Insurable Interest

Lecture 3
Insurable Interest
History and Rationale:-Scholarly authorities and historians have advanced diverse
reasons behind the principle of insurable interest. The two prominent reasons are the
prohibition of wagering agreements under the GAMING ACT 1845 and the likelihood
of fraud where an insured had no interest in the insurance subject. Section 18 of the
GAMING ACT renders a contract made by way of gaming or wagering null and void.
The Preamble of MARINE INSURANCE ACT 1745 sets out the historical rationale
behind the principle of insurable interest in the following terms:
“It hath been found by experience, that the making of insurances, interest or no
interest, or without further proof of interest than the policy, hath been productive
of many pernicious practices, whereby great numbers of ships, with their cargoes,
have ...been fraudulently lost or destroyed”
Insurable Interest
• The Marine Insurance Act 1745 rendered void marine policies that
were made “interest or no interest” or which provided that the policy
itself was conclusive proof of interest. The Marine Insurance Act 1745
was repealed by the Marine Insurance Act 1906
• Further under the LIFE ASSURANCE ACT 1774, Section 1 requires
policy holders to have insurable interest in the life assured.
The above cited statutes have not defined insurable interest and
thus leaving the task to the courts.
What is Insurable Interest?
• Insurable interest means that the insured must have a particular relationship
with the subject matter of insurance. If the insured has no insurable interest
in the subject matter, the contract is illegal, void or simply unenforceable
depending on the type of insurance. See;
Lucena V Crauford (1806) 2 BOS & PNR 269 p302
Nyimba v Nico 2017
• The requirement of insurable interest was introduced on public policy
consideration.
• Before its introduction, people were making wagers in the form of insurance
policies on the lives of people with whom they had no connection. This was
against public policy as it could lead to murder.
What is Insurable Interest?
• In 1774 the English Parliament passed the Life Assurance Act 1774 to
defeat these wagers. This act is part of Zambia’s laws.
• History and Rationale:-Scholarly authorities and historians have
advanced diverse reasons behind the principle of insurable interest.
The two prominent reasons are the prohibition of wagering
agreements under the GAMING ACT 1845 and the likelihood of fraud
where an insured had no interest in the insurance subject. Section 18
of the GAMING ACT renders a contract made by way of gaming or
wagering null and void. See; MARINE INSURANCE ACT 1745
Insurance and Wager
• Insurance resembles a wager in that both contracts contemplate the payment of a sum of
money on the happening of future uncertain event.
• Wagering contract itself creates the risk of loss while an insurance contract is made to guard
against the consequences of a loss. Wagering contacts are deemed to be gambling contract.
• The presence of an insurable interest distinguishes an insurance contract from a wager (bet
or gamble) see; Wilson v Jones [1867] 2 LR Exch 139
• A gambling contract was defined in Carlill v Carbolic Smoke Ball Company [1893] 1 QB 256
as a contract in which neither of the contracting parties had an interest. Held: that a wager
was a contract “by which two persons professing to hold opposite views touching the issue
of a future uncertain event, mutually agree that, dependent on the determination of that
event, one shall win from the other... a sum of money or other stake; neither of the
contracting parties having any other interest in that contract other than the sum or stake he
will so win or lose”. see; Hawkins J judgment
What is Insurable Interest?
• Under the LIFE ASSURANCE ACT 1774, Section 1 requires policy
holders to have insurable interest in the life assured.
in Lucena V Crauford (1806) 2 BOS & PNR 269 insurable interest was
defined as:
“A right in the property, or a right derivable out of some contract about
the property, which in either case may be lost upon some contingency
affecting the possession or enjoyment of the party.”
Classification of Risk
• Risk is a chance or possibility that something might occur:
• The risk in the insurance contract is an unknown event in terms of its
occurrence and non-occurrence, or at least in terms of the date of its
occurrence. Thus an event that has already occurred or was known at
the time of its occurrence is almost not a risk in the insurance sense
and cannot be insured.
Essentials of Insurable Interest
• The essentials of insurable interest may be summarised in three
propositions;
(a) There must be property, life or limb, rights, interest or potential liability
devolving upon the insured capable of being insured against.
(b) Such property, life or limb, right, interest or potential liability must be the
subject matter of the insurance; and
(c) The insured or policy holder must bear some relationship recognised by
law, to the subject matter whereby he/she would benefit by the safety of the
property, life or limb, rights interest or freedom from liability, and he/she
would be prejudiced by any loss, injury, damage or creation of liability.
Essentials of Insurable Interest
• The are two essential requirement of insurable interest;
• The first of these reasons has to do with the moral hazard. When the
insured has insurable interest in the property subject of insurance,
he/she will be less tempted to destroy the property insured.
• Secondly – the concept of indemnity in insurance law implies that the
insured cannot recover more than the loss. If the insured has suffered
no loss, it would be inequitable to unjust enrich him/her.
Insurable Interest In Lives
• Section 1 of the LIFE ASSURANCE ACT 1774 requires a policy holder to have interest in the life
assured. The section as construed in the Dalby v India And London Assurance Co (1854) 15 CB 365
means that the insurable interest in the life assured is required only when the policy is taken out
and not when the loss occurs.
Held; that the requirement of insurable interest imposed by the 1774 Act must be shown to exist at
the date of effecting the policy only and that life could not be equated with indemnity insurance. A
man has an insurable interest, inter alia, in his own life, in the life of his wife and in the life of anyone
who owes him money up to the amount of the debt. So long as the person for whose benefit the
policy is taken out has that insurable interest at the time the policy is taken out, it is a valid insurance
and may be kept up by the payment of periodic premiums although the debt meanwhile is repaid.
The 1774 Act does not offer any indication as to when the insurable interest must exist. However,
Dalby v India and London Life Assurance Company, established that the interest only had to exist at
the inception of the contract and not at the time of loss.
Insurable Interest In Lives
• An individual has an insurable interest in his own life to an unlimited
amount. A married person has an insurable interest in the spouse’s
life. A fiancée has no insurable interest in the life of his/her intended
spouse.
• The rationale behind spousal insurable interest is well explained by
Farwell J in Griffiths v Fleming (1909) 100 LT 765 “...husband is no
more likely to indulge in ‘mischievous gaming’ on his wife’s life than a
wife on her husband’s.
Insurable Interest In Lives
• A parent does not have an insurable interest in the life of a child.
Children have no legal duty to maintain their parents and parents are
said to have no insurable interest in the life of their offspring on the
grounds of natural affection.
• In the case of Harse v Pearl Life Assurance Co Ltd [1904] 1 KB 558 an
adult child insured the life of his mother who cooked and kept house for
him. The insurance was said to be for the purpose of funeral expenses.
The court found that the policy was void for lack of interest. There was
no obligation for a son to incur financial expense in burying his mother
(the council would cover such expenses, if necessary) and there was no
legal obligation for the mother to keep house for her son.
Insurable Interest In Lives
In Halford v Kymer (1830) 10 B & C 724
A father took out a policy of life insurance on the life of his son. When
the insurance company refused to pay on the grounds that the contract
was void for lack of insurable interest, the father argued that he had an
insurable interest because if his son died his chances of receiving care
and maintenance would be reduced. The judge stated that, as the
parish was bound to maintain him, it was a matter of indifference to
the father whether he were maintained by the parish or by his son. He
ruled that the father did not have an insurable interest in the life of his
son
Insurable Interest in Property
• Insurance generally requires the assured to have an interest in the insurance other
than that created by the contract itself or otherwise he will incur no loss through the
happening of the event insured against.
• A shareholder has no insurable interest in the assets of a company. See; Macaura v
Northern Assurance Co Ltd (1925) All ER Rep 51
This is a leading authority on the need for an insured to have a proprietary right in the
insured property. In this case although Macaura was the only shareholder in a limited
company which owned a substantial quantity of timber the insurance claim by Macaura
was disallowed on the basis that he lacked insurable interest in the timber. In the words
of the court the plaintiff “stood in no ‘legal or equitable relation to’ the timber at all”
It must be pointed out that the overriding consideration in the MACAURA case is the
separate and legal distinct personality of a company from its members.
Insurable Interest in Property
• In a sale of goods contract, once the buyer rejects the goods
delivered as not conforming to the contract, he/she will not be
deemed to have insurable interest and can, therefore, not insure the
property in his name. See;
Livio Carli & Others v Satem & Mohamed Bashanifer & Others (1959)
EALR 701
Datoo & Another v Estate Duty Commissioner (1967) EALR 208 (High
Court of Tanzania)
Insurable Interest In Employer-employee
Relationships
• An employer may have an insurable interest in the life of an employee
and conversely, in the life of his or her employer.
• An employee working under a fixed term of contract has an insurable
interest in the employer’s life up to the value of the wages to be paid
during that term. See;
Hebdon v West (1863) 3 B & S 579
Wainwright v Bland
Insurable Interest In Employer-employee
Relationships
• Cases such as Hebden and section 3 of the Life Assurance Act 1774
seem to align policies of life insurance with indemnity contracts, in
that the amount that the insured can recover appears to be linked to
the value of his loss. However, this is not correct. The sum paid under
a contract of life insurance is dependent on the value of the interest
when the policy was taken out, not on the actual amount that the
insured loses as a result of the death or accident.
Insuring On Behalf Of Third Parties

• Insuring on behalf of third parties is a common feature under the

motor insurance e.g. cover is extended to the insured’s spouse or
child or any other licensed driver authorised by the insurer to drive
the insured’s vehicle. The leading case authority is Williams V Baltic
Insurance Association Of London Ltd [1924] 2 K.B 282. The Plaintiff
had effected a motor policy on his car which extended cover to third
parties namely licensed personal friend or relative of the insured. The
plaintiff’s sister whilst driving the plaintiff’s car was involved in an
accident and was liable for damages for injuries caused to third
parties. The court held that the plaintiff’s sister was covered by the
policy and in the words of
Insuring On Behalf Of Third Parties
• Roche J.:
“The plaintiff is the insured in the sense that he is the person who
effected the insurance, but it is an insurance for himself and other
persons mentioned in clause 2 and accordingly the company’s
contract is to indemnify all such persons in the event of those things
happening against which the insurance is effected”