The House of Lords upheld the insurer’s defence on the basis that the Commissioners’ duty was to take care of the ships only after their arrival. Since the ships had not yet arrived in England at the time of loss, the Commissioners did not have an insurable interest. A panel of judges was summoned to advise the House on the issues raised; notably, Lawrence J offered his perception, sometimes referred to as ‘the moral certainty’ or the ‘factual expectancy’ test, of what constitutes ‘insurable interest’.

Chambre J: [p 298] …To constitute an interest, such as that which in the declaration is averred to be vested in the plaintiffs as Commissioners under the Act, I presume it must be necessary to show that the ships and goods at the time of the sailing, or at least before or at the times of the losses, had become the objects of the plaintiffs commission. If they were not the objects of their commission, I have no conception in what way they could have an interest in them as Commissioners.

Lawrence J: [p 300] …It is first to be considered what that interest is, the protection of which is the proper object of a policy of assurance. And this is to be collected from considering what is the nature of such contract.

[p 301] …that insurance is a contract by which the one party in consideration of a price paid to him adequate to the risk, becomes security to the other that he shall not suffer loss, damage, or prejudice by the happening of the perils specified to certain things which may be exposed to them.

[p 302] …That a man must somehow or other be interested in the preservation of the subject matter exposed to perils, follows from the nature of this contract, when not used as a mode of wager, but as applicable to the purposes for which it was originally introduced; but to confine it to the protection of the interest which arises out of property, is adding a restriction to the contract which does not arise out of its nature…A man is interested in a thing to whom advantage may arise or prejudice happen from the circumstances which may attend it… And whom it importeth, that its condition as to safety or other quality should continue: interest does not necessarily imply a right to the whole, or a part of a thing, nor necessarily and exclusively that which may be the subject of privation, but the having some relation to, or concern in the subject of insurance, which relation or concern by the happening of the perils insured against may be so affected as to produce a damage, detriment, or prejudice to the person insuring: and where a man is so circumstanced with respect to matters exposed to certain risks or dangers, as to have a moral certainty of advantage or benefit [emphasis added], but for those risks or dangers he may be said to be interested in the safety of the thing. To be interested in the preservation of a thing is to be so circumstanced with respect to it as to have benefit from its existence, prejudice from its destruction. The property of a thing and the interest devisable from it may be very different: of the first, the price is generally the measure, but by interest in a thing every benefit and advantage arising out of or depending on such thing, may be considered as being comprehended.

[p 321] …Since the 19 Geo 2, it is clear that the insured must have an interest, whatever we understand by that term. In order to distinguish that intermediate thing between a strict right, or a right derived under a contract, and a mere expectation or hope, which has been termed an insurable interest, it has been said in many cases to be that which amount to a moral certainty. I have in vain endeavoured, however, to find a fit definition of that which is between a certainty and an expectation; nor am I able to point out what is an interest unless it be 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,

[p 323] …That expectation, though founded upon the highest probability, was not interest, and it was equally not interest, whatever might have been the chances in favour of the expectation.

[p 324] …If moral certainty be a ground of insurable interest, there are hundreds, perhaps thousands, who would be entitled to insure. First, the dock company, then the dock master, then the warehouse keeper, then the porter, then every other person who to a moral certainty would have anything to do with the property, and of course get something by it.

Notes

[p 510] …Neither the words of any statute since 1845 nor any judicial pronouncement suggest that there should be a category of contracts of insurance which were not wagering contracts but which, on account of the absence of an ‘insurable interest’, should not be enforceable. Accordingly, in approaching the construction and application of s 5 of the Marine Insurance Act it is, in my judgment, right to proceed on the assumption that, provided the assured has sufficient interest in the subject matter of the insurance to prevent his contract being a wagering contract, he is entitled to enforce that contract.

The starting point for consideration of the meaning of ‘insurable interest’ under s 5(1) is, clearly, s 5(2). This does not provide an exhaustive definition, but it does identify three characteristics which the presence of an insurable interest would normally require: (a) the assured may benefit by the safety or due arrival of insurable property or be prejudiced by its loss or damage or in respect of which he may incur liability; (b) the assured stands in a legal or equitable relation to the adventure or to any insurable property at risk in such adventure; (c) the benefit, prejudice or incurring of liability referred to at (a) must arise in consequence of the legal or equitable relation referred to at (b).

…That which brings about the benefit to the assured from the safety or due arrival of the property and that which brings about the possibility of his prejudice from its loss, damage or detention or his incurring liability in respect of such property must, therefore, be the ‘legal or equitable relation’ to the adventure or property in which the assured stands. That must involve an investigation of whether there have been conferred on him any rights recognised by law or in equity or imposed on him any obligations so recognised in respect of the adventure or the insured property the enjoyment of which rights may be lost or interfered with or the performance of which obligations may be brought about or rendered more onerous by the incidence of an insured peril.

Colman J: [p 611] …There is, in my judgment, in particular no reason in principle why such a supplier should not, and every commercial reason why he should, be able to insure against loss or damage to property involved in the common project not owned by him and not in his possession. The argument that, because he has no possessory or proprietary interest in the property, he can have no insurable interest in it and that his potential liability in respect of loss of or damage to it is insufficient to found such an insurable interest, is, in my judgment, misconceived. That the presence of such an interest in the proper insured is unnecessary to found an insurance interest was a point which arose in Moonacre [1992] 2 Lloyd’s Rep 501, where the issue was whether the plaintiff had an insurable interest in a yacht of which he was not the registered owner, or the bailee or the charter, but which he merely sailed under a power of attorney from the registered owner. I rejected the submissions on behalf of underwriters that he had no insurable interest and I endeavoured to explain that, in order to establish a sufficient relation to the property in question, having regard to the decisions in Lucena v Craufurd [1806] 2 B&P (NR) 269, John Anderson v James Farquhar Morice (1876) 1 App Cas 713 and Macaura v Northern Assurance Co Ltd (1925) 21 LlL Rep 333; [1925] AC 619, it might in some cases be unnecessary to establish that the assured had any proprietary legal or equitable interest in the goods: see pp 510–13.

The suggestion that there cannot, as a matter of law, be an insurable interest based merely on potential liability arising from the existence of a contract between the assured and the owner of property or from the assured’s proximate physical relationship to the property in question, is, in my judgment, to confine far too narrowly the requirements of insurable interest. There is nothing in the authorities which prevents such a relationship to the property from giving rise to an insurable interest in the property for the purposes of an insurance on property. In Stone Vickers v Appledore Ferguson Shipbuilders, supra, I sought to explain the identification of an insurance interest in such multi-participant projects in the passage at p 301 already cited.

It is no doubt true that the conventional means of obtaining in the marine insurance market protection against such liability for property damage is to take out a liability policy, and for the purposes of such policy there is no question that the assured would have an insurable interest in his potential liability. But the fact that he has an insurable interest for that kind of risks does not lead to the conclusion that he cannot have an insurable interest in the property itself for the purpose of a policy on property risks. The fact that the market does not offer such policies is neither here not [sic] there. What matters is whether, if such a policy were effected, the assured would have a sufficient relationship with the subject matter to give rise to an insurable interest. In my judgment, he would.

Piper v Royal Exchange Assurance (1932) 44 LlL Rep 103

The assured bought a yacht in Norway ‘as she lies’. The yacht was to be delivered to England and was, until her arrival, at the risk of the seller. On the voyage to England, the vessel sustained some damage. The buyer claimed upon the policy, and was indemnified for the loss.

The court ruled that, since the risk was on the seller during the voyage, the buyer had no insurable interest at the time of loss. The underwriters, therefore, having paid under a mistake of fact, were entitled to recoup the amount they had paid to the assured buyer.

Roche J: [p 116] …Now, in those circumstances the underwriters say: ‘We insured the plaintiff through the broker on the basis that he had an interest, and we paid him on the basis that he had an interest, and he had not, and in those circumstances we claim the recovery back of the sum which we paid in settlement of this particular average claim.’

In my judgment, the underwriters are so entitled. The matter depends now as regards interest upon the Marine Insurance Act 1906, and ss 5 and 6 deal with the question of interest, with its attachment; and there are some other sections following upon that which deal with other topics of interest. Section 26 deals with the designation of the subject matter. I need not read these sections; they have been read and re-read in the course of the argument. Suffice it to say that, in my judgment, the plaintiff had no interest here. It is unnecessary to decide, but it is probable that he had an interest, not in the ship itself, but in its arrival, which might have been insured and constituted an insurable contingent interest, but I think it ought to have been so described, and this is just one of those matters of interest which requires to be defined, because it is necessary still to define the subject matter insured, although it is not necessary to specify the nature and extent of the injuries of the subject matter insured.

A person with power of attorney

…In my judgment, Mr Sharp, by reason of the powers of attorney, stood in a legal relationship to the vessel in consequence of which he would benefit from the preservation of the vessel and, if the vessel were lost or damaged, he would suffer loss of a valuable benefit. I therefore hold that he had an insurable interest in the vessel.

[p 513] …Although, no doubt, the authority given to a master in respect of his ship and the terms on which the owners employ him will not normally give rise to the passing of possession, that is not impossible. In any event, the terms on which Mr Sharp was appointed skipper and the powers vested in him are so fundamentally different from the terms normally to be expected that Mr Sharp stands in a quite different relationship to his vessel from that relationship normally found in the articles of employment of a master. Moreover, as I have already held, the existence of an insurable interest does not depend in this case on whether there was a relationship of bailment. If, however, this is not right, I consider that, given the wide terms of the powers of attorney, the master was given such degree of control as to amount to the passing of possession of the vessel in this case and was accordingly its bailee …That said, the terms of the bailment in this case are such that they conferred on the bailee a valuable benefit and the risk of loss of that benefit could quite properly found an insurable interest in the vessel itself.

I express no concluded view on the question whether, having regard to the terms on which Mr Sharp controlled the vessel, he was under any personal duty to Roarer to exercise reasonable care over the vessel and her operation. If there were such a duty of care, clearly, Mr Sharp could insure the vessel against marine perils and if the vessel were lost and even though he had incurred no such liability, he would be entitled as against the insurers to recover the value of the vessel and hold it as trustee for Roarer…My provisional view is that Mr Sharp did owe a duty to Roarer to exercise reasonable care over the management and navigation of the vessel, and that on these grounds alone, he would have had an insurable interest in her.

[p 514] …Did Mr Sharp have the authority of Roarer to act as its agent to enter into a contract of insurance? I am unable to accept the plaintiffs’ submissions on this point…The express authority which Roarer gave to Mr Sharp to purchase the vessel and register it in the company’s name as evidenced by his solicitors’ attendance…gave rise to no such implication of authority. Those documents evidence express authority confined to two functions only—purchase and registration. There is no basis upon which it can be reasonably suggested that Mr Sharp was additionally, by implication, thereby authorised to create privity of contract between the company and insurers.

[p 515] Can Roarer rely on ratification of the contract? In my judgment, the plaintiffs were not entitled to ratify the contract. The policy entered into by Mr Sharp was not a contract in the name of Roarer, but in his own name. It was not even a policy entered into in his own name and for the benefit of an additional class of persons ‘for their respective rights and interests’ …Where the agent has not purported to create privity of contract, he has not done any act for which he lacked authority. His uncommunicated intention to bind the principal is irrelevant. There was, therefore, nothing capable of ratification in the present case. Once the proposal had been made in the name of Mr Sharp alone and the policy issued only in his name, the parties to the contract were fixed and confined to those in whose names the contract was expressed to be made, namely, Mr Sharp and the insurers.

…In my judgment, Roarer was neither a party to the initial contract of insurance…nor to the renewal policy…and accordingly, has no title to sue in respect of the loss of Moonacre.

Notes

Owner of goods

An owner of goods will naturally have an insurable interest in his goods. However, property might change during the currency of the policy, and in such an event it is not always easy to pinpoint who the owner of the goods is at the time of loss. A great deal hinges upon the terms of the particular contract of sale which determines the time of the passing of property.

Re National Benefit Assurance Co Ltd, Application of HL Sthyr (1933) 45 LlL Rep 147

A claim was made by the seller, with respect to the loss of goods, upon a policy of marine insurance which purported to insure goods shipped from the UK to Russia. The insurers declined payment on the ground, inter alia, that the seller did not have an interest in the goods, as he had already consigned them to a Mr Vitouchnovsky, and thus had parted with the property in the goods.

The court ruled that the seller did, in fact, have an insurable interest, as the sale was not an outright sale, but conditional on the arrival of the goods.

Maugham J: [p 151] …Then remains the more serious question as to whether there was not an out and out sale to Mr Vitouchnovsky and the present claimant is unable to make a valid claim. In that matter, there is this difficulty, that all the documents which were in existence at the time, or practically all of them, have been destroyed and the records of the Russo-Scandinavian Bank have been taken over by the People’s Bank and there is some difficulty in ascertaining the facts…the sale was conditional on the goods reaching Rostoff-on-Don. I think that, taking into consideration what took place when the State Bank took possession, I should be quite wrong in coming to the conclusion that the property passed before the goods reached Rostoff-on-Don. Accordingly, although it is a serious point, I must come to the conclusion which is consistent with my view of the business probabilities of the time, that the goods were not sold outright to Mr Vitouchnovsky and that the consignors were entitled to a claim on the goods.

[p 292] …Did they, by undertaking it, impliedly agree with the vendors that, if the rice was destroyed after any part had been shipped on board e Sunbeam, the loss should be theirs? …If this was really their undertaking, every bag of rice shipped on board Sunbeam was at their risk, and the loss of it must have fallen upon them. But the Court of Common Pleas held that, as the plaintiffs would not, if the ship had sailed and arrived with what was on board of her when she sank, have been obliged to accept what was on board, they were not bound to pay for the rice which was on board and lost when the ship sank; from which it would seem to follow that the plaintiffs were not exposed to any risk of loss before a complete cargo had been shipped on board Sunbeam.

…There being, therefore, conflicting evidence of intention as to the interest in the rice passing to the purchasers or remaining in the vendors, the effect of the written contract being that the interest was to continue in the vendors until the completion of the cargo, and the consent of the purchasers to insure not shifting the property during the loading and before the cargo was complete, and it being at the utmost an indication of intention to assume the risk, I think your Lordships should not look out of the contract, but determine the rights and the liabilities of the parties by it alone. It was not disputed that, by the terms of the contract, the plaintiffs were not bound to take less than a complete cargo of rice, and that they had an option either to accept or reject a part cargo. If they had exercised this option by accepting what was on board before Sunbeam sank as a fulfilment of the contract on the part of the vendors, they would have had an insurable interest in the rice at the time of the loss.

Inglis v Stock (1885) App Cas 263, HL

The House of Lords ruled that the sales being ‘FOB Hamburg’, the sugar was, after shipment, at the risk of the respondent; he, therefore, had an insurable interest in the sugar and the underwriter was liable for the loss.

Earl of Selborne LC: [p 266] …The quantity actually put on board City of Dublin at Hamburg was only 3,900 bags, or 390 tons. As to this, I think it is enough to say that, if the plaintiff would have had an insurable interest in 4,000 bags, under the circumstances of the case, he had, in my opinion, such an interest though the quantity was short by 10 tons.

…But no particular bags were then set apart or marked as applicable to the one contract more than the other; it was thought sufficient by Drake and Co, or their agents, to leave this to be done when the bills of lading came forward.

[p 268] …The goods were, by the act of the vendors, separated from the bulk of all other goods belonging to them; they were shipped ‘free on board’ in what (for that purpose) was the purchaser’s ship, under two contracts so to deliver them; in both which contracts…the plaintiff was then…solely interested. I cannot infer, from any part of the evidence, that, in so shipping them indiscriminately, the vendors intended to break, instead of fulfilling, their contract, and to take upon themselves (contrary to those contracts) the subsequent risk of loss…

Lord Blackburn: [p 274] …I am quite unable to perceive why an undivided interest in a parcel of goods on board a ship may not be described as an interest in goods just as much as if it were an interest in every portion of the goods. No authority was cited in order to show that it was not so, and I can see no reason for it. Then, that being so, of course it follows that there is no defence at all, and this is my opinion.

Colonial Insurance Company of New Zealand v Adelaide Marine Insurance Company (1886) 12 AC 128, PC

Pursuant to a contract of sale, a cargo of wheat was to be shipped from New Zealand to England. The buyer took out an insurance policy providing cover for ‘wheat cargo now on board or to be shipped’ in the ship Duke of Sutherland. After commencement of loading, but before the whole cargo was loaded, both ship and cargo were lost by perils of the sea. On an action by the buyers upon the policy, the insurers contended that the buyers did not, at the time of loss, have an insurable interest on the wheat insured.

The court ruled that the buyers’ risks commenced as and when any portion of the cargo of wheat was loaded on board.

In the present case, the vendors did not sell a particular cargo on board a ship chartered by them, but merely offered to supply a cargo of wheat for Duke of Sutherland…on board at Timaru. No time or mode was fixed for payment, and nothing was said as to the place to which the cargo, when supplied and put on board, was to be carried, or to the effect that the sellers were to have anything to do with bills of lading or other shipping documents. The purchasers accepted the offer, they themselves being the charterers of Duke of Sutherland, whereas in Anderson v Morice…the firm who agreed to sell the cargo of rice by Sunbeam were themselves the charterers of that vessel, and were to receive freight for the carriage of the rice, such freight being included in the purchase money. In putting the rice on board Sunbeam the seller were not delivering it to Anderson, but were putting it on board a vessel, of which they were the charterers, for the purpose of completing the cargo which they had agreed to sell. The master of Sunbeam received it on their account, and not on account of the purchasers. The purchasers’ right was to depend on the shipping documents, which were to be under the direction of the sellers. In the present case, in putting the wheat on board Duke of Sutherland