Insurable interest - cargo and property insurance

Insurance, Insurable Interest, Property Insurance, Cargo, Marine, Risks Author: Aramayis Galichyan

Insurable interest is one of the fundamental principles in insurance, which conveys the main mission of insurance: to compensate insureds for insured losses. For an insured to be entitled to compensation, the condition of insurable interest in the subject matter of insurance has to be met. Furthermore, the absence of insurable interest may invalidate the insurance contract and make it void or even illegal.

Insurable interest is a universal insurance principle which has its roots coming from the United Kingdom where the first legal act was adopted prohibiting insurance contracts without insurance interest, namely the Marine Insurance Act 1745 (MIA 1745). The MIA 1745 stated that it has been found by experience that insurances “…without further proof of interest has led to many pernicious practices, whereby great numbers of ships, with their cargoes, have either been fraudulently lost and destroyed, or taken by the enemy in time of war…”, and as a corrective measure prohibited effecting insurance contracts without insurable interest and rendering such contracts null and void.

English law has a large influence on marine insurance law. It has indeed developed since 1745 and sets out the required elements of insurable interest as follows:

• The insured must have economic interest in the subject matter of insurance.
• A legal or equitable relation between the insured and the subject matter insured.

The definition of insurable interest varies across national legislations. Essentially, insurable interest is the evidence that the insured is interested in the preservation of the thing, life or health insured (the subject matter of insurance), and that the insured will suffer loss if the subject matter of insurance is lost or damaged. The existence of such an interest in the insured subject matter is required to be evidenced by law, contracts or other legal acts. The exact nature of insurable interest needs to be covered by the particular insurance contract (subject matter of the insurance contract) for the insured (beneficiary) to be entitled to indemnity.

The definition given by Lawrence J in Lucena v Craufurd (1806) at p. 302 is the very classic definition of insurable interest not only for marine, but also for non-life insurance contracts. In particular, he suggested the following definition:

“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: … and where a man is so circumstanced with respect to matters exposed to certain risks or dangers, as 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 definition advised by Lawrence J in Lucena v Craufurd (1806) has been widely used to describe the requirement for insurable interest to be economic or financial. This definition also requires a relationship between the insured and the subject matter of insurance, which should be such as to cause prejudice from the loss, or a benefit from the safety of the subject matter insured. The party who is intended to benefit from insurance is usually identified by non-liability insurance contracts. Therefore, only if the insured is the party who has suffered a financial loss resulting from the damage or loss of the property insured, he may be entitled to receive and keep the indemnity.

What type of relationship should exist between the insured and the subject matter of insurance?

In Feasey v Sun Life Assurance Company of Canada and Phoenix Home Life Mutual Insurance Company and Steamship Mutual Underwriting Association (Bermuda) ltd and Feasey [2003] EWCA Civ 885 Lord Justice Ward outlined the next mandatory element, namely the requirement for a legal or equitable relation to the subject matter insured. This element was depicted by Lord Eldon in the same Lucena v Craufurd (1806) at p.321:

"In order to distinguish that intermediate thing between a strict right, or a right derived under a contract, and a mere expectation or hope, which has been termed an insurable interest, it has been said in many cases to be that which amounts to a moral certainty. I have in vain endeavoured however to find a fit definition of that which is between a certainty and an expectation; nor am I able to point out what is an interest unless it be 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."

Lord Eldon emphasized that a mere expectation of a benefit was not an interest, whatever might have been the chances in favour of the expectation.

In Feasey Lord Justice Ward expressed his concern that the economic interest element has gained predominance over the need to satisfy the second part of Lucena, namely that there has to be some legal or equitable interest between the insured and the subject matter of insurance, expectation of harm or benefit not being enough.

In Macaura v. Northern Assurance Co. Ltd (1925) AC 619 the subject matter of insurance was timber which had been sold by the insured to a company in which he was the sole shareholder and a substantial creditor of the company. Macaura insured the timber in his own name. The House of Lords held that since the insured didn’t have any legal or equitable interest in the property owned by the company, he didn’t have any insurable interest in the destroyed property.

The case of Macaura is important for understanding the requirement of the legal or equitable relationship between the insured and the subject matter of insurance.

In the Scottish case, David Cowan v. Jeffery Associates and others (1988) Lord Hamilton outlined the view of the House of Lords in Macaura v Northern Assurance Co Ltd (1925) and noted that under Scots law the concept of equitable property or an equitable interest in property is unknown, and he further went on to bring a number of examples where a person could be recognised having insurable interest in an insured property, which were “illustrative of the requirement for a close legal relationship between the person insuring and the property insured”.

Section 5(2) of the Marine Insurance Act 1906 (MIA 1906) defines insurable in the following way:

“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 by damage thereto, or by the detention thereof, or may incur liability in respect thereof.”

Proprietary rights in the property indeed lead to insurable interest. However, the definition given in Lucena v Craufurd (1806) and the MIA 1906 convey the understanding that not only proprietary rights may constitute insurable interest.

As it was observed in Feasey, there is no such rule that insurable interest which relates to a liability should only be covered by a liability policy rather than a policy insuring property.

Within the context of cargo insurance, talking about insurable interests relating to liability and covered by a cargo insurance policy, the first possible situation is where a cargo insurance policy has been concluded for the benefit of a carrier. In Hepburn v. A Tomlinson (Hauliers) Ltd (1966), carriers effected a cargo insurance policy. The cargo was stolen owing to the negligence of the owners’ own staff.  The owners of the cargo had been named in the policy. The House of Lords analysed the carrier’s (bailees’) insurable interest within the scope of agency law. It approved the decision in Waters v. Monarch Fire and Life Assurance Co (1856). Lord Pearce expressed his view that a bailee or a mortgagee or others in analogous positions have, by virtue of their position and their interest in the property, a right to insure for the whole of its value, holding it in trust for the owners.

Under English law bailees are allowed to effect insurance contracts for property belonging to others which they hold ‘in trust or on commission’, and recover the full loss of the owners as trustees, regardless of whether they are liable for the loss (Waters v. Monarch Fire and Life Insurance Co. (1856)).

As it can be concluded from the ratio decidenti of Hepburn v. A Tomlinson (Hauliers) Ltd (1966) and Waters v. Monarch Fire and Life Insurance Co. (1856), carriers may in fact be considered as parties acting for the benefit of their principals, or effecting insurance policies for goods held ‘in trust and commission’ and conclude insurance contracts. However, even then they wouldn’t be allowed to keep the indemnity for loss of or damage to cargo under cargo insurance policies.

Even the widest possible interpretation of insurable interest shouldn’t confer the right of receiving indemnity, purely based on the existence of carrier’s liability for the loss. Otherwise, this might lead to a situation where carriers are not interested in the preservation of the cargo carried by them, since if the cargo is lost or damaged, they will receive indemnity. The same is applicable for freight-forwarders.

This is why international conventions providing uniform rules in respect of carrier’s liability, prohibit conclusion of cargo insurance policies for the benefit of international carriers. Because of the dynamic nature of ownership and risks in international transportation of goods, the required timing of insurable interest in cargo insurance varies from other insurance products.

The subject matter of insurance must be described so as to encompass the insurable interest in question. The insured subject matter must be ascertained and the nature of the insurable interest must be discovered to conclude whether a particular policy covers the interest in question.

Conclusion

Owners, part or joint owners, mortgagees, mortgagors, bailees, executors, trustees or other parties may all insure any property, provided they have insurable interest in it. It can be noticed that all of these parties, aside from the ownership rights, and the possible responsibility for loss of or damage to the property, may also hold possessory rights in the property.

At the same time, only those who have suffered loss as a result of damage or loss of property due to the occurrence of an insured peril may receive and retain the insurance indemnity. Such property must be the subject matter of insurance and the insurable interest must be the one covered by the particular policy to allow benefiting from insurance.

Pure liability risks would be more appropriate to insure under a liability insurance contract to avoid possible conflicts of opinions on whether or not the insured has insurable interest in the property under a property insurance contract.

As a conclusion, we may summarise that insurable interests are not necessarily proprietary rights in the subject matter insured. To be considered as having insurable interest, the insured is expected to demonstrate an interest in the safety of the subject matter, a legal right in the property insured or a right deriving from a contract, which has a beneficial financial bearing on the insured, and to demonstrate financial prejudice caused by loss of or damage to the property insured, arising from a close legal relationship between the insured and the subject matter of insurance. The subject matter of insurance must be so described, and the relationship of the insured and the subject matter must be such as to embrace the interest covered by a particular insurance policy.