The contested terrain of insurable interest in insurance claims

By Joseph Akyeampong Esq

The matter of establishing insurable interest in order to successfully make a claim in a contract of insurance has often been the subject of controversy between insurance companies and claimants.

Basically, insurable interest refers to investment which protects against financial loss should there occur an event which causes damage, loss or diminution in the value of the property or event insured against. In BIRD’S MODERN LAW ON INSURANCE, 11th Edition, it is stated of insurable interest as follows:

“Insurable interest is a basic requirement of any contract of insurance unless it can be and is lawfully waived. At a general level, this means that the party to the insurance contract who is the insured or policy maker must have a particular relationship with the subject matter of the insurance, whether that is a life or property or a liability to which he might be exposed. The absence of the required relationship will render the contract illegal, void or simply unenforceable or prevent a claim under it….”

Early requirements of insurable interest in insurance claims

Insurance claims in life policies previously was enforceable at common law without the need for the demonstration of insurable interest. These kinds of claims covered mainly wagering or betting contracts. While wagering or betting contracts were enforceable under the common law at the time, it was nevertheless deemed distasteful and the view was that, it could lead to incidents of people making bets on the lives of others which could induce murder.

To curtail the incidents of wagering in life insurance claims at the time leading to the prospect of murder, there was promulgated the Life Assurance Act of 1774. The main provisions of the Life Assurance Act which were aimed at curtailing betting or wagering were Sections 1, 2 and 3.

By section 1, no policy of insurance was to be taken on the life of any person or any event where the person for whose benefit the policy was made had no interest in the matter or was made for the purpose of wagering or betting. Any insurance which was taken for that purpose was considered null and void.

By section 2 thereof, the names of the persons who stood to benefit from the insurance were to be stated in the policy and by section 3, where the insured had a legitimate interest in the life or event, they were not to recover more than the value of their interest from the policy which was to prevent the deliberate policy of over insuring.

Until the enactment of the Life Assurance Act of 1774, it was permitted for persons to take out insurance on goods and merchandise which were loaded unto ships without having any particular interest in the goods and merchandise.

These contracts were considered to be in the nature of betting and wagering contracts and were deemed to be contracts of speculation. This practice was abolished by the Marine Insurance Act of 1775 which required only persons with legitimate interest in the goods or merchandise to take an insurance on the goods or merchandise.

Contentions in establishing insurable interest in insurance claims

Sometimes, the matter of establishing insurable interest in a property or event in order to successfully claim on an insurance has evoked litigation across the entire spectrum of insurance particularly in motor, marine and life insurance and even in home insurance against fire. In the classical Ghanaian case on insurance in ROYAL EXCHANGE ASSURANCE vrs TAILOR 1974 2 GLR 265 CA (sitting as the Supreme Court with the distinguished panel of Azu Crabbe CJ, Amissah and Archer JJA), it was stated by Azu Crabbe CJ who delivered the unanimous judgment of the court of the contested nature of insurable interest as follows: “The subject of insurable interest is particularly relevant in the leading branches of insurance – marine insurance, fire insurance, property insurance, and life insurance and although the definition of insurable interest in LUCENA vrs CRAUFORD 127 ER 630 HL was formulated in a marine insurance case, I am satisfied that the definition in that case is equally applicable in motor insurance. Where the insured is the owner of the subject matter of insurance, he has undoubtedly an insurable interest in it, although this insurable interest is not confined to the interest arising in ownership alone.

It includes every kind of interest that may subsist in or dependent upon the subject matter that is insured.” In further pronouncing on the requirement of insurable interest to make a successful claim, in ROYAL EXCHANGE ASSURANCE vrs TAILOR (supra) Azu Crabbe CJ made the poignant statement that, “an assured cannot recover upon a contract of insurance, unless he shows that he has an insurable interest in the matter of insurance”.

Though there are many cases straddling the law of insurance with respect to insurable interest, the case of ROYAL EXCHANGE ASSURANCE vrs TAILOR, spanning over half a century ago throws up very interesting perspectives on the subject of insurable interest and sets parameters on who can recover on a contract of insurance upon scaling the important hurdle in establishing insurable interest.

In the case under consideration, a transport owner who entered into a third party insurance contract with Royal Exchange Assurance, the insurance company over a number of vehicles also later extended the policy to cover another vehicle.

The vehicle was subsequently sold to another person in a hire purchase arrangement. In a claim for insurance on that particular vehicle, the insurance company repudiated the policy for the reason that, in so far as the owner had parted with possession of the vehicle by way of sale to a new owner, the original owner was not entitled to a claim of insurance on the policy.

The contested terrain of insurable interest consequently played out in full force in the case which turned on the question whether or not the owner in parting with possession of the vehicle in a hire – purchase agreement to a new owner so to speak had divested himself of his insurable interest in the vehicle so as to disable him from recovering the claim on the insurance policy.

Azu Crabbe JSC, in analysing a plethora of English cases on the subject and drawing on the distinction of retention of ownership in a property (in this case, a motor vehicle) which is on a hire – purchase and the insurable interest inherent in the vehicle in an insurance policy drew a fine distinction on the subject matter

with his definitive pronouncement on the matter in holding 1 of the report as follows:

“A person remained the owner of a vehicle when it was under his control and any lawful use of it could only be by his permission. After he had sold the vehicle and parted with the possession of it to a purchaser, the purchaser then used the vehicle by virtue of his ownership and not by the vendor’s permission. Consequently, the vendor’s insurance policy would lapse upon the sale, unless it had been transferred”

In emphasising the distinction where the owner of property who parts with possession of property in a hire – purchase agreement, but nevertheless retains ownership in the property by way of an insurable interest in order to make a claim for insurance, it was held in holding 2 of the report in drawing the distinction that, “where the insured was the owner of the subject matter of insurance, he had undoubtedly an insurable interest in it, although this insurable interest was not confined to the interest arising from ownership alone, it included every kind of interest that might subsist in or be dependent upon the subject matter that was insured. And so long as the owner had a right of seizure or the right to take possession, the owner had an insurable interest in the vehicle”.

The contentions over insurable interest in life insurance claims

An area in insurance claims which has generated much contentions and controversies is in life insurance. Over two and half centuries ago with the promulgation of the Life Assurance Act of 1774, the earliest attempt was made to streamline claims in life insurance by formulating the requirements for establishing insurable interest in claims. The highlights of the Life Assurance Act by sections 1, 2 and 3 laid this out cogently. First, there was the requirement in section 1 for the claimant to establish interest at the time the policy was entered into and no more.

By section 3, the insured was only to recover only the value of his interest. This effectively was construed to mean interest at the time of the loss which was the date of the death of the life insured. An early case of a contested claim to a life insurance benefit is the landmark English case of GODSALL vrs BOLDERO 1807 9 EAST 72.

The facts of the case was the insurance by Godsall, a creditor of Pitt to cover a debt owed to Godsall. Upon the death of Pitt who was insolvent, the debt owed to Godsall was paid off by his executors. Following an attempt by Godsall to make a claim for insurance, the insurer repudiated the claim.

It was held by the court that since the debt had been paid, Mr Godsall had suffered no loss and that the insurance which was taken by Godsall was only an indemnity. While GODSALL vrs BOLDERO (supra) was held not to have satisfied sections 1 and 3 particularly of the Life Assurance Act 1774, in DALBY vrs INDIA AND LONDON ASSURANCE CO 1854 15 C.B. 365, sections 1 and 3 were deemed to have been satisfied, that the claimant had an interest at the time of effecting the policy and not required to prove his interest at the date of loss. Another landmark and notable case of a contested claim in life assurance is the case of FEASEY vrs SUN LIFE

ASSURANCE CO OF CANADA 2003 EWCA 885; 2003 2 AER (COMM) 587.

In this case, a Protection and Indemnity Club (P & I Club), S Ltd, took out an insurance on the liability of its members for personal injury or death. It then entered into a personal accident and illness master lineship policy to cover the liability of S Ltd to its members.

It was agreed that under the master lineship, the insurers would pay fixed benefits to S Ltd for bodily injury and or illness which was sustained by a person engaged on board a vessel or offshore on a rig entered by a member with S Ltd.

The agreement was renewed from time to time with the liability reinsured with reinsurers who are the defendants. Following the cessation of the payment of claims by the reinsurers, S Ltd commenced proceedings to recover unpaid amounts due under the reinsurance.

The defendant reinsurer repudiated the claim for the reason that S Ltd had no insurable interest in the lives and wellbeing of the “original persons” insured and that the insurance was unlawful under section 1 of the Life Assurance Act, 1774 which stated that “no insurance shall be made on the life or lives of any person or persons wherein the person or persons for whose use, benefit or on whose account such policy or policies shall be made, shall have no interest or by way of gaming or wagering”. The repudiation by the insurers for lack of insurable interest by S Ltd was dismissed on account of the fact that the policy was not in violation of S 1 of the Life Assurance Act 1774.

In dismissing the action over the contention of lack of insurable interest, the court said that, “the disputed policy was not on any view a simple life policy which paid S Ltd on the death of a particular identified individual; rather the policy was agreed to pay fixed sums for injuries sustained by “original persons” but in respect of losses occurring in respect of S Ltd’s members”.

Other contentious areas of insurable interest in life insurance involves insurance on the life of a spouse, a civil partner, a fiancé insuring the life of his fiancée or vice versa, or in business relationships where an employer insures the life of employees or where a creditor insures the life of a debtor.

In all these instances, it was incumbent on the claimant to establish that he would suffer financially by the loss of a legal right on the death of the life insured and that it was only the amount of the legal loss that would be likely to be recoverable. Such other contentious views have been expressed on insurable interest so as to entitle a claimant to the proceeds of insurance.

In HARSE vrs PEARL LIFE ASSURANCE CO LTD 1904 1KB 558, a son who insured the life of his mother who lived with and kept house for him to provide for funeral expenses was held not to be entitled to the claim for lack of insurable interest. It was held by the court of a lack of insurable interest by the son because there is no obligation on the part of the son to bury his mother and also there was no obligation on the mother to keep home for his son.

Overview of insurable interest in insurance claims

Generally, the concept of insurance is a laudable one since it provides a contingency to avoid unforeseen occurrences especially with the loss of a financial benefit or incurring an unexpected financial obligation to restore a valuable property or to make for coping on the death of a benefactor who is responsible for the upkeep of a dependant, be it a child, spouse, fiancée, a parent etc.

Oftentimes, in claims for insurance, the claimant may come up against this hurdle of establishing an “insurable interest” which may be taken for granted as a matter of course by claimants who may seek to recover the insurance benefit only to be hit with the stark reality of not being entitled to the claim on account of lack of insurable interest.

Insurable interest as distinct from a claim of indemnity

It is appropriate to note that a policy of insurance which is to prevent a future untoward occurrence is sometimes effected in the nature of an indemnity. This is also aimed at ameliorating a loss which may occur in unforeseen circumstances.

Instances of indemnity insurance may occur in situations of a creditor taking an insurance on the life of a debtor or a business partner taking a policy on the life of his partner. The distinguishing feature in an indemnity insurance is for the claimant not to recover more than his anticipated loss.

When the debt is paid but the insurer keeps up with the payment of premium, this may be considered to be a wagering contract and may fail the test in establishing insurable interest.

It is important to state that there have over the years been recommendations for reform of the law in establishing insurable interest through legislation and also reports of various Law Commissions in several countries particularly in the UK which appears to be the cradle of insurance law and practice.

Nevertheless, the dictum in the “locus classicus” case of LUCENA vrs CRAUFORD 127 ER 630 which distinguished that the expectation of something in the future does not equate to insurable interest and that the interest must be a financial expectation which can be measured is commendable. The court said as follows per Lawrence J:

“…to be interested in the preservation of a thing, is to be circumstanced with respect to it as to have a benefit from its existence, prejudice from its destruction. The property of a thing and the interest derivable from it may be 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.”

The writer is a lawyer and the Principal of Akyeampong & Co, Corporate and International Business Attorneys with special focus practice in Commercial, Corporate, Banking, Finance, Insurance, International Business, International Trade, Intellectual Property and Mining Law.

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