INSURANCE LAW
WK3

Insurable Interest

It has been said that insurable interest is one of the great upstanding principles in the formation of the contract of insurance. It is the interest in which the law requires a person to have, to enable him to effect a valid insurance (Per Judge Patterson in Bernard v NEM West Indies Insurance Ltd). According to Lawrence J in Lucena v Carufurd, “Insurable interest is to be interested in the preservation of a thing, is to be so circumstanced with respect to it as to benefit from its existence, prejudice from its destruction.”

Before the legislature intervened wagering contracts were not illegal and could be enforced in a court of law. The present position is that no one may effect insurance unless he has an insurable interest in the life or property which he desires to insure. A contract made without such an interest is void. Three statutes brought about this change: The Marine Insurance Act 1906; The Life Assurance Act; and the Gambling Act of 1845. Until the passing of the legislation there was no requirement for insurable interest. The general principle of every contract was simply that it was enforceable by the parties irrespective of the subject matter provided it was neither illegal, immoral nor contrary to public policy. According to Blackstone, gambling was considered a social evil which promoted idleness, theft and debauch among the lower class. Patterson expressed similar views: “A sense of antagonism is aroused in a community of workers against persons who obtain a means of livelihood without participating in the machinery of social or economic production or distribution.” Another and more obvious reason for the change is that a strong possibility arises where the only interest of X in Y is an insurance policy there may be a temptation on the part of X to expedite Y’s demise. Indeed up until the passing of the legislation on the stamp out wagering, the English case series reveals that insurance without interest was followed by a series of arsenic poisonings. In Liberty National Life Insurance Co v Weldon 1957 Supreme Court of Alabama, a woman took on policy on 2 ½ yrs. old niece. 2mths later the niece died of arsenic poisoning. The aunt was convicted of murder and executed. The existence of an insurance policy leads to an evidential presumption against X (he who has effected the policy).

Business relationships

A contract of employment at a salary for a term of years gives the employee an insurable interest in the employer’s life during the unexpired portion of the term. The decision of Hebdon v West illustrates that with regards to life insurance on business relationships, the effect of ss2&3 of the Life Assurance Act of 1774 is to measure the insured’s loss at the time the policy was effected. In this case a bank clerk insured the employer’s life with two insurers one for 5,000 and the other for 2,500. The clerk had a contract of employment for 7yrs at a salary of 600 per annum and he owed his employer 4,700. The court upheld the refusal of the second insurance company to pay the sum insured stating that he had an insurable interest to the extent of what he was contractually entitled.

Note: 1. 4,200 was recoverable because he was contractually entitled to this amount and he stood to suffer by virtue of the loss of a legal right. 2. The fact that the assured was promised that the debt would not be called in was immaterial as no consideration had been provided and it was not legally enforceable. 3. It follows that the right to a salary is a legal right arising from the contract and that such contract gained for personal services would expire on the death of either party. Furthermore, the employer has an insurable interest in the life of the employee. (Key man insurance-companies insure their key personnel)

Note: 1. There is a divergence between theory and practice. For example, group insurance policies where the nature and value employee has an impact on the premiums paid and the assured sum. See the cases of Green v Russell and Marcel Bella Ltd v Haden where the sum insured bore no relationship to the pecuniary interest of the employer. Note also JA s96 which expressly states that sub-s1, which requires an insurable interest and which outlines the ambit of the act, does not apply to group insurance. T&T 124

Debtor creditor relationship

A creditor assurity has an insurable interest in the life of the debtor. If the debt is to be paid by two or more persons jointly, it will also support “good” insurable interest for a policy on the life of each of them for the whole amount. Despite the decision of Godsall v Boldero it is now immaterial that the debt has been repaid before death. There the court based its decision on s3 of the Life Insurance Act and held that a policy held by a creditor on the life of his debtor was a policy of indemnity and the interest was valued at the time of loss, i.e. at the death of the life insured. This decision was overruled by Dalby v Indian and London Life Assurance Ltd where the phrase “shall have no interest in s1” was interpreted to mean no interest at the time of the contract.

On the other hand, a debtor has no insurable interest in the life of the creditor even where there is a promise by the creditor not to require payment of the debt during his lifetime. The rational for this is the lack of consideration and this deficiency means that all the debtor has is an expectation that the debt will not be called in.

Trustees
Trustees generally do not have an insurable interest in the life of any beneficiary but they may have an interest arising out of the terms of the trust provided that the trust instrument directs or permits them to do so.

Mortgagees
A policy to provide security for mortgage may be affected by the mortgagor and assigned to the mortgagee. In such a case no question of insurable interest arises thus there is no requirement for insurable interest for the mortgagee. The mortgagee has an interest in the life of the mortgagor and can effect a policy on his life and pay the premium himself. If he does so he is entitled to both the policy and the mortgage debt. Where the premiums are paid by the borrower or charged to him the lender must account to the borrower for any money received under the policy.

Companies and Directors or Managers
A company has an insurable interest in the life of a director or manager if the death pf the insured director or manager would result in the loss of special services and reduce profits. See Barbados s127(c) and Jamaica s96(d)

Categories of Insurable Interest and the Life Assurance Act 1774
This Act applies throughout the region and the Commonwealth Caribbean either by settlement or expressed statute incorporated English law as former British colonies. These jurisdictions received or adopted the principles of English common law. The first section of the Life Assurance Act provides that no insurance shall be made by any person on the life or lives of any person(s) or on any other event(s) whatsoever wherein for the person of whose use, benefit or on whose account such policy(ies) shall be made shall have no interest. S2 states that the name of the person interested must be inserted into the policy. S3 In the event where the insured does have an interest he shall not be entitled to recover a sum greater than the amount or value of the interest of the insured. S4 provides that the Act does not extend to ships, goods, or merchandise.

Merkin defines four critical deficiencies: 1. The nature of the interest is to specified 2. There is no indication of the time at which such interest is required 3. There is no specific sanction for the breach of s1 4. The operation of s2 is anomalous

The guiding principles of insurable interest reside in the common law. The insured must be able to demonstrate financial loss on the death of the person whose life the policy has been taken out. There are exceptions, or rather presumptions, of insurable interest where a pecuniary interest need not be proved: 1. A person may insure his own life for any sum whatsoever and as often as he pleases (Wainewright v Bland) 2. A wife may insure her husband (Reid v Royal Exchange Assurance Co) 3. A husband has an insurable interest in the life of his wife (Griffiths v Flemming) 4. In other instances a pecuniary interest must be proved. Financial loss is essential and besides being capable of valuation he must show that e will or may loos sum legal or equitable right therefore a father has no insurable interest in the life of his child merely by virtue of money paid for education and maintenance and otherwise as this is regarded as a moral obligation which is incapable of affording insurable interest. Pecuniary interest must be established (Halford v Khymer) which illustrates that a parent does not have the necessary interest except possibly with regard to funeral expenses. Does a child who is a minor have an insurable interest in the lives of his parents if they are legally obliged to support the child? The child must establish pecuniary loss at common law since no legal obligation is present. However, if a maintenance order has been made compelling a parent to provide for a child there is a civil obligation and therefore insurable interest. See respective maintenance legislation.

Jamaica s96
This section follows the common law-presumption of insurable interest in certain circumstances. In 1993 there was an amendment to the Act 1973 which said that there was a presumption of insurable interest in the life of the spouse. In 2001 the Act went back to the use of the terms “husband” and “wife”. Why? The definition of “spouse” was wide and included also unwed unions.

Reform
The Caribbean Law Institute Insurance Bill 1991 widened the category of dependence to encompass common law wives and other persons who rely on benefactors. It introduced the presumption of a pecuniary interest by a company in the lives of employees. It recognised insurable interest by a parent or someone in loco parentis in a child who is widely defined as including a step-child or adopted child. See also Status of Children legislation.

Note: While the common law position applies in Antigua and St Kitts-Nevis there has been statutory intervention in Belize s103, Barbados s127, St. Lucia s99, Jamaica s96.

The naming of persons interested
The 1774 Life Assurance Act stipulates that “interest” is required. There is debate, however, as to when insurable interest is required. S2 of the Act provides that the person(s) for whose benefit the policy has been effected must be inserted in the policy Wainwright v Bland; Shilling v Accidental death
Note: The policy itself is not conclusive evidence that the policy was for the use or benefit of the person named therein In the latter parol evidence was inadmissible to support the contention that the assured son who paid the premium and who filled out the proposal form and was a beneficiary under the assured’s will was entitled to receive the benefit.

Note: 1. The circumstances must be looked at against the totality of the evidence. The payment of a premium is not conclusive to show that the policy was effected for the benefit of that party. 2. The term “for whose use, benefit or on whose account” is given a somewhat restrictive definition. It does not include al persons who are ultimately intended to benefit under the insurance. Note, there is a distinction between the insertion of the name of persons interested and assignment or testamentary disposition on the other. Ss1 &2 of the 1774 Act pertain to the former. In the latter case, therefore, there is no requirement to show that the ultimate beneficiaries had any interest in the life of the assured. 3. A strict application of s2 can lead to injustice Evans v Bignald where A effected an insurance policy on his wife’s life as security for a loan obtained from trustees. A was not named in the policy and the policy as held to be illegal. Note, it has been argued that s2 is superfluous as once it is established that a person has an insurable interest under s1 it is unnecessary that that person be named in the policy. Indeed in Evans A had an insurable interest in his wife’s life.

WK 4

Effect of the lack of insurable interest

A lack of insurable interest renders a policy null and void in accordance with s1 of the Life Assurance Act of 1774 (s69), however, s96 of the 2001 Act does not refer to the lack of insurable interest, neither do any of the other statutes.

Note: 1. There must be an existing right. It must be more than an expectation or hope to possess the subject matter of the insurance in the future. Such an expectation is not sufficient to constitute an insurable interest. See Lord Eldon’s dicta in Lucena v Carufurd where he said, “Expectation, though founded upon the highest probability, was not an interest.” 2. Sentimental interest cannot support insurable interest. Pecuniary interest can. Halford v Kymer 3. Perfect legal interest is not necessary. An equitable interest is sufficient interest enabling the beneficiary (cestui que trust) to insure, and the trustees will also be able to effect insurance by virtue of the legal estate vested in them, hence, a purchaser of property who has failed in making his payments punctually but who is proceeding in equity to compel performance has an insurable interest by virtue of his equitable interest. 4. Although a bare expectation of acquiring a right is not an insurable interest once a right is acquired it will be sufficient to create an insurable interest not with standing that it is contingent upon the happening of some future e vent. All that the chance of ever coming into possession is extremely revoked ie a contingent or defeasible interest may create an insurable interest.

Indemnity insurance
Insurable interest in Buildings
The general principle of non-marine insurance applies ie the interest in the building insured must exist both: 1. At the time of effecting the insurance contract; and 2. At the time of loss

The following persons may have an insurable interest in the building that can be insured: 1. Owners-An absolute owner of property is entitled to insure it as is a joint owner or a limited owner. Property owned by a limited company is owned of course by the company and not the shareholders or ordinary creditors. See Lord Buckmaster in Macaura v Northern Assurance Co Ltd where he said, “If he were entitled to insure holding shares in the company each shareholder would be equally entitled if the shares were in separate hands.” On the other hand, a creditor who has secured his debt over the companies buildings has a legal interest in those buildings and may insure Maran Galloway Co v Zielli [1905] 2 KB 555. At p562 Justice Walton said that, “In so far as the Plaintiffs’ claim depends on the fact that they were ordinary unsecured creditors of the shipowners for an ordinary unsecured debt, I am satisfied that it must fail.”

2. Mortgagees and mortgagors-In accordance with the real property legislation the mortgagors have a legal interest in the property. The mortgagee may also insure if he has a legal interest which is sufficient to establish insurable interest. A mortgagor may insure and recover the whole amount of the loss and he is personally liable for the amount of the mortgage debt Castellain v Preston. Note: If the mortgage contract contains a covenant to insure up to a specified amount the recovery is limited to insurance which provided for the payment of a specified sum on the happening of an insured event.

3. Tenants-Any tenant has an insurable interest in the building(s) which he occupies Castellain v Preston. Note: The exception applies where the tenant remains in possession after the expiration of the lease, i.e. tenant at will.

4. Vendors and purchasers-The vendor of a building has an insurable interest in that building.
Note: Where the vendor has a lean as an unpaid seller after the completion of the conveyance he retains an insurable interest Castellain v Preston.
Note further: He will also retain insurable interest where he has a contractual responsibility for the safety of the building North British and Mercantile Ins Co v Moffatt

Real property

Whether or not the 1774 Assurance Act applies
Recall that s4 states that the Act shall not apply to ships, goods and is silent as to property. There is obiter dicta in the decision of Re King where Lord Denning expressed the view that the 1774 Act applied, however in the decision of Mark Rowlands Ltd v Bernni Ins Ltd Lord Justice Kerr held that s2 of the 1774 does not apply to indemnity insurance but only to insurance which is provided for the payment of a specified sum on the happening of an insured event. This case involved leased premises which were destroyed as a result of the tenant’s negligence. The landlord recovered under the policy and the insurers then sued the tenant in the name of the landlord for damages for negligence. The tenants who were unnamed in the action and were not co-insured with the landlords argued that they did not have an insurable interest. The action was dismissed on the ground that under the terms of the lease the insurance had been effected for the joint benefit of the landlords and tenants.

See the PC decision of the Siu Yin Kwan v. Eastern Insurance Company [1994] 1 All ER 213 where the PC examined the historical development of insurable interest and its purpose. They applied the Mark Rowlands decision finding that the 1774 Act did not apply to indemnity policies.

Insurable interest on goods

Looking at: 1. Owners-Kosmopoulos & Macaura 2. Vendors and Purchasers – Castellion v Preston Note also the Sale of Goods Act. A purchaser has an insurable interest in goods when either the property or the risk in the goods passes to him.
Note: The 1774 Act does not apply. The Gaming Act of 1845 applies which does require interest to exist at any particular time. If insurable interest existed at the time of the contract it is not necessary at the time of loss.

3. Persons with limited interest- Persons who hold goods in trust or on commission. All bailees, carriers, warehouse men, war fingers have been held to have an insurable interest in goods entrusted to them. Their interest is limited to the extent of their commission or other charges of bailment but it is clear that they can insure for the whole value of the goods holding the balance over their own interest for the benefit of the owners of the goods. See Waters v Monarch Fire & Life Assurance Co. where warehouse men recovered the full value of goods in trust irrespective of the fact that the owners of the goods were not aware of the insurance and had not charged for it. Cf with North British v Moffatt where an interest over goods had passed to a purchaser the insured merchants could not recover from the purchaser because the term “interest or on commission” were restricted by the words “for which they are responsible”. See also A Tomlinson (Hauliers) Ltd v Hepburn where carriers were entitled to recover the full cost of the goods, the policy was expressed to be a goods in transit policy.

What if the insured declines to sue, preventing the third party from recouping his losses, is the third party entitled to sue? See Vandepitte v Preferred Accident Insurance Corp. where the PC denied the third party on the basis of privity of contract. Of course a third party may evade the doctrine relying on trust principles or agency (Williams v Baltic Ins Co). See the decision of Glengate Properties v Norwich Union Fire Ins Society Ltd [1996] 2 All ER 487 where the CA was required to decide exactly when an assured might be interested in goods. In this case the architect’s plans were destroyed in a building. Were the plans insurable? The CA held that the Plaintiff was interested in property if he had a right to insure it thus giving a restrictive interpretation of the word “interest” to mean actual insurable interest.