The subject of insurable is of great importance in the three leading branches of insurance, ie marine insurance, fire insurance and life insurance, and gives rise to many difficult questions.
Similar questions no doubt, may, in theory, arise in the different branches of accident insurance. But in practice, they rarely do so, either because of the nature of the insurance, or because the language of the policy prevents them from arising.
A. WHAT CONSITITUTES AN INSURABLE INTEREST
The classical definition of insurable interest was given by Lawrence J in Lucena v Craufurd:
‘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, not necessarily and exclusively that which may be the subject of privation, but the having 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 ; and where a man is so circumstanced with respect to matters exposed to certain risks or damages, or to have a moral certainty of advantage or benefit, 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 or advantage arising out of or depending on such thing may be considered as being comprehended.’
This definition forms the basis of s (2) of the Marine Insurance Act 1906 which provides:
‘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 the safety or due arrival of insurable property, or may be prejudiced by its loss or by damage thereto, or by the detention thereof, or may incur liability in respect thereof.’
Where, as in the case of personal accident insurance and most branches of property insurance, the subject-matter of insurance is a physical object exposed to certain perils, an insurable interest is constituted by the fact that the assured, from his relation to the subject-matter, will suffer prejudice if the subject-matter is lost or damaged by such perils. Thus, the assured is clearly prejudiced by the loss of life or limb, or by the theft of his own goods, and has, therefore, an insurable interest for the purposes of a personal accident or burglary insurance.
In case of liability insurance, in which the subject-matter of insurance is not, strictly speaking, physical object, the definition of insurable interest must be broadened. It is sufficient if the assured has an insurable interest in the event insured against, i e the event must be one by the happening of which he would suffer prejudice. Thus it is clear that the assured will suffer prejudice by the happening of an accident for which he is responsible to third persons, or by the insolvency of his debtor; and he has, therefore an insurable interest for the purposes of a liability or solvency insurance policy.
In the case of goods, or other property, insurable interest may be based on ownership, and this ownership may be either sole or joint; absolute or limited; legal or equitable.
Ownership is not , however, necessary; insurable interest may be founded upon contract.
Thus , a bailee who has contracted, expressly impliedly, to be responsible for the safety of goods belonging to another, or who has contracted to insure them, has an insurable interest in them. Apart from any question of contract, the mere fact of possession, if lawful, is sufficient to give an insurable interest.
An interest, to be insurable must have a pecuniary value. Its nature, however, is broadly, speaking immaterial.
An insurable interest need not be a permanent or continuing interest; it is nonetheless insurable because it is defeasible, since it is a valid interest until it is defeated.
The fact that the interest of the assured is precarious, and that other persons are entitled at any moment to call on him to hand over the object insured to them, does not therefore prevent his interest from being sufficient to support a contract of insurance.
The interest must, however, be a real interest, since the mere expectation of acquiring an interest, however probable, does not give the right to insure the property out of which the expectation arises,
So long as there is a real interest, it is not necessary that the assured should be entitled to a present enjoyment. A right to future possession, or a future interest, however remote, is equally insurable, since the assured’s prospect of benefit is clear, and the prejudice, which he suffers by reason of the object insured being destroyed by the peril insured against, cannot be attributed with absolute certainty to any other cause than such peril.
Where the assured has, in fact, an interest, it is immaterial how such interest has been acquired.
The inclination of the Courts is to find in favour of an insurable interest, whenever the facts the facts of the case and the law applicable permit.
B. THE NECESSITY FOR AN INSURABLE INTEREST
Every contract of insurance requires an insurable interest to support it; otherwise, it is invalid.
In certain kinds of insurance, e g liability insurance and fidelity or solvency insurance, the very nature of the insurance implies the existence of an insurable interest, whilst other kinds of insurance, e g personal accident insurance and burglary or livestock insurance, are, in practice, affected by the assured, for the most part, in respect of his own person or property. Occasionally, however, the assured may, for his own benefit, effect an insurance on the person or property of another, and then the question of insurable interest becomes important.
Thus, a personal accident policy may be effected by the assured against the loss which he may suffer by reason of an accident to a third person. To render such an insurance valid, the assured must have an insurable interest in such person’s safety; and this interest must be of a pecuniary nature. A son, therefore, whose father is a pauper and dependent on him, has not a sufficient insurable interest to support an insurance on his father against personal accident.
Again the assured cannot recover on a contract of fire insurance unless he shows that he has an insurable interest in the subject-matter of insurance. For it is clear that if he has no insurable interest in a particular object, he cannot be prejudiced by its destruction, nor is there anything to which the right of indemnity given by the contract can attach. The contract will be nothing more than a contract to pay a sum of money on an uncertain event, in the determination of which neither of the contracting parties has any interest, and which, apart from the contract itself, cannot, therefore, by any possibility be adverse to the interest of the assured, i e it will be a mere wager.
As far as marine insurance is concerned, the Marine Insurance Act 1906, s 4, provides that:
(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 the 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 of 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.
By the life Assurance Act 1774, s 1, insurances without interest are prohibited. The Act, notwithstanding its title, is not confined to life insurance, for it expressly refers to insurances on any other event or events whatsoever. Hence, it has been held to apply to policies on the rise or fall in the price of shares, on the determination of the sex of a particular person, and on the date of the conclusion of peace. On the other hand, the Act does not apply to insurances on ships, goods or merchandise, or to mere wagers not expressed in the form of a policy. The Act further provides that no greater amount shall be recoverable from the insurers than the amount or value of the assured’s interest.
C. DESCRIPTION OF INTEREST
1. The general rule
Although the assured must have some interest in the subject-matter to entitle him to effect an insurance in respect of it, it is not, as a general rule, necessary that he should specify in the contract or even disclose to the insurers, either the nature or the extent of his interest.
As far as marine insurance is concerned, the Marine Insurance Act 1906, s 26(2) provides:
‘The nature and extend of the interest of the assured in the subject-matter insured need not be specified in the policy.
All that requires is an adequate description of the subject-matter, and such description is sufficient to cover any interest which the assured may have in the subject-matter, whether as owner or otherwise. This equally applies where the assured has several interests, differing as regards both nature and extent, in respect of the same subject-matter.
2. Exceptions to the general rule
A specific description of the assured’s interest is, however, required in the following cases:
a Where there is an express condition to this effect.
b. Where the insurance is prospective profits or is against consequential loss.
c Where the interest is, from its precarious nature, material to the risk.
(a) Express condition
Sometimes the insurers it an express condition that the policy shall not extend to cover certain kinds of interest, unless the assured shall specify them, e g in the case of goods, held in trust or on commission.
The assured is occasionally required by an express condition to disclose to the insurers at the time of effecting the insurance, or to specify in the contract, the extent of his interest in the subject-matter of insurance. In any case, however, he cannot recover after loss in an action brought on the policy, unless he proves the extent of his interest, or where he has intended to cover by the insurance more interests than his own, their extent and his intention to cover them.
(b) Prospective profits or consequential loss
Where the peculiar nature of his interest is such that the risk may be affected thereby, and it may, therefore, be properly said that such interest is itself the subject-matter of insurance, the interest must be specified.
In this case the interest is not a direct interest in the safety of the subject-matter, but only a collateral interest, i e a prospective advantage to be derived from its continued safety.
Thus, profit or remuneration, which has already been ascertained at the date of the insurance, or which must necessarily be earned in the ordinary course of events before the loss, need not be separately, since either is recoverable under an insurance on the property out of which it is earned, as being a direct interest in such property.
Prospective or anticipation profit to be derived from the use of property is, on the other hand, in a different category. It is not ascertainable at the date of the insurance, nor is there at that date any certainty that it will ever be earned. The destruction of the property out of which profit is expected to be earned cannot be said to carry with it as a necessary consequence the loss of such profit, for the profit might never be earned, even though the property were not destroyed. Under an insurance on the property, therefore, prospective profit cannot be recovered. To enable it to be recovered it must be specifically insured as such.
Such an insurance is an anomaly, since prospective profit is in the nature of an expectancy. But the insurability of such profit is well recognized.
Similarly, where the insurance is against consequential loss, a specific description of the assured’s interest is necessary.
(c) Precarious nature of the interest
Even when the interest of the assured in the subject-matter is a direct interest, it is necessary for him to disclose it, if it is of so precarious or unusual a nature as materially to affect the risk.
D. THE TIME FOR INSURABLE INTEREST
1. Interest at the time of the loss sometimes essential
(a) Insurances other than life insurance
Where the assured seeks, in the event of loss by fire, to recover from insurers sums payable under the policy, it is essential for him to show that at the time of the loss he had an insurable interest in the object destroyed. This is the crucial date; for if he had no interest, he can have suffered no loss, and is therefore entitled to no indemnity.
The possession of an interest, or of its acquisition at any particular date, so long as it is acquired before loss, appears to be of less importance.
In the case of marine insurance, the Marine Insurance Act 1906, s 6(1) provides that:
‘The assured must be interested in the subject-matter insured at the time of the loss though he need not be interested when the insurance is effected.’
The view, however, has been expressed that, in the case of fire insurance, the assured must have an insurable interest at the date of effecting the insurance, and that otherwise he cannot recover.
Where the policy contemplates the possible substitution of other property in place of that possessed by the assured at the date of effecting the insurance, e g in the case of a tradesman insuring his stock-in-trade, the assured will be entitled to recover notwithstanding that the property actually destroyed was not acquired by him until after the date of the policy. As in this case, however, the insurance is not an insurance on specific objects, but only on a class objects, it may be said that the class, and, therefore, his interest in it, existed at the date of the contract.
In the case of policies effected by carriers, warehousemen and bailees of a similar type, it is clear that the policies must apply to such as may, from time to time, come into their hands, and not merely to those goods, which happened, in fact, to be in their possession at the date of effecting the policy.
There, however, the insurance is equally an insurance on a class of objects, and not on the specific object; the assured’s interest is an interest in the permanent subject-matter, i e the class, and exists throughout the duration of the contract, unaffected by any change in the individual objects composing the class.
The same reasoning does not, however, apply to insurances on specific objects, in which the assured has no interest at the time of insuring. In the case of specific goods, there appears to be no reason for drawing a distinction between fire insurance and marine insurance, and, accordingly, the insurance of the future interest is valid, provided that the interest is, in fact, acquired before loss.
The position, however, may be different in the case of insurances upon houses, buildings, and similar property, and under the Life Assurance Act 1774, if, as may be the case, it applies to such insurances, it may perhaps be necessary for the interest to subsist at the time of insuring. Apart from this possible statutory prohibition, there is no reason why future interests in such property should not be insurable in the same way as future interests in specific goods.
In any case, if the assured expressly represents that he has an interest at the time of insuring, he must, in fact, have an insurable interest at the time of insuring. The acquisition of an interest subsequently, before the loss, will not be sufficient.
(b) Life insurance
The insured must have an insurable interest at the time at which the policy is effected. It is immarterial whether or not he later ceases to have such an interest, e g where before the debtor, whose life is insured, dies, he pays the creditor the amount of the debt.
2 Retrospective insurance
Although the subject-matter may, in fact, have been destroyed by fire at the date of effecting the insurance, the contract may, nevertheless, in some cases be valid, and operate to indemnity the assured notwithstanding such destruction; for there is no objection, in principle, to a retrospective insurance, provided that the assured had, in fact, at the date of the loss, an insurable interest.
Such an insurance, in the case of houses, buildings, or similar property, does not appear to be prohibited by the Life Assurance Act 1774, ss 1 and 3, even if that Act applies to the fire insurance, since the assured is, in fact, prejudiced by reason of the happening of the peril insured against, and he has therefore an insurable interest existing at the date of effecting the insurance. To render a contract of this kind valid, it is necessary to establish.
a. that bothe the assured and the insurers were ignorant of the loss at the time of making the contract; and
b. that they both intended the contract to apply to such a loss.
Their intention need not necessarily be shown by express words. It must, however, be clear from the language used that such was the intention of the parties; if this cannot be shown, the policy is void, and the premium must be returned. It would further appear that where the fact of a loss is known both parties, but its amount is unascertained, a contract indemnifying the assured against such loss would be equally valid, for, in this case the contract is still a contract upon a contingency.
As far as marine insurance is concerned, the Marine Insurance Act 1906, s 6(1) provides that:
The assured must be interested in the subject-matter insured at the time of the loss though he need not be interested when the insurance is effected: provided that where the subject-matter is insured “lost or not lost”, the assured may recover although he may have acquired his interest until after the loss, unless at the time of effecting the contract of insurance the assured was aware of the loss, and the insurer was not.’
Section 6(2) of the Act goes on to state:
‘Where the assured has no interest at the time of the loss, he cannot acquire interest by any act or election after he is aware of the loss.’