The Doctrine of Insurable Interest in Property Insurance

Stuart-Smith LJ:

‘The learned Judge concluded that Davy (and ICI) had an insurable interest in the plant:

Mr Havelock-Allan [counsel for Deepak] seeks to impugn that finding. He contends that a party, having no proprietary or possessory interest in a property, does not have an insurable interest in that property merely because loss of or damage to that property may result from a breach of contract or duty on its part giving rise to a liability in damages to the owner of the property. Alternatively, if the contractor or sub-contractor engaged in connection with the construction of a building ever has an insurable interest in the building itself, he does not have such an interest after construction of the building has been completed merely because the building may suffer loss or damage thereafter as a result of some breach of contract or duty on his part.

Mr Wilmot-Smith for Davy (and Mr Mowschenson on behalf of ICI) submit that there was no reason why Davy should not have an insurable interest in the plant which existed during the period of construction the commissioning (which was completed on 31 Jan 1992) and beyond 10 Aug 1992 when the construction of the plant was complete.

Thus the question to be determined is whether Davy would have had an insurable interest in the plant itself. In the absence of such interest no question could arise of Davy insuring the plant or Deepak doing so on Davy’s behalf. In our judgment, the answer to this issue is not complex. Davy may well have had an insurable interest in the plant whilst it was under construction and commissioning…

In our judgment Davy undoubtedly had an insurable interest in the plant under construction and on which they were working because they might lose the opportunity to do the work and to be remunerated for it if the property or structure were damaged or destroyed by any of the “all risks”, such as fire or flood. Thereafter Davy would only suffer disadvantage if the damage to or destruction of the property or structure was the result of their breach of contract or duty of care. In order to protect the contractor and sub-contractors against the risk of disadvantage by reason of damage or destruction of the property or structure resulting from their breach or contract or duty they would, in accordance with normal practice, take out liability insurance or, in the case of architects, professional indemnity insurance. We consider Mr Havelock-Allan’s submission is well founded; what they cannot do is persist in maintaining an insurance of the property or structure itself. Two dates are critical. The commissioning of Deepak’s plant was completed on 31 Jan 1992. Davy continued to work on the plant thereafter to rectify construction defects but, by 10 Aug 1992, all known construction defects had been rectified and rectification work had been inspected. At the latest the construction of the plant was complete by 11 Aug. Thereafter, with effect from 11 Aug 1992, Deepak transferred the insurance of the plant from the Marine-cum-Erection Policy (under which Davy and “other Contractors and Sub-contractors appointed from time to time had been named as co-assured) to the conventional property insurance policy under which the existing ammonia plant was already insured (ie the “Fire Policy”). Davy was not named as a co-insured under this policy. Thus by the time the insurance of the plant was switched to the “Fire Policy”, Davy was no longer bound to be prejudiced if the plant was damaged or destroyed by an insured peril.

Accordingly, we must differ from the approach adopted by the [trial] Judge. He held that he could see no reason why Davy (and ICI) should not have an insurable interest in the plant so long as they were arguably responsible in some way for damage to it. He posed the question:

They could, of course, do so. This would be by means of liability insurance. Even if Davy (and ICI) or any of the sub-contractors had been named in the subsequent “Fire Policy” they would not have been covered in respect of their breach of contract or duty under that policy. We therefore reverse the Judge’s findings on this issue and hold that Davy had no insurable interest in the plant on 30 Oct 1992, the date of the explosion, giving rise to Deepak’s claims.’

Waller LJ:

‘There are various points to make on Deepak. First, so far as the all risks policy during the currency of the contract period was concerned, an insurable interest even on property seems to go beyond a “legal or equitable” interest in the property. A sub-contractor’s insurable interest on the judgments in Deepak flows from the pecuniary loss that he will suffer from the loss of the opportunity to do work if the plant was destroyed by fire. Secondly Deepak recognises unsurprisingly that a sub-contractor has an insurable interest in his own liability for negligence which he can also insure. But third, in Deepak it was common ground that if Davy were co-insureds they would have a complete answer to the subrogated claim even if damage was due to their negligence. It was thus unnecessary for the Court of Appeal to analyse or deal with how if Davy as sub-contractor was a co-insured it had an insurable interest in the whole plant and thus how as a co-insured Davy would have an answer to any subrogated claim if the explosion had occurred during the period of construction, unless Davy’s insurable interest during this period included Davy’s liability in negligence or in contract. In the judgment reference is made to Petrofina (UK) Ltd v Magnaload Ltd [1983] 2 Lloyd’s Rep 91; [1984] 1 QB 127; Stone Vickers Ltd v Appledore Ferguson Ship Builders Ltd [1991] 2 Lloyd’s Rep 288 and National Oil Wells (UK) Ltd v Davy Offshore Ltd [1993] 2 Lloyd’s Rep 582. No disapproval is expressed of those decisions; it is simply said that “in each case the insurable interest subsisted during construction and commissioning.” Those decisions were themselves at first instance being respectively of Lloyd J, Mr Anthony Colman QC sitting as a Deputy Judge of the High Court and Colman J as he then became. Petrofina was however also approved in the Court of Appeal (save in one immaterial respect) in Mark Rowlands Ltd v Berni Inns Ltd [1986] 1 QB 211. They have been followed in Hopewell Project Management Ltd v Ewbank Preece Ltd [1998] 1 Lloyd’s Rep 448 a decision of Mr Recorder Jackson QC (as he then was). Petrofina, Stone Vickers, and National Oil Wells were also extensively analysed and approved so far as material in the judgment of Brooke LJ in Co-operative Retail Services Ltd v Taylor Young Partnership & ors 74 Con LR 12 or Court of Appeal transcript 4 July 2000. That judgment was itself approved when the case went to the House of Lords [2002] UKHL 17.

These decisions hold that persons in the position of sub-contractors have an insurable interest in the work or plant as a whole; the definition of that interest relied on in those authorities comes originally from a judgment in the Canadian Supreme Court, Commonwealth Construction Co v Imperial Oil (1976) 69 DLR (3rd) 558 which in terms recognised the insurable interest of sub-contractors “having its source in the very real possibility (“may”) of liability, considering the close relationship of the labour performed by the various trades under their respective agreements….”. They held further that sub-contractors can recover from insurers the full value of the works holding (where appropriate) the balance beyond their interest in trust for the owner. They further held most relevantly that sub-contractors can defeat a subrogated claim based on the sub-contractor’s liability in negligence to the owner because the insurers were pursuing a claim in relation to the loss covered by the policy.

MacGillivray on Insurance Law 10th Edition is critical of these decisions and indeed suggests Deepak has added force to the criticism [see para 1–155 to 1–157]. It may be as reflected in paragraph 1–159 of MacGillivray that the true answer is that the risk of being held liable for causing damage to property, will not by itself create an insurable interest in the property, but if there is a further legal link that interest may also be embraced within the subject of the insurance. I suggest that the question truly is one of construction. It may be more usual to cover liability with liability insurance. But there is no hard and fast rule and where the subject of insurance is intended to be and can properly be construed as embracing the insurable interest in relation to liability, there is no reason not to so construe it. The point is exemplified by the fourth point I make on Deepak by reference to the views of Stuart-Smith LJ on the “fire policy”. The fact that you may have an insurable interest relating to liability does not necessarily mean that that interest will be covered by a policy identified by reference to a specific subject matter. If the insurance policy is simply taken out on the plant, as one would expect from a “fire policy”, post-construction period, such a “fire policy” may not be construed to embrace the only insurable interest which Davy has. But that should be contrasted with the position where it is intended during the construction period that liability will be embraced.

The final point to make on Deepak is that I would suggest that the circumstances in Deepak were such that the court may have been more reluctant than in many cases to hold that such insurable interest as Davy had was embraced by the subject of the policy. The decision is not authority for any broader proposition such as it being impossible to cover the insurable interest of liability by virtue of a policy on property if the terms of the policy embrace the insurable interest.