The history and background of Insurable interest cannot be penned and concluded

without mentioning the Marine Insurance Act 1745. With specific reference is the
preamble of the same which says and quote;

It hath been found by experience, that the making of insurances, 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 cargos, has
been fraudulently lost or destroyed.

This was the first statute to include this principle on insurable interest in a piece of
legislation. It is evident that the issue of insurable interest was first addressed in
marine because thats where the problem was prevalent and it had to be nipped in
the bud. This fact is further buttressed by the fact that in Canada the Marine
Insurance Act is very vocal in the same principle as well, especially on sections 7
up to section 18. This shows how this principle is of essence in marine business.

The background of this inclusion in Marine Insurance Act 1745 is mainly to do

away with the risk of gamblers in marine insurance. Gambling and gaming are
illegal in marine insurance. These kind of activities are done by people with no
interest whatsoever in the insured but they insure it for the sake of financial gain
and that was a direct thorn in the business of marine insurance hence such
promulgation of the principle of insurable interest. Also of significance is the issue
of betting as well. Betting was taking over insurance business in marine and such
people were just doing it for the sake of financial enrichment not because they
have any attachment of interest in the subject matter.

For example betters and gamblers would just insure a cargo that they have no
interest in and also make sure that the cargo of ship disappear or is lost so that they
are indemnified and enrich themselves which is against the fact that insurance
moneys should not provide a profit for the insured. So in a bid to protect the
marine insurance industry the law was made to make sure such rot is eradicated.

Definition

Insurable interest was defined by section 5 (2) of the Marine Insurance Act, 1906
which reads and I quote;

In particular a person is interested when he stands in any legal or equitable

relation to any insurable property at risk in consequence of which he may
benefit by the safety of insurable property, or may be prejudiced by its loss, or
damage thereto or may incur liability in respect thereof.1

This definition was legally strengthened by the decision of the court in the case of
Lucena v Craufurd2 where the court upheld the notion of insurable interest to be
of essence in indemnifying an insurance contract.

Now it is within this definition that we need to qualify the legality of this principle
and see if its not contrary to public policy and if the principle is not repugnant of
justice.

There are two types of insurable interest which are Contractual and Statutory.
Contractual insurable interest is when the insurance contract requires an existence
of an insurable interest for the contract to be effected whereas statutory Insurable
interests is when the insurable interest is required or mandated by a statute dealing
with insurance.

Because of the vast and wide coverage of insurance industry the legal opinion will
be broken down into three major insurance fields.

1
R Hodgin, Insurance Law, 2002, pg 55
2
(1806) 2 Bos & PNR 269
Life Assurance

A contract in life insurance is said to be an aleatory contract. This is so because it is

based on a lot of uncertainty and chance. In this contract the insurer is obligated by
a contract to pay the insured a specified amount of money at the maturity of that
policy or at his death to his legal dependants or executors of his estate. This
specified amount of money is based on the premiums that the insured was paying
during the life cycle of the policy meaning that the accumulation of these
premiums are a result of the money paid to the insured or the legal dependants as
the case may be.

In Dalby v. India and London Life Assurance Co.3 it was held that a contract of
life insurance is not a contract of indemnity, like a marine or a fire policy, but is a
contract to pay a definite sum in consideration of an annuity paid during life. A
contract of life insurance may be defined as:
One in which one party agrees to pay a given sum of money upon the happening
of a particular event contingent upon the duration of human life in consideration
of immediate payment of a smaller sum or other equivalent payments by the
other.4
Life insurance can only be valid when the person who is privy to that policy has an
insurable interest to the life of the insured. It is directly against the public policy
for a person who has no insurable interest in the life of the insured at all to take a
life insurance policy in the name of that person. These matters are clearly governed
by the Life Assurance Act, 1774 of England.

The legal assumption is that everyone has an interest in his own personal life so its
not necessary for one to show any interest in the continuation of his own life. This
3
[1854] 15 CB 365: 139 ER 465
4
C. R Ongom, What is the necessity of Insurable Interest in Insurance Contracts?; pg 4
position was elevated in the case of Wainwright v Bland5 where an executor, suing
for a policy effected by his testator on two years of his life was not required to give
or explain any reason why making and insurance for such a short period of time.

Generally spouses have an interest in the life of their other spouses. In the above
case Lord Kenyon CJ declared that and I quote;

it must be presumed that every wife had interest in the life of their husbands
therefore it is not necessary to prove that she had insurable interest just because a
large sum of money would go from her husbands estate to another upon his death.

The case of Halford v Khymer6 has given a rule in English law that states that a
parent has no insurable interest in the life of his child because love and affection
cannot bring up insurable interest. Even children do not have insurable interest in
the life of their parents unless they are still dependent on the parents, therefore this
category of relationship can only benefit under statutory insurable interest.

Insurable interest in life insurance can also be acquired through contractual

transactions. A creditor has an insurable interest in the life of a debtor only to the
amount of the debt. Moreso if the debt has been guaranteed by a surety then the
creditor has insurable interest in the life of the surety too.

In Powell v Dewy7 it was held that a partner in a business firm has no insurable
interest in the life of another partner only and unless if the partner owes the other
partner and the insurable interest is only to the value of the debt as well.

5
[1836] 1 M&W 32
6
(1830) 10 B & C 724
7
123 N.C. 103 (N.C 1898)
Employers can also take out 'key man' insurance, provided they show an interest
arising out of a potential financial loss recognized by law and the amount insured
is limited to the value of that loss. In such cases the employer insures the life of a
key employee whose death while in employment might have serious repercussions
on the profitability of a contract in which he was involved, the policy could be
continued even though the employee is no longer employed by that employer.8 In
the case of an employee, this might only cover the contractual notice period. In
group life schemes, it may also prevent the employer offering benefits to
employees' families.

Property Insurance

Property insurance has a lot of differences; one of them is that unlike life assurance
this is a contract of indemnity. This means that the insured is compensated up to
the value of the property and not anything more than the worthy of the property. So
the insured should not suffer loss after the damage of his property neither should he
gain profit after the loss of the same but should recover the value of the property.

In life assurance where interest must be proven to be in existence at the time when
the contract is made its a total opposite with property insurance interest must exist
at the time of loss not when it is made.

On mortgage it should also be taken into account that a lender who grants a
mortgage on the security of a house has an insurable interest in that house, but only
up to the amount outstanding on the loan.

8
R Hodgin, Insurance Law, 2002, pg 58
In the case of Macaura v Northern Assurance9; the insured was the sole
shareholder and an unsecured creditor in a company. In his personal name and
capacity he insured the timber of the company which was its only asset, against
fire. Though the fire destroyed the timber but his claim was rejected for lack of
legal merit. This was so because the company is as a legal persona should have
insured the timber in its own capacity and name. According to Lord Sumner, the
Plaintiff stood in no legal or equitable relationship to the timber.

This position above was rather corrected in a decision in Wilson v Jones10; the
insured was a shareholder in a company that was laying its first transatlantic
telegraph cable on the bed of the ocean. If it was an attempt to insure the cable, the
insured would fail, as he had no legal or equitable interest in the cable. It was held
that he had in fact insured his interest in the shares of the expected profit on the
successful completion of the venture.
Truckers have an insurable interest in goods that they are transporting and they can
insure them against any loss and damage that is not caused by their negligence.
This is so even if they are not the sole owners of such goods. So the policy will be
there to indemnify them to the value of such a load in full incase of anything
happening to the goods. The case of A Tomlinson (Hauliers) Ltd v Hepburn11is of
authority on this matter.

Marine Insurance

A marine insurance contract is one in which the insurer promises to indemnify the
insured against any loss to the insured subject matter, be it a ship or the cargo,

9
[1925] AC 619
10
(1967) LR 2 Ex 139
11
[1966] 1 All ER 418
arising out of the perils of the sea, subject to the conditions and the extent of the
policy.
Justice Blackburn defines a marine insurance policy as a contract of indemnity
against all losses occurring to the subject matter of the policy from certain perils
during the adventure. Therefore, a person can only insure the subject matter if he is
interested in the preservation and safety of that matter.
Every person who has an interest in a marine adventure has an insurable interest
and a person is said to be interested in a marine adventure if he stands in such a
relationship with the thing insured that upon its destruction, he may incur liability
or suffer a loss, on it12.
A marine insurance policy effected without an insurable interest, like all other
insurance contracts, becomes a mere wager, void at law. It is not necessary that to
have an insurable interest, the person insuring must be in possession of a vested
right. A partial as well as a contingent interest is also insurable.

Insurable interest, in a marine policy, must exist at the time of the loss though it is
not necessary that it should be in existence at the time of effecting the policy. The
policy will be considered valid if the insured insures the subject matter without
being interested in it, at the time of effecting the policy and if he acquires an
interest in it after it has been lost, he can recover under the policy.

A marine policy, just like a fire policy, is a personal contract and hence, the
insurable interest of the insured in the subject matter continues till the time he is in
actual possession of it. If he has transferred the title in the subject matter to another
person, through an agreement to that effect, he ceases to have any interest in it and

12
Section 7 of the Marine Insurance Act, 1963
the policy will also come to an end. So long as the seller of a ship or of the goods
retains any interest in the property, he can insure it to the extent of his interest.13

In Reed v Cole14 it was held that where the owner of a ship has sold her under a
contract which requires him to pay the buyer a certain sum of money should a loss
happen within a particular period of time, the owner has an insurable interest to the
extent of such a sum. Where the subject matter insured has been mortgaged, the
mortgagor has an insurable interest in that subject matter to its full value and the
mortgagee has an insurable interest on any sum due or to become due under the
contract.

Conclusion

Insurable interest is a mandatory precondition to all types of insurance contracts.

But it is an undeniable truth that insurable interest is a sine qua non to a contract of
insurance. In fact, it is the existence of insurable interest which differentiates a
contract of insurance from a wager, which is void in the eyes of law. Every contract
of insurance, to whichever category it may belong to, shall display an insurable
interest and in the absence of such an interest, it shall be void and inoperative.
BIBLIOGRAPHY

Cases
Lucena v Craufurd (1806) 2 Bos & PNR 269

Dalby v. India and London Life Assurance Co. [1854] 15 CB 365: 139 ER 465

Wainwright v Bland [1836] 1 M&W 32

13
C. R Ongom, What is the necessity of Insurable Interest in Insurance Contracts?; pg 8
14
[1764] 3 Burr 1512
Halford v Khymer (1830) 10 B & C 724

Powell v Dewy123 N.C. 103 (N.C 1898)

Macaura v Northern Assurance [1925] AC 619

Wilson v Jones (1967) LR 2 Ex 139

A Tomlinson (Hauliers) Ltd v Hepburn [1966] 1 All ER 418

Reed v Cole [1764] 3 Burr 1512

Books

Insurance Law: Text and Materials; Second Edition; Ray Hodgin; Cavendish
Publishing Limited; London

Law of Marine Insurance; Susan Hodges; Cavendish Publishing Limited; London

Journals

What is the Necessity of Insurable Interest in Insurance Contracts?; Robert Ongom

Cwinya-ai; May 2009

Statutes

Marine Insurance Act, 1745; 1963 & 1906