DETERMINING THE EXISTENCE OF INSURABLE INTEREST IN AN INSURANCE CONTRACT

By Ninsiima Irene

Advocate and legal consultant with M/s Angualia Busiku & Co. Advocates www.lawyers-uganda.com

April 2013

Introduction

It has been pointed out judicially that it is not an easy matter to give a definition of an insurance contract.[1] Even statutes have not given a definition because of the risk of inadvertently excluding contracts which should be within their scope. However for regulatory purposes, it has been suggested that a contract of insurance is any contract whereby one party assumes the risk of an uncertain event which is not within his control, happening at a future time in which event the other party has an interest and under which contract the first party is bound to pay money or provide its equivalent if the uncertain event occurs.[2] . From this definition, an insurance contract must have the following aspects; first is a legal entitlement i.e. there must clearly be a binding contract and the insurer must be legally bound to compensate the insured, a right to be considered for a benefit which is only discretionary is not enough.3 Second there must be uncertainty as to whether or not the event insured will occur  and  third, the occurrence must be out of the insured’s control, fourth, the insurer must undertake to pay the insured money or moneys worth on the occurrence of that event and lastly the insured must have an insurable interest in the subject matter of insurance.

Requirement of insurable interest under a contract of insurance

Insurable interest is a basic requirement of any contract of insurance. At a general level, this means that the party to the insurance contract  who is the insured or policy holder must have a particular relationship with the subject matter of the insurance contract, whether that be a life or property or a liability to which he might be exposed. Absence of this makes the contract illegal, void and unenforceable depending on the type of insurance.

2.1 Definition of insurable interest.

Insurable interest has been described loosely as:  the assured’s pecuniary interest in the subject matter of the insurance arising from a relationship to it recognized in law.[3] The legal definition was considered in the classic decision of the House of Lords in the case of Lucena V Craufurd[4], in this case the crown commissioners insured a number of enemy ships which had been captured by British Vessels but were still on the High seas. The statute giving them authority empowered them to take charge of such ships only when they reach the British ports. A number of ships were lost at the sea before reaching port. Whether or not the commissioners had an insurable interest in them, Lord Eldon said

“…insurable interest is 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.”

He went on to conclude that at the time of the loss the commissioners having no proprietary right to the ships had no insurable interest at all. Therefore one must have a Proprietary or contractual right in order to found an insurable interest. One must have a right to a legal or equitable interest or a right under a contract, a mere expectation or even moral certainty of loss  should  a particular property be destroyed is not enough. Thus it has been said that a person with a vested interest has an insurable interest but a person with a contingent interest for example a beneficiary under a will has no insurable interest. He has no right because the testator may revoke the will i.e. the contingency may not happen.[5]

In Macaura V Northern Assurance Co Ltd[6] the sole shareholder of a limited liability company insured in his own name, timber owned by the company, the House of Lord held that he had no insurable interest in the timber owned by the company that had been subsequently destroyed by fire. That as a shareholder he had no right to the property owned by the company, a company being a separate legal entity. However a shareholder can insure his shares against loss of value due to the failure of the venture of the company and a creditor may insure against his debtors insolvency. A point of interest that also arose out of Macaura’s case is that possession of property by itself is not enough to found an insurable interest. The timber was standing on Macaura’s land. There must be a right of enjoyment of the property or some legal liability in respect of it.

MacGillivray[7]  has provided a working definition of insurable interest under life insurance in the following words;

where the assured is so situated that the happening of the event on which the insurance money is to become payable would, as proximate cause, involve the assured in the loss or diminution of any right recognized by law or in any legal liability there is an insurable interest in the happening of that event to the extent of the possible loss or liability”.

He  goes on to say that definitions of insurable interest in different contexts of life and property insurance provide for the following;

  • A right recognized by law. This must be an existing right not a mere hope or expectation of a future benefit because an event may happen to prevent such hope or expectation being realised. A mere moral obligation too does not create an insurable interest.
  • Any legal liability. This refers to two distinct cases, first, just as an assured has an interest in his own life, so he has an interest in his own assets and is entitled to take out liability insurance to indemnify him against loss in the event of being made liable in damages towards a third party. Secondly an insurable interest in property is created when the assured’s legal relationship to it renders him liable to pay money in the event of it being lost or damaged by an insured’s peril. Thus a person who has agreed that goods in transit are to be at his risk has an insurable interest in them even if he is not the owner or has no possession of them.

Legal basis of the requirement of insurable interest

A person insured under a contract of insurance is required to posses an insurable interest either because the requirement is inherent in the nature of a particular contract of insurance itself in order for it to be enforceable or because it is stipulated by statute as a condition of the validity of the policy.

Interest required by policy of indemnity.

If upon a proper construction of the policy the insurer has undertaken to indemnify the assured against loss caused by or arising from a particular risk, an interest is required by reason of the nature of the contract. One of the principles in the case of Macaura v Northern Assurance Co[8] is that if the assured has no interest at the time when the loss insured against occurs, it is clear that he cannot recover anything on an indemnity policy because he has suffered no loss against which he can be indemnified.[9] Similarly if he has an interest less than the full value of the subject matter, he can suffer no greater loss than the total value of his actual interest at the time of loss and therefore his claim for personal indemnity cannot exceed the value of his interest.[10]

Valued policies are indemnity contracts of insurance. Here the parties may agree to the value to be placed on an insured property for example in marine insurance and the agreed value is then conclusive and binding as between both parties. If the property is lost or destroyed the insurer is bound to pay the agreed value and is not permitted to object that this is not the true value. In case of only partial loss which diminishes the value of the property, the assured recovers a proportion of its agreed value corresponding to the depreciation in its actual value.

Not all contracts of insurance are indemnity contracts, where a contract provides that on the occurrence of an event insured against the insurer will pay a fixed sum or a sum calculated by the application of a particular formula or scale regardless of whether the assured has suffered a loss or not, or irrespective of the amount of loss in fact suffered, then it is not an “indemnity insurance” but a “contingency insurance”.

Where the insured lacks an insurable interest, the insurer may be able to raise this as a defence to the insured’s claim that the insured has no interest at all and the contract is a wager  and void or that he has an interest insufficient to constitute an insurable interest in law in which case the contract will be voidable.

Statutory requirement of insurable interest

Whether or not the terms of an insurance contract require insurable interest, if it is required by statute, a policy without it will be void and in some cases illegal and in such cases the requirement cannot be waived. Under the Marine Insurance Act[11], insurable interest is required under s.6 and must attach before loss occurs, a defeasible or contingent interest is also insurable[12] and a partial interest is insurable as well14. Under the Insurance Act,[13] s. 96 provides that in life insurance the policy holder must have an insurable interest in the life or event. Insurable interest is deemed to exist in certain cases for example a parent of a minor or a guardian of a minor on the life of minor, spouses on each others lives etc.

Time when the interest is required

In other types of insurance other than marine insurance, interest must exist only at the time the policy is effected.[14] In marine insurance, interest needs to exist at the time of loss, in Uganda, the Marine Insurance Act[15] s.6 (1) provides that the assured must be interested in the subject matter of insurance at the time of the loss, though he or she need not be interested when the insurance is effected. This provision takes into account the fact that marine insurance is often effected before formal completion of the commercial transaction which forms the subject matter of insurance. In marine insurance, persons deemed to have an insurable interest in a marine adventure are the owner of the goods[16], the insurer or underwriter, the lender of money on bottom or respondentia19, and the master or any member of the crew of the ship[17].

The interest must be a financial or pecuniary interest. This means that the assured must show that he would suffer financially by the loss of the legal right on the death of the life assured or occurrence of loss and it is only the amount of likely loss that can be recovered.

Insurable interest in life policies.

In life insurance policies an insured must have an insurable interest in the life of the life insured at the time of effecting the policy absence of which renders the policy void. Insurable interest arises out of the pecuniary relationship that exists between the insured and the life assured such that the policy holder must show that he stands to benefit financially from the continued existence of the life assured or be put in a financial loss by the death of the insured.

  • Insurable interest in ones own life. This is presumed to exist because one can protect their estate from loss which might result from their premature death.
  • Insurable interest in one’s spouce’s life. A husband and wife have reciprocal rights and duties created by the marriage tie.
  • They would have an insurable interest in the lives of their parents if the parents are legally obliged to support the child and a child would suffer financially by such a loss of a legal right on their death.
  • Adult children. They have no such insurable interest unless such can prove some legal obligation arising on the death of the parent. In the case of Harse V. Pearl Life Assurance Co Ltd[18]a son insured the life of his mother who lived with him and kept house for him. The insurance was expressed declared to be for funeral expenses. It was held that the policy was illegal for lack of interest, there being no legal obligation on the son to burry his mother when she died, and she not being legally bound to keep house for him.
  • Parent insuring life of a child. Such insurances have been said to be effected in practice. The case of Halford V Kymer[19]is the authority for the fact that a parent would not usually have the necessary interest, except possibly for funeral expenses because there is no other financial loss arising. There can be no other obligation on a parent to incur expenditure on the death of a child. Even if a parent is being supported by an adult child, there is no obligation and hence no interest.

Insurable interest in property insurance

In respect of business relations, insurance may be effected by for example a creditor on the life of his debtor, an employer on the life of his employee or vice versa or a partner on the life of his partner. In such a case the amount of interest is limited to the pecuniary interest of the insured. In the case of Hebdon V West[20] a bank clerk insured his employers life with two insurers, one policy being for 5,000 pounds and another for 2,500 pounds when his employer died, the clerk received the 5,000 pounds from the 1st insurer but the 2nd insurer refused to pay. Court held that the clerk was entitled to 5,000 pounds which he had received. That he had an insurable interest in his employers life to the extent of what he was contractually entitled to under his contract of employment i.e. an amount of 4,200 pounds because he stood to suffer this loss of a legal right and this interest was more than satisfied by the payment by the 1st insurer, and the 2nd insurer was not liable.

Insurable interest of a party to a contract of Sale of goods.

A party to a contract of sale of goods who either has property in the goods or bears the risk of their loss has an insurable interest[21] but an innocent purchaser of stolen goods without good title to them does not have an insurable interest[22].

Insurable interest in the case of limited interest in property

The categories of legal or equitable interest which will support insurable interest include the interest of a mortgagor and a mortgagee, vendor and purchaser, landlord and tenant, trustee and beneficiary. However once the insured is not the sole unencumbered owner of the property, whether real or personal the question of the extent of his interest becomes very important. Any one who has a proprietary interest in property may insure it up to its full value, contractually the insured must have an interest the time of loss and the value of his interest is crucial, he can prima facie recover only sufficient to indemnify him.

For example any tenant of property has an insurable interest in it and can therefore insure it up to its full value. If he is merely a weekly tenant with no obligation to insure or repair his recovery is limited to the value of his insurable interest which can at most be the equivalent of four weeks rent. If he has a fixed term lease under which he is liable to pay the full rent regardless of the destruction of property, he will have an interest at the time of loss to that extent.

Waiver of insurable interest

Where the requirement of insurable interest is not a statutory requirement then the insurer may decide to waive it. If it arises out of the nature of the contract where the requirement of insurable interest is merely implied into the contract as a consequence of the principle of indemnity, there is no reason why in an appropriate case contractual requirement should not be waived/ dispensed with and there are clear authorities on this; In Prudential Staff Union Versus Hall,[23] the plaintiff Association of employees insured with Lloyds against any loss suffered by any of its members of money held by them as agents/ collectors of their employer. |Clearly the Association had no insurable interest in its members’ liabilities yet this was held to be no bar to its enforcing the insurance contract since there was a contractual undertaking of the insurer to pay the association waiving any requirement of insurable interest.

Insurance of third parties interests by a limited owner or one without interest.

If the insured has a limited interest in the goods insured but has insured them for their full value, he may in certain cases be entitled to recover the full value upon the loss, holding the balance on trust for the third parties entitled to the other interest and indeed if he himself has suffered no loss, he may recover the full value for the third party. What matters is that the insured has in interest in the property. In the case of Waters V Monarch fires and Life Assurance Co.[24], the plaintiffs were flour and corn factors who effected a floating policy over the goods in their warehouse at a particular time. It was held that the plaintiffs were entitled to recover the full value of the goods, they would retain sufficient to cover their own interest and were trustees for the owners of the goods as to the rest. It was clear from the words of the policy that it covered the interests of the owners. The fact that they were unaware of the policy was irrelevant.

In contrast, In North British and Mercantile Insurance Co. V Moffat,[25] tea merchants insured chests of tea in their ware houses which were their own or “in trust or on commission” which they were responsible , fire destroyed certain chest which had been resold by the insured. It was held that because property in those chests had passed to the purchasers, the insured had no interests in them and could not recover for the purchases to whom he was not liable.

In the leading case of Hepburn V A. Tomlinson (Hauliers) Ltd[26] carriers effected insurance on a quantity of tobacco which was stolen in circumstances attaching no liability on them. The policy was clearly expressed as goods in transit policy. It was held that the carriers were entitled to recover the full value of the tobacco for the benefit of the owners. The principle in this case is mostly applicable to the situation where a bailee or carrier of goods for reasons of commercial convenience and insures goods on behalf of their owner as well as on his own behalf.

Thirty party’s rights.

The above principles sanction an exception to the doctrine of privity of contract where by a third party cannot benefit by or be sued upon a contract between two others. The question is; What is the relationship between insured and third party?. (i) If he claims on the policy and recovers, it is clear that he must account to the owner whether trustee or in quasi contract for money had and received. (ii) If the insured does not in fact claim, the third party will only be able to recover by showing that the insured contracted as his agent or as trustee for him. On this basis, the third party can ratify and adopt the insured’s act provided that the insured had contracted as agent and the third party is not an undisclosed principal and thus if necessary, sue the insurer directly.

The insured without an interest.

Here the insured can only recover if by the construction of the contract, the requirement of insurable interest was waived. In Williams V Balhe Insurance Association of London[27], the plaintiff effected a motor policy on his car including cover against liability to third parties injured by the use of the car. The policy was also expressed to cover any friend or relative of the insured driving with his consent. The plaintiff’s sister driving the car with his consent negligently injured some people who recovered damages. The issue was whether the insured could claim on his sister’s behalf since he had no insurable interest in his sister’s liability. It was held that from the wording of the policy, the requirement of insurable interest was waived since the policy clearly extended to the sister’s policy.

Conclusion.

The requirement of insurable interest in a contract of insurance thus may arise as a statutory requirement or may arise from the nature of the contract like in indemnity insurance, the time when it is required is very crucial since there is a difference between the time it must exist in marine and non marine insurance. It has also been seen that in case of the requirement arising out of contract it may be waived by the agreement of the parties. Nonetheless where it is required, its non existence renders the contract viod and unenforceable and in some cases illegal and therefore it is one of the key elements which must be taken into account in every insurance contract.