right to which it is legally entitled. Thus, a parent company has an insurable
interest in the shares of its subsidiary but not in the underlying assets or
profits of that company. 
In Macaura V. Northern Assurance Company Ltd [1925] AC 619, the
sole shareholder of a limited company who was also a substantial creditor
of the company insured in his own name timber owned by the company.
When the timber was destroyed by a fire, he claimed for indemnification
under the policy. The House of Lords observed that he had no insurable
interest in the property owned by his company.
See also on this point: Mark Rowlands Ltd V. Bernni Inns Ltd [1986] QB
211; [1985] 3 All ER 473, [1985] 2 Lloyds Rep 437, [1985] 3 WLR 964,
[1986] ANZ Conv R 501
Coram: Kerr LJ
The plaintiff owned the freehold and had let the basement to the defendant.
The plaintiff insured the building. The defendant covenanted to pay to the
plaintiff an insurance rent equal to the proportionate cost of insuring the
part of the building occupied by the defendant and did pay such rent. The
building was destroyed by fire caused by the negligence of the defendant.
The insurer paid the plaintiff the sum due under the policy and brought an
action in the name of the plaintiff to recover its outlay from the defendant.
The defendant was not named as a co-insured in the relevant insurance
policy. The issue came to whether the tenant had an interest in the
landlord’s fire insurance policy and an insurable interest in the premises
which were destroyed by fire.
Held: ‘this ancient statute’, Section 2 of the 1774 Act (which makes it
unlawful not to name, as the tenant was not named, ‘the person interested’
in a policy to which the Act applies) had no application to indemnity
insurance but only to insurances which provide for the payment of a
specified sum upon the happening of an insured event. Lucena v
Craufurd was the classical definition of an insurable interest.
Kerr LJ said: ‘The intention of the parties, sensibly construed, must
therefore have been that in the event of damage by fire, whether due to
accident or negligence, the landlord’s loss was to be recouped from the
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insurance moneys and that in that event they were to have no further claim
against the tenant for damages in negligence. Another way of reaching the
same conclusion, on which Mr. Harvey also relied, is that in situations such
as the present the tenant is entitled to say that the landlord has been fully
indemnified in the manner envisaged by the provisions of the lease and
that he cannot therefore recover damages from the tenant in addition, so as
to provide himself with what would in effect be a double indemnity.
Although the receipt of insurance moneys by an innocent party is of course
normally no defence to a wrongdoer (see Bradburn v. Great Western
Railway Co. (1874) LR 10 Ex 1), Mr. Harvey relied on a number of
passages in Parry v. Cleaver [1970] AC 1, 13 to show that considerations
of ‘justice, reasonableness and public policy’ (per Lord Reid) may require
exceptions to this general principle. I do not think it necessary to elaborate
upon this line of argument in the present case save to say that I accept it
and regard it as complementary to the conclusion which is to be derived
from the construction and effect of the terms of the lease itself, as indicated
above.’ and (after citing Canadian authorities) ‘In each of the cases the
minority concluded that the absence of any provision expressly or impliedly
exonerating the tenant from negligence was fatal, but the majority view was
that there was no need for any such provision, since it was sufficiently clear
from the terms of the leases and the landlords’ covenant to insure against
fire, including fire caused by the tenants’ negligence, that the landlord could
not maintain an action for negligence against the tenants, and that the
landlords’ insurers’ right of subrogation could therefore equally not be
enforced.’

Insurable Interest in Life Insurance

The insurable interest in a life insurance is the life of the insured. In the
case of Dalby V. India And London Life Assurance Co. [1854] 15 Cb
365, the court observed that the insurable interest must exist at the time the
policy is effected and need not to continue thereafter. Unlike the insurable
interest in property which requires the insurable interest to exist at the
commencement and execution of the policy to the occurrence of the loss,
the court in DALBY stated that in life insurance the interest should exist at
the time of execution of the agreement and need not exist at the

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occurrence of the death. The consequence of this has led to the treatment
of the life insurance policy as an asset that could be used as a security or
guarantee.

NOTE: Spouses have an unlimited insurable interest in each other’s lives.

 Griffins V. Fleming [1909] 1 KB 805

Just as an aside, but to complete our understanding of this topic as it

affects life insurance, it will be recalled that in the Prudential case, Channell
J. had laid out criteria which would determine whether a contract was a
“contract of insurance” It will be recalled that one of the criteria in that case
was the need to have an interest adversely affected. This principle was
criticized in Gould v Curtis (1913) 3 KB 84 (a life insurance case) per
Buckley LJ, at 95, where he pointed out that whilst it is true of fire and
marine insurance, (that is, to have an interest adversely affected) it is not
necessarily so in the case of life insurance, particularly if the life policy also
contains endowment provisions. Scottish Amicable Heritable Securities
Association Ltd v Northern Assurance Co 1883 11 R (Ct of Sess) 287,
per Lord Justice Clerk (Moncrieff): ’It is a contract belonging to a very
ordinary class by which the insurer undertakes, in consideration of the
payment of an estimated equivalent beforehand, to make up to the assured
any loss he may sustain by the occurrence of an uncertain contingency. It
is a direct, not an accessory obligation like that of a surety, and is fulfilled
and terminated by payment of the loss. (See also Law v London
Indisputable Life Policy Co (1855) 1 K & J 223 (life insurance) per Wood
V-C, at 228; Daff v Midland Colliery Owner’s Mutual Indemnity Co
(1913) 6 BWCC 799, HL (employer’s liability insurance) per Lord Moulton,
at 820). Nevertheless, the rest of Prudential was upheld in all aspects in
Gould.

Effect if no insurable Interest

A contract without insurable interest is null and void for all purposes,
though in practice void contracts are often performed as if they had full
legal effect. 

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Does the insured have to disclose the nature of the insurable interest
that he has in the subject matter of the insurance?

In McKenzie v Whitworth [1875] LR E497.Exch 142, in speaking about a

marine insurance policy, Bramwell B. stated: “The rule is that you must
specify the subject matter of insurance, not your interest in it”.
See also Ogden v Montreal Insurance Co [1853] 3 C & P. 497. It was
held: Where a mortgagor is insuring in the name of a mortgagee, he need
not disclose the amount of the mortgage. See further: Keifer v Phoenix
Insurance Co [1903] 1 Com LR (Can) Held that a person insuring need not
disclose that he is not the sole owner of the subject matter of the insurance.
Note that most of the basic constructs/concepts in modern insurance law
may be traced to the United Kingdom Marine Insurance Act of 1906. That
Act provided in section 26(2) that:
“The nature and extent of the interest of the assured in the subject matter
need not be specified in the policy”.
It seems clear therefore that all that is necessary is that the description
which is given is adequate and sufficient to cover any interest which an
assured may have in the subject matter of the policy and it does not matter
whether that interest is as owner or otherwise. So in the case of London &
North Western Rly Co v Glyn the judge, Crompton J said: I think that
notwithstanding the condition [i.e. as to the declaration of goods in trust] an
insurance simply on “goods” would have covered the plaintiff’s interest as
carriers in the goods”.
It also does not matter whether the assured has different interests in the
property assured. For example, in a sale of property where the vendor is
giving the purchaser a mortgage, and the vendor has insured the property.
Before the sale is finalized but after the purchaser has taken possession
and could himself have insured, the building burns down. Can the vendor
recover from the insurer under a property policy? Yes, he can because he
has an interest as mortgagee of the property.
Exceptions to general rule that insurable interest need not be stated:
1) Express Condition to this effect in proposal form. The insurer may
make it a special condition that the policy shall not cover certain kinds

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 of interest unless the insured shall specify them; e.g. where goods
are held in trust (e.g. bailment) or on commission
2) Where the interest is against prospective profits or against
consequential loss, e.g. interest in rental income from property owned
by the insured. Note the property is covered by the insurance. But
what if the interest which is seeking to be covered is rental income
from the property? While the general rule is that a mere “spes” or
expectancy cannot be insured as that would be in the nature of a
gambling contract which the law will not protect, this type of
expectancy is well recognised in insurance law.
3) Where the interest is, from the precarious nature of the subject
matter. If the nature of the risk is so precarious or unusual, may also
need to be disclosed. {See Commercial Union Assurance Co v
Anderson (1885) LJQB 146 CA}. In Steyn v Malmesbury Board of
Executors and Trust and Assurance Co. [1921] CPD 96, it was
held that where the assured was a tenant at sufferance of the
premises where the insured machinery was situated, the court was of
the view that that fact should be disclosed.

When does the insurable interest have to subsist?

If an insurable interest should have existed at the time the policy was
effected and it did not, then the policy is void ab initio. This is the typical
property insurance policy.
Pursuant to the UK Marine Insurance Act section 6(1), 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 effected.
Thus, a carrier of goods may insure goods to be shipped over the “next
year”.
What of a tradesman or storekeeper who insures his stock in trade?
What about persons who operate as “bailees for value” such as warehouse
keepers?
These really represent insurance of classes of goods rather than specific
goods themselves.

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According to legal precedents:
(1) In life insurance, an insurable-interest must be present when the
insurance policy is taken, but not necessarily when a claim occurs; for
example, anyone who takes a life insurance policy on his or her spouse,
and continues to pay premium even if the marriage breaks up, is entitled to
collect death benefits under the policy,
(2) in marine insurance, an insurable-interest must be present when a claim
occurs, but not necessarily when the policy is taken; for example, a supplier
may obtain a blanket policy for the goods to be shipped in a year but must
show that the goods were actually shipped when making a claim for loss or
damage, and
(3) in most other types of insurance (such as fire or auto insurance), an
insurable interest must be present, both at the time the policy is taken and
when a claim occurs; for example, a homeowner who sells the house on
which fire insurance was taken, cannot collect on it in case of a fire.
Insurable interest is one of the foundations of insurance because, in its
absence, insurance would be no different from gambling and (even if legal)
would not constitute a binding agreement.
Therefore, you have an insurable interest in any property you own or any
property that is in your possession. Expressed another way, a person has
an insurable interest in something when loss or damage to it would cause
that person to suffer a financial loss or certain other kinds of losses.

Examples of Insurable Interest

If the house you own is damaged by fire, the value of your house has been
reduced by the damages sustained in the fire. Whether you pay to have the
house rebuilt or you end up selling it at a reduced price, you have suffered
a financial loss resulting from the fire. By contrast, if your neighbor's house,
which you do not own, is damaged by fire, you may feel sympathy for your
neighbor and you may even be emotionally upset, but you have not
suffered a financial loss from the fire. You have an insurable interest in your
own house, but in this example you do not have an insurable interest in
your neighbor's house.
Let’s look at some of the most common situations where insurable interest
exists and how it is defined.
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Insurable Interest – Immediate Family
The definition of insurable interest among family members is, A substantial
interest engendered by love and affection if closely related by blood or by
law. This definition is more lenient when trying to determine the amount of
life insurance one person can buy on another person, because their loss
could result in emotion damages, not just financial ones. Family members
include spouses insuring one another, children insuring their parents (and
vice-versa), grandparents insuring their grandchildren, and brothers and
sisters who have an insurable interest on one another. Beyond that, this
definition of insurable interest does not include cousins, nieces/nephews,
aunts/uncles, stepchildren/stepparents and other in-laws. These relatives
would have to prove insurable interest on the financial relationship
definition below.

Insurable Interest – Financial Relationship

The definition of insurable interest with respect to a financial relationship is,
“an interest based upon a reasonable expectation of pecuniary advantage
through the continued life, health and bodily safety of another person, and,
consequently, loss by reason of their death or disability”. Simply put, a
person or organization can buy a life insurance policy on the life of another
person if the value of the person being insured can be shown to be greater
than the value of the insurance purchased. For example, a creditor, like a
bank, can buy a life insurance policy on a debtor up to the value of the
outstanding loan. Should the debtor die, the creditor’s loan is repaid.
Another example would be a life and/or health insurance policy on the
company’s CEO or other key employees, where it can be shown that the
loss of this key employee would cause serious financial loss to the
company. Only where it can be shown that due to a financial relationship,
like employer/employee, creditor/debtor, business partners, etc. would
there exist an insurable interest and a life insurance policy could be
purchased.
Living Benefits Insurance – the laws around insurable interest are not
only applicable to life insurance policies. They also include health
insurance or living benefits policies. The most common types of health
insurance purchased would be critical illness insurance on a key person or
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a specialized disability insurance policy called Key Person Disability
Insurance or a Disability Buy/Sell Insurance.

The Jamaican Insurance Act section 96

Note carefully the provisions of the Jamaican Insurance Act, section 96
which deal with Insurable Interest
96.-(1) For the purposes of this Act, but without restricting the
meaning of the expression "insurable interest", the following
persons shall be deemed to have an insurable interest in the
life of another person as follow-
(a) a parent or guardian of a child who is under eighteen years
of age, in the life of the child;
(b) a husband, in the life of his wife;
(c) a wife, in the life of her husband;
(6, a grandparent of a child who is under eighteen years of age,
in the life of his grand-child;
(e) any person, in the life of another upon whom he is wholly or
partly dependent for support or education;
(f) a company or other person, in the life of an officer or
employee thereof; and
(g) any person who has a pecuniary interest in the duration of
the life of another person, in the life of that person.
(2) This section applies to policies whether effected before or
after the appointed day.

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