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Insurable interest – the doctrine that would not die

Published online by Cambridge University Press:  02 January 2018

Gary Meggitt
Gary Meggitt*
Affiliation:
The University of Hong Kong
*
Gary Meggitt, Faculty of Law, 10/F, Cheng Yu Tung Tower, Centennial Campus, The University of Hong Kong, Pokfulam Road, Hong Kong. Email garym@hku.hk
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Abstract

The doctrine of insurable interest grew out of eighteenth-century anxieties over fraudulent seafarers and habitual gamblers. It was created by the courts, entrenched by statute and remains in place to this day despite the fact that it serves no practical or legal purpose. It was hoped by many that, when the English Law Commission and Scottish Law Commission established their joint review of insurance contract law in 2006, the doctrine would be consigned to the proverbial dustbin of history. Eight years later, these hopes have been dashed. The doctrine is here to stay. This paper asks ‘Why’ and finds the answer to be elusive.

Type
Research Article
Information
Legal Studies , Volume 35 , Issue 2 , June 2015 , pp. 280 - 301
Copyright
Copyright © Society of Legal Scholars 2015

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Footnotes

*

The author wishes to thank Robert Merkin and John Lowry for their helpful comments on earlier drafts of this paper. The usual disclaimer applies.

References

1. [2003] 2 All ER (Comm) 587.

2. The Commissions' Second Joint Consultation Paper and Issues Paper 4 may both be found at http://lawcommission.justice.gov.uk/areas/insurance-contract-law.htm (accessed 29 November 2013).

3. It should be noted that while the Commissions' Issues Paper 4 and Second Joint Consultation Paper looked at both England & Wales and Scotland, this paper focuses on the law in the former.

4. Those interested in a detailed discussion of the history and intricacies of the doctrine should look to, for example, Birds, J, Milnes, B and Lynch, S (eds) MacGillivray on Insurance Law (London: Sweet & Maxwell, 12th edn, 2012) orGoogle Scholar Merkin, R Collinvaux's Law of Insurance (London: Sweet & Maxwell, 9th edn, 2010). Alternatively, there are more concise treatments of the subject inGoogle Scholar Birds, J Birds Modern Insurance Law (London: Sweet & Maxwell, 9th edn, 2013) andGoogle Scholar Lowry, J, Rawlings, P and Merkin, R Insurance Law Doctrines and Principles (Oxford: Hart Publishing, 2011, 3rd edn, 2011).Google Scholar

5. [1881–1885] All ER Rep 493.

6. Parties may agree in the insurance policy on the value of the thing insured and this valuation is conclusive (unless there is fraud). The insured may recover this agreed value in the event of a total loss or a proportion of the agreed value for a partial loss. See Marine Insurance Act 1906, s 27.

7. The Marine Insurance Act 1906 is available at http://www.legislation.gov.uk/ukpga/Edw7/6/41/contents (accessed 29 November 2013).

8. The doctrine of utmost good faith, which has also created no little controversy, was reformed in respect of consumer insurance by the Consumer Insurance (Disclosure and Representations) Act 2012. The text of the legislation is available at http://www.legislation.gov.uk/ukpga/2012/6/contents/enacted (accessed 29 November 2013).

9. There are some very early authorities on the need for an insurable interest, such as Goddard v Garrett (1692) 2 Vern 269 and The Sadler's Company v Badcock (1743) 2 Atk 554.

10. Issues Paper 4, para 2.5.

11. The Life Assurance Act 1774 is available at http://www.legislation.gov.uk/apgb/Geo3/14/48/contents (accessed 29 November 2013).

12. Life Assurance Act 1774, s 1.

13. The Gambling Act 2005 is available at http://www.legislation.gov.uk/ukpga/2005/19/contents (accessed 29 November 2013).

14. This possibility was raised in Davey, J ‘The reform of gambling and the future of insurance law’ (2004) 24(4) Legal Stud 507–515.CrossRefGoogle Scholar

15. [1986] QB 211.

16. The Privy Council reached the same view in Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199.

17. See Wainewright v Bland (1835) 1 M&W 32 and Reed v Royal Exchange Assurance Co (1795) Peake Ad Cas 70, respectively. Section 253 of the Civil Partnership Act 2004 extends the latter provision to civil partners.

18. See Halford v Kymer (1830) 10 B and C 724.

19. See Hebdon v West (1863) 3 B and S 579. Also, see Fuji Finance v Aetna Life Insurance Co [1997] ch 173 on ‘key employee’ cover.

20. (1806) 2 Bos & PNR 269.

21. In Macaura v Northern Assurance Co Ltd [1925] AC 619, the policyholder was an unsecured creditor and the only shareholder in a company that owned a large amount of timber. The timber was destroyed by a fire but his claim on the policies that covered it failed because, in Lord Sumner's view, ‘His relation was to the company, not to its goods …’

22. [1992] 2 Lloyd's Rep 501.

23. [1993] 2 Lloyd's Rep 582.

24. This approach echoes that of Lawrence J in Lucena, who disagreed with Lord Eldon's formulation and observed that ‘A man is interested in a thing to whom advantage may arise or prejudice happen from the circumstances which may attend it.’

25. A P&I club is a mutual insurance association that provides cover for its members, who are usually ship-owners, ship-operators or demise charterers. Unlike an insurance company that provides marine cover, whose directors will be answerable to its shareholders, a P&I club is only responsible to its members.

26. See Birds, J ‘Insurable interest – orthodox and unorthodox approaches’ (2006) J Bus L 224–231 for a further discussion of Waller LJ's approach in Feasey.Google Scholar

27. [1996] 2 All ER 487.

28. [1999] 1 Lloyd's Rep 387.

29. The Lloyd's Market Association and Mark Templeman QC argued that the 2005 Act was not, nor was it intended to be, directed at insurance. Nicholas Legh–Jones QC questioned whether the 1845 Act had actually ‘created an obligation for insurable interest in the form developed by the courts’.

30. For a further discussion of the implications of the 2005 Act, see Nicoll, C ‘Insurable interest: as intended’ (2008) 5 J Bus L 432–447.Google Scholar

31. In the absence of any actual loss on the part of the insured, he will not recover any money from the insurers in respect of any detriment to the subject matter of the policy. For a discussion of this issue, see Campbell, N ‘The nature of an insurer's obligation’ (2000) 42 Lloyd's Mar & Com L Q 42.Google Scholar

32. See Goldsall v Boldero (1807) 9 East 72.

33. (1854) 15 CB 365.

34. There is a question as to whether it needs to be ‘expected’ as per section 4. There is also an exception ‘where the subject-matter is insured “lost or not lost” ’. In this case, ‘the assured may recover although he may not have acquired his interest until after the loss, unless at the time of effecting the contract of insurance the assured was aware of the loss, and the insurer was not’.

35. Second Joint Consultation Paper, para 10.8.

36. [2005] 2 All ER (Comm) 367.

37. Second Joint Consultation Paper, para 1.25. The original comment was in R Merkin Reforming Insurance Law: Is There a Case for Reverse Transportation? Report for the English and Scottish Law Commissions on the Australian experience of insurance law reform (2007).

38. In Lowry, J and Rawlings, P' ‘Rethinking insurable interest’, in Worthington, S (ed) Commercial Law and Commercial Practice (Oxford: Hart Publishing, 2003), the authors suggested that the policy considerations that underpinned Lord Eldon's formulation of the doctrine were ‘no longer relevant’. The doctrine, it was suggested, ‘harks back to a time when policy issues dictated that [insurable interest] should be a precondition to the validity of the insurance contract’. Those policy considerations were redundant and the indemnity principle was a sufficient safeguard against potential mischief.Google Scholar

39. Second Joint Consultation Paper, para 10.2.

40. See Harse v Pearl Life Assurance Co [1904] 1 KB 558.

41. Issues Paper 4, Pts 4 and 6.

42. Second Joint Consultation Paper, paras 10.11–10.12.

43. Second Joint Consultation Paper, para 12.5.

44. FSMA is available at http://www.legislation.gov.uk/ukpga/2000/8/contents (accessed 29 November 2013).

45. The General Insurance Standards Council (GISC), a voluntary, non-statutory body, was responsible for the regulation of brokers and insurers dealing in general insurance until its responsibilities were taken over by the FSA in January 2005.

46. The PRA is part of the Bank of England and responsible for prudential regulation and supervision. See the Bank of England's website, available at http://www.bankofengland.co.uk/PRA/Pages/default.aspx (accessed 29 November 2013).

47. The FCA is responsible for business supervision. The FCA website is available at http://www.fca.org.uk/

48. Paragraph 21 of Sch 2 to FSMA covers participation in Lloyd's syndicates.

49. The Order is available at http://www.legislation.gov.uk/uksi/2001/544/contents/made (accessed 29 November 2013).

50. Issues Paper 4, para 7.4.

51. The policy statement is available at http://www.fsa.gov.uk/pubs/policy/ps04_19.pdf (accessed 29 November 2013).

52. Issues Paper 4, paras 7.9–7.17. The ISDA's letter to the Law Commission on this point is available at http://www.isda.org/whatsnew/pdf/Law-Commission04-18-06.pdf (accessed 29 November 2013).

53. Issues Paper 4, para 7.15. The Potts opinion is also discussed in Juurikkala, O ‘Credit default swaps and insurance: against the Potts opinion’ (2011) 26(3) J Int'l Banking L & Reg 128–135. The nature of credit derivatives discussed by Potts is also covered inGoogle Scholar Arner, D, Lejot, P and Liu, Qiao Finance in Asia: Institutions, Regulation and Policy (London: Routledge, 2013) ch 8, pp 343–345, 362–365.Google Scholar

54. The FCA Handbook is available at http://fshandbook.info/FS/html/FCA (accessed 29 November 2013).

55. PERG 6 is available at http://fshandbook.info/FS/html/FCA/PERG/6 (accessed 29 November 2013).

56. The FOS website is available at http://www.fos.org.au/centric/home_page.jsp.

57. The full decision is available at http://www.ombudsman-decisions.org.uk/viewPDF.aspx?FileID=6840 (accessed 29 November 2013).

58. IPT1 is available at http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageExcise_ShowContent&id=HMCE_CL_000194&propertyType=document (accessed 29 November 2013).

59. Notice 701/36 is available at http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageExcise_ShowContent&id=HMCE_CL_000129&propertyType=document#P35_3849 (accessed 29 November 2013).

60. See Merkin, R ‘Gambling by insurance – a study of the Life Assurance Act 1774’ (1980) 9 Anglo-Am L Rev 331 for a discussion of the issues raised by the 1774 Act.CrossRefGoogle Scholar

61. See the Institute of Islamic Banking & Insurance website, available at http://www.islamic-banking.com/

62. Interestingly, the Commissions' Joint Scoping Paper raised the possibility of introducing a statutory definition of ‘insurance’. Little appears to have come of this suggestion.

63. [1997] 2 Lloyd's Rep 54.

64. [1904] 2 KB 658.

65. [1913] 3 KB 84.

66. The report is available at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/118530/annual-fraud-indicator-2012.pdf (accessed 29 November 2013).

67. The Bureau's website is available at http://www.insurancefraudbureau.org/ – see also Rea, SA Jr ‘The economics of insurance law’ (1993) 13 Int Rev Law & Econ 145–162 CrossRefGoogle Scholar, which argues that a property owner has a greater opportunity, compared to a non-owner, to damage his own property for fraudulent purposes.

68. The Darwins' case was dramatised by the BBC. See http://www.bbc.co.uk/programmes/b00rs2kc (accessed 29 November 2013).

69. In Harnett, B and Thornton, Jv ‘Insurable interest in property: a socio-economic re-evaluation of a legal concept’ (1948) 48(8) Colum L Rev 1162–1188.CrossRefGoogle Scholar

70. For example, the International Association of Insurance Fraud Agencies (IAIFA) (website available at http://www.iaifa.org/index.html) was founded in 1985.

71. The UK Office for National Statistics crime & justice figures are available at http://www.ons.gov.uk/ons/taxonomy/index.html?nscl=Crime+and+Justice (accessed 29 November 2013).

72. Second Joint Consultation Paper, para 12.13.

73. See Nicoll, above n 30, in which it is submitted that the real issue is how a policy is constructed and that ‘the onus [is] upon brokers and underwriters to ensure the words of the policy reflect what is intended’.

74. Second Joint Consultation Paper, para 12.15.

75. Securitisation is defined by The Financial Times as ‘The creation and issuance of tradable securities, such as bonds, that are backed by the income generated by an asset, a loan, a public works project or other revenue source. Pooling of assets such as mortgages into securities that are sliced up and sold to different types of investor. Lenders pass on loans quickly, giving them few incentives to ensure they are repaid. Limited information on underlying assets makes them illiquid and hard to value.’

76. See Smith, M ‘The legal nature of credit default swaps’ (2010) Lloyd's Mar & Com L Q 386.Google Scholar

77. See Containing Systemic Risks and Restoring Financial Soundness, IMF Global Financial Stability Report (April 2008) (‘IMF Report 2008’) p xiii, available at http://www.imf.org/External/Pubs/FT/GFSR/2008/01/pdf/text.pdf (accessed 29 November 2013).

78. See Bavoso, V ‘Financial innovation and structured finance: the case of securitisation’ (2013) 34(1) Company Law 3–12.Google Scholar

79. AIG, then the world's largest insurer, was a major casualty of the crisis, although was not a result of its traditional insurance activities. See Sjostrom, Wk Jr ‘The Aig bailout’ (2009) 66 Wash & Lee L Rev 943, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1346552 (accessed 29 November 2013).Google Scholar

80. (1931) 174 N.E. 441 at 444.

81. [1997] 2 Lloyd's Rep 113.

82. For example, in Ted Baker Plc & Anor v Axa Insurance UK Plc & Ors [2012] EWHC 1406, the Commercial Court held that ‘theft’ was to be given its ordinary and literal meaning, and rejected the insurer's contention that this ordinary meaning should give way to a business commonsense meaning derived from the background facts.

83. See Dino Services Ltd v Prudential Assurance Co Ltd [1989] 1 Lloyd's Rep 379.

84. The fact that the courts are required to do so does, however, remind us that insurers often apply different meanings to the same words and apply the same meanings to different words from policy to policy.

85. [1998] 1 WLR 896. In De Souza v Home and Overseas Insurance Co Ltd ([1995] LRLR 453 at 456), Mustill LJ warned that sometimes it is ‘better to withdraw a little from the authorities to the former ground of this policy and these facts, and to look critically at each authority to see whether it really leads inexorably to a solution of our present problem’.

86. This ‘background knowledge’ is that which existed at the time of the contract and would be regarded as relevant by a reasonable person but – an important ‘but’ – it does not include the details of any negotiations, as per the rule laid down by Lord Wilberforce in Prenn v Simmonds [1971] 2 All ER 237.

87. [1985] 1 AC 191.

88. [2009] UKSC 2.

89. [2011] UKSC 50.

90. [2012] UKSC 14. Commonly referred to as ‘The Trigger Litigation’.

91. [2005] EWCA Civ 238.

92. In R (on the application of Prudential Plc) v Special Commissioner of Income Tax [2013] UKSC 1, it was held that extending the principle of legal advice privilege beyond its current limits risked opening a proverbial floodgate and permitting far too much documentation and advice to be withheld from disclosure.

93. [1990] 2 AC 605. Lord Bridge explicitly referred to Cardozo CJ's comment in Ultramares in the course of his judgment. In addition, Lord Oliver warned of creating ‘a liability wholly indefinite in area, duration and amount and would open up a limitless vista of uninsurable risk for the professional man’.

94. [1990] 2 All ER 908.

95. [1978] AC 728. Other notable cases in this area include Spartan Steel v Martin [1972] All ER 557 and Junior Books v Veitchi [1983] 1 AC 520.

96. [1999] 2 AC 455.

97. [1983] 1 AC 520 at 539.

98. See Sime, S Blackstone's Civil Practice: A Commentary (Oxford: Oxford University Press, 2013) ch 16. The Regulation is available at http://europa.eu/legislation_summaries/justice_freedom_security/judicial_cooperation_in_civil_matters/l33054_en.htm (accessed 29 November 2013).Google Scholar

99. Dicey, Morris & Collins: The Conflict of Laws (London: Sweet & Maxwell, 15th edn, 2012) is the definitive text on this subject.Google Scholar See also Briggs, A The Conflict of Laws (Oxford: Oxford University Press, 2nd edn, 2008).Google Scholar

100. Second Joint Consultation Paper, para 12.12. The ACE paper is available at http://www.acegroup.com/Media-Center/ACE-Perspectives/Multinational.html (accessed 29 November 2013).

101. There are several surprising comments in relation to these jurisdictions. For example, it is implied that both Australia and New Zealand recognise the doctrine, whereas they do not, and it is suggested that ‘there is no settled legal insurable interest requirement for non-life or non-marine policies’ in Hong Kong, although an ‘insurable interest is deemed to exist if [for example] the policyholder has legal or equitable title to the subject matter’. In actuality, the position in Hong Kong – with the exception of the absence of the Gambling Act 2005 – is on all fours with that in England & Wales.

102. The ICA is available at http://www.comlaw.gov.au/Details/C2004C00163 (accessed 29 November 2013).

103. The ALRC website is available at http://www.alrc.gov.au/ and ALRC Report 20 on insurance contracts is available at http://www.alrc.gov.au/report-20 (accessed 29 November 2013).

104. See Kirby, M ‘Australian insurance contracts law: local reform with a global relevance’ (2011) 4 J Bus L 309–329 for a discussion of the implementation of the ICA.Google Scholar

105. See Merkin, above 37, para 8.7.

106. See the OECD's Insurance Statistics Yearbook 1999–2008, available at http://www.keepeek.com/Digital-Asset-Management/oecd/finance-and-investment/insurance-statistics-yearbook-2010_ins_stats-2010-en-fr (accessed 29 November 2013). Performance still 2008 has not been as healthy, which is a problem shared across many jurisdictions.

107. The New Zealand Act is available at http://www.legislation.govt.nz/act/public/1985/0117/latest/whole.html#DLM75989 (accessed 29 November 2013).

108. (1987) 1 SCR 2.

109. Article 34, s 3401 is available at http://codes.lp.findlaw.com/nycode/ISC/34/3401 (accessed 29 November 2013).

110. Second Joint Consultation Paper, paras 12.36–12.69, 13.66–13.116.

111. Of these 32 responses, 14 were from insurers, brokers and their trade associations, and a further ten from lawyers, ‘legal associations’ and the judiciary. There do not appear to have been any from consumer groups or similar bodies. The Summary of Responses document is available at http://lawcommission.justice.gov.uk/consultations/post_contract_duties.htm (accessed 29 November 2013).

112. The suggestion was that ‘the insurance would only be void if there was never a real probability that an insurable interest would be acquired’.

113. Utmost good faith has now been abolished for consumer insurance by the Consumer Insurance (Disclosure and Representations) Act 2012, which is available at http://www.legislation.gov.uk/ukpga/2012/6/contents/enacted (accessed 29 November 2013).

114. See Lowry and Rawlings, above 38.

115. See Meggitt, G ‘The “rock of uncertainty” – mesothelioma, insurers and the courts’ (2013) J Bus L 563.Google Scholar

116. [2013] EWCA Civ 39.

117. Available at http://www.financial-ombudsman.org.uk/publications/ombudsman-news/4/calling-a-spade-a-shovel.htm (accessed 29 November 2013).

118. The FOS annual review and PPI factsheet are available at http://www.financial-ombudsman.org.uk/publications/ar13/about.html#product (accessed 29 November 2013) and http://www.financial-ombudsman.org.uk/results.html?q=ppi%20policy (accessed 29 November 2013), respectively.

119. The ABI website is available at https://www.abi.org.uk/

120. See http://www.barnesandnoble.com/w/business-interruption-policy-wordings-harry-roberts/1117218412?ean=9780900493959 (accessed 29 November 2013).

121. See Burling, J Lloyd's Law and Practice (London: Routledge, 2014).Google Scholar

122. An up-to-date overview of the Commissions' proposals may be found in Hertzell, D and Burgoyne, L ‘The Law Commissions and insurance contract law reform: an update’ (2013) 19 J Int'l Mar L 105.Google Scholar

123. Merkin, above 37, para 1.3.

124. The Act is available at http://www.comlaw.gov.au/Details/C2013A00075 (accessed 29 November 2013).