1. The statutory requirements
At common law there was no general requirement that the insured should have an interest in the event against which the insurance is effected and so the courts generally enforced wagering agreements,1 including wagers under the guise of insurance contracts. However, as a result of a series of legislative measures introduced during the eighteenth and nineteenth centuries, insurable interest became a fundamental requirement governing the validity of an insurance contract. The legislation resulted from the perceived moral evils inherent in wagering,2 together with the concern that those who lack interest in the subject-matter of the insurance might be tempted to bring about the loss in order to gain the proceeds of the policy. As seen in Chapter 1, the requirement of insurable interest distinguishes a contract of insurance from a wager,3 for in a valid contract of insurance the interests of the parties go beyond the mere winning or losing of a bet.
The need for an insured to prove interest in the subject-matter of the policy was first introduced by the Marine Insurance Act 1745 which rendered void marine policies without interest, or those which provided that the policy itself was to be conclusive proof of interest (termed PPI policies) or those made ‘interest or no interest’. The preamble of the 1745 Act stated:
Whereas it hath been found by Experience, that the making Assurances, 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 either been fraudulently lost and destroyed …: For Remedy whereof, be it enacted. … That from and after the first Day of August one thousand seven hundred and forty-six, no Assurance or Assurances shall be made by any Person or Persons, Bodies Corporate or Politick, on any Ship or Ships belonging to his Majesty, or any of his Subjects, or on any Goods, Merchandizes or Effects laden or to be laden on Board of any such Ship or Ships, Interest or no Interest, or without further Proof or Interest than the Policy, or by way of Gaming or Wagering, or without Benefit of Salvage to the Assurer; and that every such Assurance shall be null and void to all Intents and Purposes.
The prohibition introduced by the 1745 Act was extended beyond marine insurance to other forms of insurance by the Life Assurance Act 1774 (sometimes referred to as the Gambling Act 1774). This requires the proposer for life insurance to possess insurable interest at the date of entering into the contract in order to prohibit ‘a mischievous kind of gaming’ (see the preamble to the statute), but no such requirement need be shown at the date of the loss.4 Failure to establish insurable interest at the outset will render the policy illegal with the result that the court will not order a return of the premiums to the insured.5 The Act does not apply to marine policies,6 nor does it apply to the insurance of ‘goods and merchandises’ since the latter are specifically excluded by section 4.7 Rather, ‘goods and merchandises’ were covered by the Gaming Act 1845, section 18, which struck down a policy taken out by an insured who had no interest, or no reasonable expectation of obtaining an interest, in the subject-matter of the policy.8 The 1845 Act was repealed by the Gambling Act 2005, so that the need to demonstrate insurable interest at the outset is removed. However, this relaxation will be of little practical importance given the indemnity principle (see below). It will thus remain the case that the insured will need to demonstrate loss when the peril occurs.
With respect to other types of indemnity insurance, the precise scope of the 1774 Act has been a matter of considerable judicial debate. While it is unclear from the wording of the statute whether it applies to real property insurance and liability insurance, modern case law suggests that it does not.9 In Mark Rowlands Ltd v Berni Inns Ltd,10 the insurer argued that the insured’s tenant could not benefit from a building’s fire insurance because he was not named in the policy as required by section 2 of the Act.11 Kerr LJ expressed the opinion that to give the phrase ‘or other event or events’ contained in section 2 their literal meaning, so as to hold that the Act applies to indemnity insurance, would create ‘havoc in much of our insurance law’.12 He therefore concluded that ‘this ancient statute was not intended to apply, and does not apply, to indemnity insurance, but only to insurance which provides for the payment of a specified sum on the happening of an insured event’.13 In a similar vein, in Siu Yin Kwan v Eastern Insurance Ltd,14 Lord Lloyd of Berwick stated that:
s 2 must take colour from the short title and preamble to s 1. By no stretch of the imagination could indemnity insurance be described as a ‘mischievous kind of gaming’. Their Lordships are entitled to give s 2 a meaning which corresponds with the obvious legislative intent.15
The view expressed by Lord Denning MR in Re King, Robinson v Gray16 that the 1774 Act did apply to buildings insurance was dismissed by Lord Lloyd on the bases that it was expressed by way of obiter, it is not reflected in the judgments of the other two members of the court and the point was not argued.17 In any case, with respect to insurance on real property it should be borne in mind that the principle of indemnity operates to prevent a person who lacks insurable interest from recovering under the policy.
Finally, The Marine Insurance Act 1906 (which repealed the 1745 Act), section 4 provides that a contract of marine insurance is deemed to be a gaming or wagering contract and is therefore void unless the insured possesses an insurable interest as defined by section 5 of the Act. It is further provided that insurable interest must exist at the date of the loss, as a marine policy is one of indemnity. Section 5 of the Act goes on to define insurable interest in the following terms:
(1) … every person has an insurable interest who is interested in a marine adventure.
(2) In particular a person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure or to any 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.
While this definition is confined to marine policies, it nevertheless provides a useful insight into the requirement of insurable interest in insurance law generally. Of particular note in this respect is the reference in section 5(2) to the insured standing in a ‘legal or equitable relation’ to the property at risk, so that where the insured will be prejudiced by the loss or damage of the insured property, the requirement of insurable interest will be established. In summary, insurable interest in property is satisfied where the insured has some proprietary, contractual or possessory interest in it.18
2. Insurable interest in lives: the Life Assurance Act 1774
2.1 Time when interest must be shown
The Life Assurance Act 1774, section 1, which, it should be noted, is unaffected by the Gambling Act 2005,19 provides that a policy of insurance will be ‘null and void to all intents and purposes whatsoever’ unless the insured has an insurable interest in the life of the assured. Section 3 of the Act goes on to restrict the amount recovered by the insured to the value of his interest. Taking the literal reading of section 1 and section 3 together, it might appear that the interest of the insured would have to be satisfied both at the time of effecting the policy and at the time of the loss as with indemnity insurance generally.20 The question of when insurable interest has to be shown received a definitive answer in Dalby v The India and London Life Assurance Co.21 The life of the Duke of Cambridge had been insured with the claimant’s company, Anchor Life, for £3,000 under four policies. Anchor reinsured the risk with the defendants. When the insured subsequently cancelled the life policies, Anchor nevertheless maintained the reinsurance policy until the Duke’s death at which time the claimant claimed. The defendants refused to pay on the basis that the claimant’s interest in the Duke’s life ceased when the insured cancelled the policies. However, the court 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. Parke B construed section 3 of the 1774 Act as merely requiring the insured to ‘value his interest at its true amount when he makes the contract’,22 The judge opined that to hold to the contrary would result in the injustice of the insured paying a fixed premium over the term of the policy, only to find that he could recover some uncertain sum which depended on the value of his interest at the time of the death.23
The decision in Dalby has not escaped criticism.24 Taking the facts of the case itself it is evident that the mischief which the 1774 Act was designed to address is undermined by the finding that insurable interest on death is not required. Indeed, once the insured cancelled his policies on the Duke of Cambridge’s life, it is difficult to see what possible interest Anchor had in the Duke’s life. It is certain that the company did not suffer a loss when he died because it was no longer bound to pay insurance monies to the insured. In this respect it can be seen that Dalby apparently has the effect of legitimising gaming. This also arises in the context of, for example, a creditor who insures the amount of a debt owing to him at the time when the insurance is effected but who continues to maintain the policy on the debtor’s life after the loan has been repaid. Again, this seems to be a clear example of wagering. Nevertheless, the practical justification for Dalby lies in the fact that insurance is commonly used as a vehicle for investment and saving and as such it has been said that ‘it is desirable to give life policies the ordinary characteristics of property’.25
2.2 Defining insurable interest in life policies
In contrast to the Marine Insurance Act 1906, the 1774 Act does not provide a definition of insurable interest. However, the nature of the interest required can be deduced from the language of section 3 itself which provides that ‘no greater sum shall be recovered or received from the insurer or insurers than the amount of value of the interest of the insured in such life’. The inference then, is that it must be a financial or pecuniary interest. While section 1 of the 1774 Act is aimed at preventing wagering by declaring insurance without interest to be ‘null and void’, the purpose of section 3 is to prevent recovery of more than the value of the interest. The interrelationship between the two provisions was recently explained by the trial judge in Feasey (representing Syndicate 957 at Lloyd’s) v Sun Life Assurance Corporation of Canada.26 Langley J said that:
In my judgment there is no requirement to be found in Section 3 to enter into any detailed examination of the values of insurable interests with or without the benefit of any hindsight. Nor is it required that a court should examine and assess whether a given value was arrived at without negligence or reasonably. The underlying purpose of Section 3 is derived from Section 1: to outlaw recovery of the proceeds of what is properly to be described as gaming or wagering.27
In two categories of life insurance insurable interest is presumed to exist and section 3 of the Life Assurance Act 1774 is disapplied so that there is no upper limit on the sum insured. The two exceptions are: (i) policies on the insured’s own life where the insurance is for the insured’s own benefit;28 and (ii) policies on the life of a spouse.29 The rationale underlying the presumption that spouses possess an unlimited insurable interest in their respective lives was explained by Farwell J in Griffiths v Fleming,30 who said that ‘a husband is no more likely to indulge in “mischievous gaming” on his wife’s life than a wife on her husband’s’.31 The Insurance Ombudsman has decided that the presumption should also extend to engaged couples.32 Section 253 of the Civil Partnerships Act 2004 extends the common law presumption in favour of ‘spouses’ to civil partners.33
2.3 Life policies on family members
As has been seen, subject to the exception of spouses, the general rule is that the proposer for life insurance must have some pecuniary interest in the insured life and, by analogy with the principle of indemnity,34 the sum recoverable is limited to the extent the loss is capable of being quantified. With respect to family relationships the requirement of insurable interest can have particularly harsh consequences. For example, it is settled that an adult child does not have an insurable in the life of a parent. In Harse v Pearl Life Assurance Co,35 the claimant effected two life policies on the life of his mother who lived with him as his housekeeper and to whom he paid an allowance. The claimant’s father was alive, but being paralysed he did not work and would therefore be unable to meet the funeral expenses of his wife in the event of her predeceasing him. One of the policies stated that it was to cover funeral expenses. Upon discovering that the policies were void for want of insurable interest, there being no obligation on a child to bury his parent,36 the claimant sued for the recovery of the premiums paid by him which now amounted to more than the original sum assured. It was held by the Court of Appeal that the claimant’s lack of insurable interest rendered the policy illegal and, on the basis that money paid over under an illegal contract is irrecoverable, the insurers were not bound to return the premiums. However, if the insurers elect not to raise the 1774 Act by way of defence but choose to pay the sum insured, then on the basis of melior est conditio possidentis, the person in receipt of the payment can keep it.37
Whether a minor has an interest in the lives of his parents is doubtful because there is no common law obligation on a parent to maintain a child.38 However, such an obligation may arise by virtue of a maintenance order compelling a parent to support a child, in which case insurable interest will exist. In practice, the principle that a child has no insurable interest in the life of its parents is generally circumvented by a parent taking insurance on his or her own life and ensuring that it is expressed to be for the benefit of the child.39 As with co-habitees, it would seem sensible for the law to recognise that a minor has an insurable interest qua dependent in the life of a parent.40
Although it is common practice for parents to insure the lives of their children,41 at law a parent lacks insurable interest because no financial loss results from the child’s death. In Halford v Kymer,42 a father effected a policy on the life of his son, which named himself as beneficiary, should the son die before attaining the age of 21 years. In holding that the father lacked insurable interest, the court rejected the father’s contention that he had a financial interest in his son’s life because he expected his son to reimburse him the costs of maintenance and education at some future time. Bayley J, construing the relevant provision in the Life Assurance Act, was emphatic in his rejection of the father’s claim:
It is enacted by the third section, ‘That no greater sum shall be recovered than the amount of the value of the interest of the insured in the life or lives.’ Now, what was the amount or the value of the interest of the party insuring in this case? Not one farthing certainly. It has been said that there are numerous instances in which a father has effected an insurance on the life of his son. If a father, wishing to give his son some property to dispose of, make an insurance on his son’s life in his (the son’s) name, not for his (the father’s) own benefit, but for the benefit of his son, there is no law to prevent his doing so; but that is a transaction quite different from the present; and if a notion prevails that such an insurance as the one in question is valid, the sooner it is corrected the better.43
At odds with the case law considered above is the decision in Barnes v London, Edinburgh & Glasgow Life Insurance Co Ltd,44 in which the Court of Appeal held that a person who had undertaken to care for her infant stepsister had an insurable interest in her life to the extent of securing ‘the repayment of the expenses incurred’.45 The decision has been doubted,46 and is unlikely to be followed by a future court.
2.4 The employer–employee relationship
An employer may have an insurable interest in the life of an employee and conversely, an employee may have insurable interest in the life of his employer. Calculating the value of the interest can be a relatively simple exercise in the straightforward employer/employee situation.47 The starting point is generally the contract of employment between the parties, so that where an employee is employed on a weekly contract, the court will ascertain the value of one week’s employment to the insured/employer.48
An employee who is working under a fixed term contract has an insurable interest in the employer’s life up to the value of the wages to be paid during that term. In Hebdon v West,49 Hebdon, a bank clerk, was employed for seven years under a fixed term contract at a salary of £600.00 per annum. The bank had also lent him £4,700 and the managing partner, Pedder, had promised him that the debt need not be repaid during his, Pedder’s, lifetime. At a time when his contract had approximately five years to run, Hebdon insured Pedder’s life through two life companies, one policy was for £5,000 and the second policy was for £2,500. After six years Pedder died and the employment was terminated. Hebdon received £5,000 under the first policy but when the second insurers refused his claim, he sued. The first insurers had not raised the point that the value of the policy exceeded the salary due to Hebdon over the entire term. Further, as insurable interest in life policies must be found to exist at the date when the policy is effected, not at the date of the loss, they could not in any case raise the point that his employment contract had only one year left to run at the date of the death (a quantifiable loss of salary of only £600.00). However, with respect to the second life policy, Wightman J held that the promise made by Pedder not to call in the debt was gratuitous and therefore non-enforceable. This had the effect that since Hebdon’s insurable interest had been amply satisfied by the first policy he therefore lacked the requisite insurable interest to enforce the second policy. Wightman J, considering the effect of the 1774 Act, said:
We assume, then, that the plaintiff had a pecuniary interest in the life of Pedder to the extent of £2,500 at the time he effected the policy with the defendant’s office. If that be so, the question then arises whether payment, after the death of Pedder, of £5,000 by another life insurance company … is a bar to the plaintiff’s claim. … Looking to the declared object of the legislature … it was intended by the third section of the Act that the insured should in no case recover or receive from the insurers (whether upon one policy or many) more than the insurable interest which the person making the insurance had at the time he insured the life.50
The judgment is illuminating in so far as the judge proceeds on the basis that the effect of section 3 of the Act is to treat life policies as contracts of indemnity, the sole distinction being the time when insurable interest must exist. However, the strict orthodoxy of quantifying the pecuniary interest of the insured by reference to the terms of the employment contract is often ignored by the courts. This is apparent where, for example, the death of an employee would have serious implications for the profits and asset value of a business, and so the court will have regard to consequential losses ensuing from the death.51
2.5 Creditor and debtor insurance
A secured creditor has an insurable interest in the life of a debtor.52 Such interest will ensue even after the debt has been paid because, as has been seen, the requirement of insurable interest need only be shown at the time when the life policy is effected and so a creditor can recover the whole sum insured even if the debtor dies after repaying the debt.53 The value of the creditor’s interest is the amount of the debt including interest payments. A debtor may have insurable interest in the life of a creditor where the latter has promised not to call in the debt during his lifetime provided such promise is binding by virtue, for example, of the doctrine of promissory estoppel.54
2.6 A wider approach towards insurable interest
The Court of Appeal has recently subjected insurable interest to detailed examination and has suggested that a more open textured approach should be adopted towards the requirement. In Feasey v Sun Life Life Assurance Corporation of Canada,55 Steamship, a Protection and Indemnity Club, insured the liabilities of its members under a Master Lineslip Policy with Syndicate 957 for personal injury or death suffered by employees of the members on board a vessel or offshore rig. Syndicate 957 reinsured its liability with Sun Life and Phoenix. The benefit under Steamship’s policy did not reflect the club’s actual liability or that of its members but was intended to reflect, as closely as possible, Steamship’s overall exposure. Due to changes in the Lloyd’s Rules which affected liability insurance, the reinsurance became, in effect, first party as opposed to third party insurance. In an action brought by the Syndicate against the reinsurers for unpaid sums allegedly due under the reinsurance policy, Sun Life argued that Steamship had no insurable interest in the lives and wellbeing of the original persons when entering into the Master Lineslip so that the policy was rendered illegal by the Life Assurance Act 1774, section 1. By way of alternative, Sun Life and Phoenix argued that contrary to section 3 of the Act, Steamship was seeking to claim more than the value of any insurable interest it had.
Both the first instance judge56 and the majority of the Court of Appeal held that Steamship did posses a pecuniary interest in the losses covered by the policy and that its interest was capable of being ascertained when the policy was entered into. As a matter of construction the insurance was found to be one to pay fixed sums on the happening of certain events and, as such, it therefore fell within section 1 of the Act. In determining the issue of insurable interest Waller LJ took the view that this necessarily depended upon the construction of the particular insurance in question. Having reviewed the authorities on both life and property insurance he noted the difficulties which have faced the courts in attempting to formulate an all-embracing definition of the requirement. Indeed, on the basis of the case law Waller LJ concluded that the context and the contents of any given policy is critical. He stated:
It is sufficient under section 5 of the Marine Insurance Act for a person interested in a marine adventure to stand in a ‘legal or equitable relation to the adventure.’ That is intended to be a broad concept. … In a policy on life or lives the court should be searching for the same broad concept. … It may be that on an insurance of a specific identified life, it will be difficult to establish a ‘legal or equitable’ relation without a pecuniary liability recognised by law arising on the death of that particular person. There is however no authority which deals with a policy on many lives and over a substantial period and where it can be seen that a pecuniary liability will arise by reference to those lives and the intention is to cover that legal liability. … The interest in policies falling within section 1 of the 1774 Act must exist at the time of entry into the policy, and be capable of pecuniary evaluation at that time.57
[I]t is not in my view a legitimate starting point to say that because normally such and such a type of risk would be insured in a certain way, therefore a different form of policy must be unlawful. Each case must depend on the precise terms of the policy under consideration. The questions are-what on the true construction of the policy is the subject matter of the insurance? Is there an insurable interest which is embraced within that subject matter? Is the insurable interest capable of valuation in money terms at the date of the contract? The question that will then arise under section 3 is whether the sum payable under the policy is greater than the value of the pecuniary interest valued as of the date of the policy?58
Rejecting the alternative contention of the reinsurers based upon section 3 of the Act, it was held that they had failed to demonstrate that Steamship was seeking to recover a sum exceeding the value of its interest as at the date of the contract.
While the decision in Feasey adheres to the orthodoxy in pure life policies, it is of signicance given that the issue of insurable interest is rarely litigated nowadays. It thus affords a rare insight into contemporary judicial thinking on the requirement. It also serves to highlight a range of problems left unresolved by the case law. This is particularly true with respect to the problems that the requirement has given rise to in the context of property insurance involving construction insurance.59 Permission to appeal to the House of Lords was granted, but the parties settled during argument.
2.7 Proposals for reform
The English and Scottish Law Commissions identify a number of problems with respect to the law governing insurable interest.60 In essence, it is argued that the rules are overly restrictive, in particular (i) the law is difficult to analyse, (ii) the boundary between life and liability insurance is blurred, (iii) it can be difficult to obtain insurance, for example cohabitants and other family members cannot insure each other’s lives, (iv) technicalities, such as section 2 of the LAA 1774 can be used to avoid policies, (v) employers may be unduly limited in the amount which they can insure the lives of employees, (vi) insurance on an open ended debt is uncertain, (vii) the issue of moral hazard or gambling is no longer relevant, (viii) composite polices of insurance can be threatened and (ix) the remedy for breach is unclear.61 In light of these problems the Law Commissions regard the requirement of insurable interest in non-indemnity policies as unnecessary; however, they recognise that few countries, other than Australia, have abolished it62. Accordingly, they ask for responses to the question ‘whether there should continue to be a requirement for insurable interest in life insurance contracts?’63 At the time of writing, the Law Commissions have not published a responses paper, however they have noted that there has been 28 responses to this question. Nonetheless, in the event of the requirement of insurable interest in life insurance continuing, they propose a number of reforms. They conclude that the current law is too narrow and the category of insurable interest supported by natural affection should be increased, giving a larger class unlimited rights to insure the lives of others .64 The Commissions go on to list a number of groups which should be deemed to have insurable interest arising out of natural affection:65
(1) any person—in his or her own life and in the life of his or her spouse or civil partner;
(2) any person who is cared for and dependant on his or her parent or guardian – in the life of his or her parent or guardian;
(3) any parent—in the life of his or her adult child;
(4) any person—in the life of his or her cohabitant (the meaning of ‘cohabitant’is still under consideration).
Notwithstanding this recommendation, the Law Commissions query whether this class could be widened further. They recognise that there are still some relationships which fall outside their proposals, such as parents who have an interest in their children who are under 18 years of age, fiancées, siblings and grandparents.66 They tentatively propose that where there is a relationship of natural affection, a policyholder should be able to insure the life for an unlimited amount.67 In circumstances where there is no relationship of natural affection, the provision of consent by the person whose life is to be insured should be an alternative ground for proving an insurable interest.68 However, in this particular case, the Law Commissions have not formed a conclusion as to whether the value of the insurance should be limited to the amount consented to.
For relationships of economic dependence the Law Commissions propose to expand the test that the insured must show an interest in the duration of the life insured which is pecuniary and recognised by law. They are troubled by this test,69 and instead propose that the requirement should be that the policyholder has a reasonable expectation of the pecuniary or economic loss on the death of the life assured, rather than a pecuniary interest recognised by law.70 The value of the insurance should be equivalent to the reasonable expectation of the loss and consent can provide an alternative ground for establishing an insurable interest.71
Finally, the Law Commissions propose that the consequences of making a life insurance policy without insurable interest should that the policy is void not illegal, this will allow the insured to reclaim the premiums.72
3. Declaring the name of the insured in the policy document
The Life Assurance Act 1774, section 2 provides that the name or names of the person or persons interested in the policy for whose use, benefit or on whose account such policy is effected must be inserted in the policy document.73 Failure to comply with this provision renders the contract illegal. It is designed to prevent avoidance of section 1 of the Act (requiring insurable interest), and so sections 1 and 2 are symbiotic. Section 2 serves little practical purpose particularly since often it will be the insured’s next of kin who benefits from the insurance and there is no requirement that their names should be specified in the policy. Also, in this respect, an insured may assign a policy of assurance during its currency to a third party who lacks the requisite insurable interest. There have been difficulties posed by this provision in respect of group policies, for example those effected by an employer or a trade union in respect of employees. This is because it is unclear from the outset exactly who will, from time to time, fall within the group. The potential problem in this situation was averted by section 50 of the Insurance Companies Act 1973, which disapplies section 2 of the 1774 Act, provided that the class of persons covered by the policy is identifiable with reasonable certainty.
At its simplest level, the mischief which section 2 is designed to prevent is the situation where, for example, X appears to effect an insurance policy on a life in which she has an insurable interest, but in reality the contract is for Y’s benefit who lacks insurable interest. The object of the Act is not to prevent Y ultimately benefiting from X’s policy, since X may apply the proceeds of such policy in any way she pleases. But rather to ensure that if Y is to gain immediate benefit, then Y’s name must appear in the policy from the outset and, if the policy is to be valid, Y must have an insurable interest when the policy is effected.74 The issue of whether the name of the true insured is declared in the policy is resolved by enquiring whether the contract ‘is really and substantially intended for the benefit’ of that named person.75 This is amply illustrated by the decision in Wainwright v Bland.76 The insured, Miss Abercromby, effected a policy on her own life in her own name. This was done on the advice of Wainwright, the claimant, with whom she lived. Previously she had taken out a number of other life policies, two of which had been assigned to Wainwright just before her death. On the evidence, it was apparent that the insured could not afford the premiums herself but had paid them with money supplied by the claimant. It is evident that the court was suspicious that the insured had been murdered by the claimant, and the jury decided that the policy was invalid. In addressing the jury, Lord Abinger CB said:
[T]he question in this case is, who was the party really and truly effecting the insurance? Was itÊthe policy of Miss Abercromby? Or was it substantially the policy of Wainwright the [claimant], he using her name for the purposes of his own? If you think it was the policy of Miss Abercromby, effected by her for her own benefit, her representative is entitled to put it in force; and it would be no answer to say that she had no funds of her own to pay the premiums; Wainwright might lend her the money for that purpose, and the policy still continue to be her own. But, on the other hand, if, looking to all the strange facts which have been proved before you, you come to the conclusion that the policy was, in reality, effected to Wainwright; that he merely used her name, himself finding the money, and meaning (by way of assignment, or by bequest, or in some other way), to have the benefit of it himself; then I am of opinion such a transaction would be a fraudulent evasion of the [Life Assurance Act] and that your verdict should be for the defendants.77
It has been convincingly argued that section 2 of the Act adds nothing to the requirement of insurable interest, for if the aim of the Act is to prevent gaming, that goal is amply achieved by section 1 alone.78 The conundrum created by the section 2 requirement can be seen by returning to the example postulated above. Even if Y’s name is declared in the policy, this alone will not render the policy valid because, in any case, Y lacks the requisite insurable interest. If, on the other hand, Y does have insurable interest in X’s life, it should not matter that her name does not appear in the policy because the object of the Act (to prohibit ‘a mischievous kind of gaming’) is not violated. The decision in Evans v Bignold,79 serves to illustrate the point clearly. Mr Evans, approached the trustees of his father-in-law’s estate and asked them to advance him £200.00, which was the amount due to his wife under the terms of her father’s will when she reached 21 years. In case she died before then, a surety was found to secure repayment of the advance, and the surety required Mr Evans to take out a life policy on Mrs Evans’s life. The policy was, however, effected in her name. She did attain 21 years and so repayment of the advance was not required. Nevertheless, the policy continued and, when she died, her administrator (Mr Evans) sought to claim on the policy. The court was forced to decide that since the policy had originally been taken out for the benefit of Mr Evans and his name did not appear on the policy, it was unlawful and unenforceable. Since Mr Evans, as Mrs Evans’s husband, had an insurable interest in her life, section 2 of the Act operated to defeat a policy which did not involve any element of gaming.
It is suggested that for those cases where doubt arises as to whether section 1 is satisfied, the test formulated by Baron Pollock would equip the court to ascertain the true beneficiary of the policy in order to determine whether that person has an insurable interest in the life insured.80 Viewed on this basis, Mr Evans would recover under the policy.
Curiously, there appears to be an inconsistency in the way in which the rigour of the law is applied. For example, an insured may properly assign a policy to a person who lacks insurable interest. The rationale here is rooted in the notion of a person’s right to freely dispose of property. This is particularly important given the investment value of life policies,81 and businesses now exist which offer to purchase policies from insureds at a sum generally greater than the surrender value offered by insurers.
4. Insurable interest in property insurance
4.1 The requirement of proprietary interest or contractual right
The classic definition of insurable interest in property insurance was formulated by Lord Eldon LC in Lucena v Craufurd,82 as being ‘a right in 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’.83 Accordingly, the insured must possess some present legally enforceable right, whether legal or equitable, or a contractual right, to the insured property. This will, for example, exclude a beneficiary under a will and also an intestate’s next of kin for although ‘there is no man who will deny that such an heir at law has a moral certainty of succeeding to the estate; yet the law will not allow that he has any interest, or any thing more than a mere expectation’.84 Lord Eldon justified a restrictive definition of insurable interest on the basis that it was necessary to ensure certainty and to avoid illusory insurance. His Lordship was, of course, concerned at ascertaining the limits on who could insure. Taking the facts of Lucena v Craufurd, which centred on ships lost at sea, Lord Eldon said:
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 any thing to do with the property, and of course get something by it.85
The traditional view in English law therefore is that the insured must have a proprietary right in the insured property. This is starkly illustrated by Macaura v Northern Assurance Co Ltd,86 in which the insured, Macaura, was an unsecured creditor and the only shareholder in a limited company which owned a substantial quantity of timber, much of which was stored on his land. Two weeks after effecting insurance policies with several companies in his own name, the timber was destroyed by fire. A claim brought by Macaura on the policies was disallowed on the ground that he lacked insurable interest in the timber. Lord Sumner, proceeding on the basis that neither the company’s debt to the insured nor his shares were exposed to fire, observed: ‘the fact that he was virtually the company’s only creditor, while the timber is its only asset, seems to me to make no difference … he was directly prejudiced by the paucity of the company’s assets, not by the fire’.87 His Lordship stated that the insured ‘stood in no “legal or equitable relation to” the timber at all. He had no “concern in” the subject insured. His relation was to the company, not to its goods.’88 Further, as a gratuitous bailee he was not liable for the timber and therefore an interest could not be based on bailment.
The guiding principle in Macaura is pivoted upon the separate legal personality accorded to companies, so that a company is, in law, an entity distinct from its members. It was the company which owned the timber and therefore had a proprietary interest in it, not its shareholder. The fact that the timber was in his possession did not give him a proprietary interest. He merely had a factual expectation of loss. On the other hand, if Macaura, qua creditor, had insured against the company’s insolvency, or qua shareholder, had insured his shares against depreciation due to the failure of a company venture, then the requirement of insurable interest would have been fulfilled. This decision was distinguished by Colman J in Sharp v Sphere Drake Insurance Ltd, The Moonacre,89 where the sole shareholder in a company was held to have an insurable interest in a yacht purchased by the company, as the yacht was intended for his use and a power of attorney had been granted to him in respect of it.
4.2 Towards a broader test of ‘factual expectation’
The restrictive approach to insurable interest has not escaped judicial criticism in England,90 nor has it found favour in other common law jurisdictions. For example, Lord Eldon’s reasoning was emphatically rejected by Wilson J in Constitution Insurance Company of Canada v Kosmopoulos,91 in which the Canadian Supreme Court adopted the more liberal ‘factual expectation’ test propounded by Lawrence J in Lucena v Craufurd.92 Put simply, under this test a moral certainty of profit or loss is sufficient to constitute insurable interest. Thus, on very similar facts to Macaura v Northern Assurance Co Ltd, the insured was able to recover under the policies on the basis that as a sole shareholder of the company he ‘was so placed with respect to the assets of the business as to have benefit from their existence and prejudice from their destruction. He had a moral certainty of advantage or benefit from those assets but for the fire.’93 Addressing the concern of Lord Eldon that a broader definition of insurable interest would lead to an increase of liability of insurers upon the occurrence of a single insured event owing to an increased number of policies covering the same risk, Wilson J said:
But insurance companies have always faced the difficult task of calculating their total potential liability arising upon the occurrence of an insured event in order to judge whether to make a particular policy or class of policies and to calculate the appropriate premium to be charged. It is not for this Court to substitute its judgment for the sound business judgment and actuarial expertise of insurance companies by holding that a certain class of policies should not be made because it will result in too much insurance. I would have thought that a stronger argument could be made that there is too little insurance. Why should the porter in Lord Eldon’s example not be able to obtain insurance against the possibility of being temporarily out of work as a result of the sinking of ships?94 … A broadening of the concept of insurable interest would, it seems to me, allow for the creation of more socially beneficial insurance policies than is the case at present with no increase in risk to the insurer. I therefore find both of Lord Eldon’s reasons for adopting a restrictive approach to insurable interest unpersuasive.95
The broader ‘factual expectation’ test has also been adopted by the Australian legislature,96 and has been followed in many American states. For example, paragraph 3401 of the New York Insurance Law, Article 34 defines insurable interest as including ‘any lawful or substantial economic interest in the safety or preservation of property from loss, destruction or pecuniary damage’.97 The Wisconsin Insurance Code has gone further by dispensing with the requirement of an insurable interest for the validity of an insurance policy. In New Zealand, the Insurance Law Reform Act 1985 section 7(1) abolishes the requirement of insurable interest in the case of life insurance and all contracts of indemnity insurance.98
The Gambling Act 2005 aside, there are also indications in recent English decisions that a wider and more liberal approach is being taken to the question of insurable interest. In Mark Rowlands Ltd v Berni Inns Ltd,99 the Court of Appeal adopted and approved the definition propounded by Lawrence J in Lucena v Craufurd,100 despite the fact that Lord Eldon’s formulation of insurable interest formed the backdrop to the House of Lords decision in Macaura v Northern Assurance Co Ltd.101 More recently, the issue has emerged in the context of insurers’ rights of subrogation. Simply put, on paying a claim in full the insurer takes on the rights of action which the insured would have had: in effect, the insurer steps into the shoes of the insured (see Chapter 11). This means that the insurer can, for instance, sue the tortfeasor responsible for the loss. However, the tortfeasor can use all the defences that would have been available against an action brought by the insured, and the insurer will have no action where the loss is caused by the insured.102 This is of particular importance in insurance policies relating to construction contracts, in which the head contractor is commonly required by the contract to insure the project for their own benefit and that of the subcontractors. The issue then comes down to whether the subcontractor has an insurable interest which will grant immunity against the insurers’ subrogation rights. In Petrofina (UK) v Magnaload Ltd,103 Lloyd J held that each of the individual subcontractors on a construction site had an insurable interest in the entire works despite the fact that they were working only on limited parts of the site, their interest arising not from any ownership or possession, but from the fact that, in the event of negligence, they would face liability for any part of the works damaged or destroyed. Although the subcontractors had no property interest in the works in progress they had an insurable interest in the continued existence of those works. In so finding, the judge drew the analogy of the insurable interest possessed by a bailee in goods bailed to him. Accordingly, it was possible for a policy covering the entire works to be taken out on a co-insurance basis by the head contractor and all subcontractors. Lloyd J reasoned that to hold to the contrary would result in commercial inconvenience as each subcontractor would need ‘to take out his own separate policy. This would mean, at the very least, extra paperwork; at worst it could lead to overlapping claims and cross claims in the event of an accident. Furthermore … the cost of insuring his liability might in the case of a small sub-contractor, be uneconomic.’104 The judge therefore held that the subcontractor’s insurable interest lay in a ‘pervasive interest’ in the entire property. In the absence of any English decision directly on the point, Lloyd J turned to the decision of the Supreme Court of Canada in Commonwealth Construction Co Ltd v Imperial Oil Ltd, in which de Grandpre J stated:
On any construction site, and especially when the building being erected is a complex chemical plant, there is ever present the possibility of damage by one tradesman to the property of another and to the construction as a whole … By recognising in all tradesmen an insurable interest based on that very real possibility, which itself has its source in the contractual arrangements opening the doors of the job site to the tradesman, the Courts would apply to the construction field the principle expressed so long ago in the area of bailment. Thus all the parties whose joint efforts have one common goal, eg, the completion of the construction, would be spared the necessity of fighting between themselves should an accident occur involving the possible responsibility of one of them.105
This approach was adopted by Colman J in National Oilwell Ltd v Davy Offshore (UK) Ltd,106 in holding that the suppliers of a subsea wellhead completion system for a floating oil production facility were co-insured’s under the contractors’ all risks policy. The judge dismissed the contention that there cannot be an insurable interest based merely on potential liability arising from the existence of a contract between the insured and the owner of property. He held that that an insurable interest could be found in ‘the insured’s proximate physical relationship to the property in question’.107 Citing Lloyd J’s judgment in Petrofina, Colman J said:
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 of 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.108
The Court of Appeal tentatively approved of the more expansive approach to the issue of insurable interest in Glengate-KG Properties Ltd v Norwich Union Fire Insurance Society Ltd.109 The court had to consider the meaning of the phrase ‘the interest of the insured’ in a policy covering the owner of a building against consequential loss following a fire or other insured peril. The issue for the court was whether the insured could recover for the loss of architects’ drawings which were, at the time of the loss, owned by the architects although the insured might eventually have acquired them. It was held that the insured had an insurable interest in the drawings despite his lack of proprietary interest in them. Although the court saw his insurable interest as being in respect of consequential loss rather than in the actual drawings themselves, nevertheless Auld LJ and Sir Iain Glidewell, citing Mark Rowlands Ltd v Berni Inns Ltd, expressed the view that the insured could have insured the drawings on the basis of Lawrence J’s ‘factual expectation’ test.110
While not the primary issue in these cases, the definition of insurable interest was, nevertheless, decisive in determining the rights and obligations of the parties. This line of authority can therefore be seen as amounting to some recognition by the English courts of the broader conception of interest adopted in Canada and elsewhere. However, some limit was placed upon this trend by the Court of Appeal in Deepak Fertilisers & Petrochemical Corporation v Davy McKee (London) Ltd and ICI Chemicals and Polymers Ltd.111 The court did accept the broad conception of insurable interest in finding that a subcontractor in a building contract possessed an insurable interest in the entire works during construction. This was because of the economic disadvantage which would be suffered if, in the event of the structure being damaged or destroyed, they lost the opportunity to complete the work and receive remuneration. However, once the work had been completed the court stressed that such interest came to an end.
The litigation arose out of the construction for Deepak of a methanol plant in India which exploded a few months after it was commissioned. There was a ‘marine-cumerection’ policy under which contractors and subcontractors were named as co-assureds. The subcontractors included Davy McKee, a firm of consulting engineers, and ICI, who had provided expertise and technology. The critical question was whether the co-assureds had an insurable interest and were, therefore, immune from an action brought by Deepak’s insurers exercising subrogation rights. At first instance, Rix J rejected the insurers’ contention that the decisions in Petrofina and National Oilwell Ltd pointed to the cessation of insurable interest after completion of the works and concluded that Davy and ICI possessed the requisite interest so long as they were arguably responsible for damage to it. Since it was the insurer’s case that Davy and ICI bore responsibility for the explosion even though it happened after completion of the plant, Rix J felt that they should ‘in principle … be entitled to insure against their potential liability’.112 In his view the question relating to any temporal limitation on a contractor’s insurable interest had not arisen in the earlier case law, but he saw no reason why an architect, technical designer, or constructor should not be able to insure against liability for damage due to their fault, even though it occurred after completion of the structure.
The Court of Appeal, reversing the judge’s decision, held that the insurable interests of the co-assureds ceased immediately upon completion of the works and did not continue thereafter merely because they could be exposed to potential liability at some future time. It followed that any damage to the plant after it was commissioned that was attributable to the fault of Davy could not be regarded as covered by the insurance policy. The insurers, therefore, could sue Davy. Stuart-Smith LJ stated that once the works were complete: