Insurable Interest
Insurable interest is a complex subject in marine insurance. The complexity is dual: a number of different legislative instruments, as well as the lack of an exact definition or test governing it, cause problems. The matter is sometimes a question of construction in which the courts may find insurable interest because it is commercially convenient or because it is a broad concept. Insurable interest in life insurance and indemnity insurance is regulated and interpreted differently. Since a contract of marine insurance is a contract of indemnity, in this chapter only insurable interest in the context of indemnity insurance will be discussed.
In order to prove an interest insurable against a peril, it must be an interest such that the peril would, by its proximate effect, cause damage to the assured.1 Insurable interest is now a requirement in marine insurance policies, but until the beginning of the eighteenth century a contract of marine insurance could be enforced at common law by the assured notwithstanding the lack of a personal interest in the subject matter of the insurance. For instance a policy containing the words ‘interest or no interest’, or ‘without further proof of interest than the policy’ allowed the assured to recover against the underwriters a certain stipulated sum of money, whether he had any interest in the ship/cargo or not.2 Thus, a policy of insurance was enforceable even if the assured stood neither to lose nor to gain from the success or failure of the adventure or the loss or survival of the insured property. These contracts were, in substance, wagering contracts3 in which neither party had any interest in the outcome of the future uncertain event, save for that amount which was to be won or lost under the contract.4 By the Marine Insurance Act 17455 for the first time by legislation in England such contracts were rendered null and void in respect of British ships and their cargoes. The purpose behind the requirement that the assured should have an insurable interest before he is permitted to recover under a marine policy was said to be to prevent wagering contracts.6 Additionally, it has been emphasised that an insurable interest is required for the reason that a marine insurance contract is a contract of indemnity.7 Editors of Arnould disagree with the former view for the reason that English law recognised contracts of insurance as contracts of indemnity before the 1745 Act.8 It is submitted that preventing wagering contracts is closely linked with insurance being a contract of indemnity. It is undeniable that insurable interest was needed to prevent gaming and wagering in the eighteenth century.9 The preamble of the 1745 Act stated: ‘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.’ In Murphy v Bell10 Best CJ stated that by the 1745 Act gambling was not the only thing guarded against,11 the Act also aimed to prevent illegal traffic, and the means of profiting by the wilful destruction and capture of ships, particularly by privateers, which carried no cargoes, and the crews of which were composed of more persons than it was safe to trust with the secret that the ships were to be wilfully destroyed or purposely exposed to capture.12 In Moran, Galloway & Co v Uzielli13 Walton J said that ‘unless the assured is exposed to a risk of real loss by the perils insured against, the contract is not a contract of indemnity, but is a mere wagering contract, and cannot be enforced’. Thus, it is submitted that insurable interest is a requirement to prevent gaming and wagering contracts as well as a matter arising from a marine insurance contract being a contract of indemnity.
As stated above, the first legislation introducing insurable interest as a requirement of marine insurance policy was the Marine Insurance Act 1745 which provided that no assurances should be made on any goods on board any British ships –
… interest or no interest, or with or without further proof of interest than the policy, or by way of gaming or wagering … and that every such assurance shall be null and void to all intents and purposes.14
So long as a policy contained words to the same effect as those enumerated in the Act, the case fell within the Act although it could be manifest that it was not a gaming insurance.15 The policy in Murphy v Bell was on five tierces coffee, valued at £27 per tierce, and the ‘policy was to be deemed sufficient proof of interest’. Best CJ found that the words, that ‘policy to be deemed sufficient proof of interest’ were of precisely the same import as the words ‘without further proof of interest than the policy’. The words, ‘should be valued at five tierces of coffee’, admitted that five tierces of coffee belonging to the assured were on board, which would dispense with the necessity of proving that any coffee belonging to the assured was on board. As no inquiry was to be made as to whether the assured had any property in the ship insured or not, it was, in effect, an insurance ‘interest or no interest’, which was rendered null and void by the 1745 Act.16 Another agreement which was defeated by the 1745 Act was discussed in Kent v Bird.17 The claimant and the defendant made an agreement under which the claimant agreed to pay to the defendant £20 if the vessel arrived at the next port and the defendant agreed to pay £1000 if the vessel made her voyage to China and back to the river Thames. The claimant paid £20 to the defendant at the next port, the vessel then lost her passage. The claimant had some goods on board that were liable to suffer by the loss of the season. While it was still doubtful whether the ship would or would not save her passage, the captain had applied to each of the parties, to persuade them to rescind the agreement. The claimant was willing to do so but the defendant refused. Lord Mansfield held that this was a case exactly which was aimed to be prevented by the Marine Insurance Act 1745. If the first of these events happened, the defendant won; but he could not lose unless both happened. This was held to be clearly gaming and wagering, which was not allowed by the Act.
Subsequently, the Marine Insurance Act 1788 required the names of those interested in the insurance to be inserted into the policy, to make it easier to check that they had a valid insurable interest. The Act applied to ‘Any Policy or Policies of Assurance upon any Ship or Ships, Vessel or Vessels, or upon any Goods, Merchandizes, Effects, or other Property whatsoever.’ Thus, despite its title the Act may not have been confined to marine insurance.
In 1845 the Gaming Act was passed which held that wagers were unenforceable. For general indemnity insurance, therefore, section 18 of the Gaming Act 1845 created an indirect requirement of insurable interest by providing that ‘all contracts or agreements, whether by parole or in writing, by way of gaming or wagering, shall be null and void; and no suit shall be brought or maintained in any court of law or equity for recovering any sum of money or valuable thing alleged to be won upon any wager.’ Section 18 had the effect of making all contracts of insurance unenforceable where no interest could be demonstrated.18
The Marine Insurance Act 1906 (MIA 1906) repealed the Marine Insurance Act 1745 and the Marine Insurance Act 1788 (insofar as it applied to marine policies on goods).19
Section 4 of the MIA 1906, entitled ‘Avoidance of wagering or gaming contracts’, provides:
[1] Every contract of marine insurance by way of gaming or wagering is void.
[2] A contract of marine insurance is deemed to be a gaming or wagering contract –
[a] Where the assured has not an insurable interest as defined by this Act, and the contract is entered into with no expectation of acquiring such an interest; or
[b] Where the policy is made ‘interest or no interest’, or ‘without further proof of interest than the policy itself’, or ‘without benefit of salvage to the insurer’, or subject to any other like term: provided that, where there is no possibility of salvage, a policy may be effected without benefit of salvage to the insurer.
The Marine Insurance (Gambling Policies) Act 1909 made taking out marine policies without insurable interest a criminal offence, punishable by a fine or imprisonment for up to six months.20
The Gambling Act 2005 was adopted to regulate certain types of licensed gambling activities. Gambling contracts that relate to those activities can be enforced at law. For example, it has allowed consumers to take bookmakers to court to be paid out their winnings. The Gambling Act 2005 repealed section 18 of the Gaming Act 1845.21 In its place, the Act states that ‘the fact that a contract relates to gambling shall not prevent its enforcement’ (section 335(1)). This provision came into force on 1 September 2007.22 A wager policy might fall within the definition of betting provided in the Act, which states that betting is making or accepting of a bet on the outcome of an event or process or the likelihood of anything occurring or not occurring. Thus, it is possible to argue that it could no longer be maintained that such a policy is void by reason of gaming legislation.23 However, a broader question is whether wager policies remain void under s.4 of the 1906 Act following the entry into force of section 335 of the Gambling Act 2005.24 That section provides that the fact that a contract relates to gambling shall not prevent its enforcement, without prejudice to any rule of law preventing the enforcement of a contract on the grounds of unlawfulness (other than a rule relating specifically to gambling).
Section 4 of the MIA 1906 has not been repealed by the 2005 Act. On the other hand, section 335(1) will override any rule of law preventing enforcement of a gambling contract where that rule relates specifically to gambling. Section 4(2) of the MIA 1906 deems a policy entered into without insurable interest or the expectation of interest and ppi policies to be gaming or wagering contracts. It is arguable that section 335(1) overrides section 4 of the 1906 Act and permits the enforcement of policies entered into without insurable interest, or on terms including a ppi or similar clause, where such contracts fall within the definition of gambling in the 2005 Act. Section 335(1) however, is expressly without prejudice to any rule of law preventing the enforcement of a contract on grounds of unlawfulness (section 335(2)). On the other hand section 335(2) applies only where the rule is not a rule specifically relating to gambling. It is submitted that section 335(1) of the 2005 Act does not make contracts enforceable that are otherwise void under section 4 of the 1906 Act.25 Section 4 has not been repealed by the 2005 Act expressly and it is unlikely that it will be deemed to have been impliedly repealed.26 Section 10 of The Gambling Act 2005 provides that the definition of bet does not include a bet the making or acceptance of which is a regulated activity within the meaning of section 22 of the Financial Services and Markets Act 2000. Marine insurance is a regulated activity. Moreover, the indemnity principle is untouched by the 2005 Act, thus it remains the case that the assured must prove his loss when the peril occurs (section 6(1) MIA 1906).27 Thus it appears that irrespective of section 335, there is no repeal of the MIA 1906 section 4. It should also be borne in mind that under section 4 a contract is also void for public policy reasons.28
Definition of insurable interest
It is difficult to provide a definition which will match all situations.29 In Lucena v Craufurd30 Lord Eldon and Lawrence J gave two different definitions of which the latter has been cited with approval in a number of cases.31 Lord Eldon described insurable interest 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.’ Thus it appears that the assured must show a legal or equitable interest in the insured property or a right under a contract. This definition is narrow compared to Lawrence J’s formulation of insurable interest, that is, ‘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’. Thus, Lawrence J contemplates that an insurable interest in property can exist even if the assured does not have a proprietary or other right to that property.32 It is sufficient to have some relation to, or concern in the subject of the 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.33
In Lucena v Craufurd34 the assured were commissioners, whose duty was under a statutory commission to take charge of Dutch vessels and cargoes ‘which had been or might be thereafter detained in or brought into the ports of the United Kingdom’. Before the commission was issued, certain Dutch vessels and their cargoes had been seized by order of the British Government for the purpose of being brought to the United Kingdom. After the commission was issued, the commissioners insured these ships and their cargoes. The ships with their cargoes were lost before arrival in the United Kingdom, and the commissioners brought an action upon the policy. Under these circumstances Lawrence J expressed his opinion that, as the purpose and object of the commission was only to take care of the Dutch property after its arrival in England, and the commissioners till then had not any power to interfere with it, and could not in their character of commissioners suffer any damage by a loss happening before they had any concern in the ships or goods, they could not be said at the time of the loss to have had any insurable interest. In the words of Lord Eldon: ‘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.’
The modern definition of insurable interest emphasises that the context and the terms of a policy with which the court is concerned will be all important.35 Waller LJ said in Feasey v Sun Life Assurance Co of Canada that the definition of insurable interest in the context of property insurance should not be slavishly followed in different contexts.36 It is also worth adding that in Sharp v Sphere Drake Insurance (The Moonacre)37 Mr Colman QC sitting as a deputy judge opined that ‘… the essential question … to test the existence of an insurable interest has been whether the relationship between the assured and the subject matter of the insurance was sufficiently close to justify his being paid in the event of its loss or damage, having regard to the fact that, if there were no or no sufficiently close relationship, the contract would be a wagering contract.’
Although it does not provide an exhaustive definition,38 section 5(2) of the MIA 1906 identifies three characteristics which the presence of an insurable interest would normally require:39
1 The assured may benefit by the safety or due arrival of insurable property or be prejudiced by its loss or damage or detention or in respect of which he may incur liability.
2 The assured stands in a legal or equitable relation to the adventure or to any insurable property at risk in such adventure.
3 The benefit, prejudice or incurring of liability referred to at (1) must arise in consequence of the legal or equitable relation referred to at (2).
Ownership of property carries with it an insurable interest. In a contract of sale existence of a legally binding agreement is required to prove insurable interest. In Stockdale v Dunlop40 it was held that if there is no legally binding agreement upon which the assured agreed to buy goods he has no insurable interest to insure the goods and the profit thereon. Lord Abinger CB stated that if contracts for goods to be purchased in future were allowed to be the subject of insurance, it would be allowing a wager policy to be made.41
Contingent interest
Where a seller sells the goods and the title passes to the buyer before payment the seller has a contingent interest in the goods. His interest is contingent upon the buyer rejecting the goods. Under a C&F contract the buyer will have a contingent interest which might accrue to him from the completion of the loading of the cargo on board the vessel and its safe delivery. In Anderson v Morice41a the buyer insured the cargo of rice, which he purchased from the seller ‘at and from Rangoon, to any port in the United Kingdom or Continent, by the Sunbeam, on rice, as interest may appear’. While loading at Rangoon, the Sunbeam sank together with the greater part of the cargo having been shipped. The rice already shipped was wholly lost but after the sinking the captain signed bills of lading for the cargo shipped, which were endorsed to the buyer who paid for the lost cargo. The buyer was held to have had no insurable interest in the goods that sank. The question was whether the buyer was so situated with respect to the rice in question at the time of its loss that he would, if uninsured, have suffered any loss from the destruction of the rice. The question then followed whether each separate bag was at the risk of the buyer from the time it was put on board the Sunbeam, or whether it remained at the risk of the sellers until the whole intended loading was complete. The sale contract was on C&F terms so that the rice was at the risk of the buyer from the time it had been loaded on board the ship, and that therefore he had an insurable interest in it from that time. At the time of the casualty the goods had not been appropriated to the contract so that neither risk nor title had passed yet to the buyer. It was therefore held that while some of the cargo had been loaded, the buyer had no insurable interest and the payment he made was voluntary.
Mortgagor and mortgagee
There may be other persons besides the owner who ‘may be prejudiced by its loss’ and they also would have an insurable interest. For instance the mortgagee has interest to insure a vessel that is herself the security upon which money has been lent. A mortgagee has, by virtue of his position and his interest in the property, a right to insure for the whole of its value, holding on trust for the owner of the amount attributable to their interest.42 The mortgagor however is entitled to insure his ship for her full value.
Profits may be insured, on the ground that they form an additional part of the value of the goods, in which the party has already an interest.43 The owner of goods on board a vessel may insure the profits to arise from them. Similarly, a consignee, or a factor in respect of his commission may insure his profit.
Pervasive interest
Pervasive interest may be found in commercial contracts as a matter of commercial convenience.44 In the case of the construction industry in which several parties undertake performance of contract works on site, for example, a building site, a ship yard or at an oil refinery, it will be convenient if the head contractor takes out a single policy covering all contractors and sub-contractors in respect of loss of or damage to the entire contract works. While the construction contract is being performed, a claim against the sub-contractor may be brought for damage negligently caused to property owned by another party involved in the project. Both the parties who caused the loss and who suffered the loss are insured under a composite policy and it may then be necessary to consider whether in relation to that damaged property the sub-contractor had an insurable interest in the property to claim from the insurer to remedy the loss.45 It may be argued that the sub-contractor will have an insurable interest in his own goods and equipment during performance of the sub-contract works, but since he has no title to or possessory interest in the other property involved in the project he can have no sufficient interest in such property to constitute an insurable interest. The answer to the argument will be that it is now beyond dispute that an insurable interest in property can exist even if the assured does not have a proprietary or other right to that property.46 It may also be asserted that the interest of such a contractor is not in the other property but in his potential liability to the owners of such property for loss of or damage to it caused by his breach of contract or duty. It follows that since the insurance in question is an insurance on property and not on liability, there would be no relevant insurable interest. The policy is indeed on property47 but the courts unanimously rejected such an argument and found insurable interest in favour of a contractor or a sub-contractor. 48 Although the sub-contractors were not given possession of the works as a whole, on any construction site there is ever present the possibility of damage by one tradesman to the property of another and to the construction as a whole.49 Insurable interest here finds its source in the contractual arrangements, which open the doors of the job site to the tradesmen.50 In Petrofina v Magnaload Lloyd J held that it is a matter of convenience to allow the head contractor to take out a single policy covering the whole risk, including all contractors and sub-contractors in respect of loss of or damage to the entire contract works. If each party involved in such arrangements takes out individual policies it would mean extra paperwork or could lead to overlapping claims and cross-claims in the event of an accident.51 Furthermore, the cost of insuring his liability might, in the case of a small sub-contractor, be uneconomic; the premium might be out of all proportion to the value of the sub-contract. 52 If the sub-contractor had to insure his liability in respect of the entire works, he might as well have to decline the contract.53
The authorities referred to a bailee who is able to insure goods for the whole of their value, holding over the amount recovered in excess of his own interest as trustee for others with an interest in the goods, such as the true owner or mortgagee. It is a matter of whether the supplier of a part to be installed into the vessel or contract works under construction might be materially adversely affected by loss of or damage to the vessel or other works by reason of the incidence of any of the perils insured against by the policy in question. The cases referred to in this part established that if the answer to that question is in the affirmative then a sub-contractor should also have sufficient interest in the whole contract works to be included as co-assured under the protection of the head contractor’s policy. A sub-contractor ought to be able to recover the whole of the loss insured, holding the excess over his own interest in trust for the others.
In Stone Vickers Ltd v Appledore Ferguson Shipbuilders Ltd,54 for instance, the sub-contractor responsible for constructing and supplying the propeller, tailshaft and ancillary equipment did have such an interest in the whole contract works and accordingly would have been entitled to sue as co-assured under the policy. In Talbot Underwriting Ltd v Nausch Hogan & Murray Inc (The Jascon 5),55