Marine Insurance: Law and Practice
CHAPTER 3
INSURABLE INTEREST
I INTRODUCTION
3.1 The law on insurable interest as it applies to marine insurance contracts derives from the nature of the contract as one of indemnity and also from an historical legacy of policies against gambling.1 Consequently the requirement is complex, not universally adhered to in practice, and the subject of proposals for abolition or reform.2 However, the outcome of current, fluctuating debate on the future of the concept is uncertain. For present purposes, therefore, the following discussion is based on what the law currently is rather than on what it may eventually turn out to be.II GAMING AND WAGERING
3.2 Since a contract of marine insurance is a contract of indemnity, it follows as a matter of principle that the assured must have an insurable interest in the subject matter of the insurance. It was held at common law, therefore, in Lucena v Craufurd,3 that the insurer is not liable where the assured cannot prove that he had such an interest. As advised by Lawrence J in that case, in a carefully crafted opinion subsequently cited frequently with approval, the test of insurable interest is a moral certainty of benefit from the survival of, or prejudice from loss suffered by, the subject matter.4 However, Lord Eldon LC preferred the narrower test of “a right in the property, or a right derivable out of some contract with the property”.5 These two approaches have continued to jostle with each other as aids to determining the existence of an insurable interest.6 3.3 Notwithstanding the rule in Lucena v Craufurd, it was possible validly to conclude a contract on the basis of terms that the assured was not required to have or to prove that he had such an interest. This practice facilitated the fraudulent loss of ships and cargo, the carrying on of prohibited and clandestine trades, and a form of gambling on ships and cargoes in which the assured had no insurable interest. To overcome these ills, a marine insurance Act was passed in 17457 to prohibit such contracts, making them not only null and void but also illegal.8 3.4 Exactly a century later, as a matter of general law, the Gaming Act 1845, section 18 provided that “All agreements … by way of gaming and wagering shall be null and void”. However, the 1845 Act neither repealed the 1745 Act nor clarified the relationship between the two statutes. One possibility was that all contracts by way of gaming and wagering, including all marine insurance contracts, were null and void under the 1845 Act even if they were not invalidated by the 1745 Act, so the only remaining function of the 1745 Act was that, in addition to their being null and void, marine insurance contracts which fell foul of the 1745 Act should also be illegal. However, it came to be accepted that the validity and legality of marine insurance contracts remained to be determined by the 1745 Act. This in turn required determination of the scope of the 1745 Act, which was drafted in traditional fashion, with reference to ships and goods, but was also applied (semble with neither reference to nor awareness of the role of the 1845 Act9) to other interests which were at risk as a consequence of ships’ and/or goods’ being at risk, namely intangible interests such as profits on goods,10 commission11 and cash advances.12 3.5 The 1745 Act was consolidated into the Marine Insurance Act 1906, s.4(1) of which states that every contract of marine insurance by way of gaming or wagering is void. A contract of marine insurance is deemed to be a gaming or wagering contract by section 4(2) in two cases. The first is where the assured does not have an insurable interest as defined by the Act13 and the contract is entered into with no expectation of acquiring such an interest.14 The second is where the policy is an “honour policy” or a “ppi policy”.15 3.6 The effect of and relationship between the subsections of s.4 is not manifest. In particular, it is not clear: whether s.4(1) literally provides a general rule invalidating all marine insurance contracts by way of gaming and wagering, and section 4(2) is a non-exclusive illustration of it; or section 4(2) is intended to explain in more detailed terms the effect of section 4(1). On the first explanation, section 4 generally invalidates gaming and wagering contracts, of which contracts without an obvious insurable interest are simply examples. On the alternative interpretation (which is supported by section 4’s appearance in the Part of the Act dealing with insurable interest), section 4 only invalidates contracts which are treated as gaming and wagering contracts because the insured has no obvious insurable interest in them. The first explanation is supported by history and common understanding; but the second conforms more closely to the wording of the statute. 3.7 Section 4(2)’s concern with “honour policies” or “ppi policies” addresses a traditional practice, which continues today, of adding to the policy a “ppi clause”—a term purporting to acknowledge “policy proof of interest”—representing the parties’ agreement to rely on the honour of the assured that he has an insurable interest and on the honour of the insurer that he will not contest that claim.16 The Marine Insurance Act 1906, section 4(2)(b) gives as specific examples: where the policy is made “interest or no interest”, or “without further proof of interest than the policy itself”, or “without benefit of salvage to the insurer”, or subject to any other like term. The subsection is, however, subject to the proviso that, where there is no possibility of salvage, a policy may be effected “without benefit of salvage to the insurer”.17 Scrutton LJ has given as a reason for this practice that “there are … cases where there is a real loss, but it is difficult to prove its exact amount, and it is convenient in a business sense to have it assessed beforehand”18—although his terminology seems more appropriate to justifying valued polices than including a ppi clause. A more generalised explanation is that they are simply to overcome and provide agreement on practical problems of proof. 3.8 Obviously, an honour policy may fall within the scope of the Marine Insurance Act 1906, section 4(2)(a). But the fact that a policy is effected on ppi terms does not necessarily mean that the assured in fact has no insurable interest. A ppi policy is not, however, deemed by the Act to be a gaming or wagering contract only in the absence of proof of the existence of the assured’s insurable interest. The incorporation of ppi terms is enough to invalidate what would otherwise be a valid policy;19 and a contract which, at the time it is concluded, is invalidated by the Act cannot be rescued by a term permitting the assured to remove (ie, effectively to attempt to conceal) a ppi clause nor (though this might not appear strictly to be required by the statute) by a term that the ppi clause is to be considered not as part of the contract but as binding in honour only.20 3.9 When used, ppi clauses have habitually been pinned or stapled to the policy or included in a part separated from the main policy by perforations, so that they can be detached or torn off. This practice, said Scrutton LJ, has placed judges in difficulty in that they have a duty not to enforce void contracts but usually have no evidence other than two pinholes in the margin of the policy or that a piece of paper has been torn off. At least, he said, businessmen should be aware that, if they persistently enter into contracts which are null and void under a statute, they must not complain if the courts obey the statute rather than their commercial practice.21 Since such businessmen cannot rely on honour to defeat the law, they are equally at risk if one of the parties reneges on his undertaking, especially where professional or commercial inhibitions on doing so are overcome by financial pressures, in particular where one of the parties has become insolvent and his insolvency practitioner maintains the strict legal position. 3.10 The effect of section 4 of the Act is to make contracts of marine insurance by way of gaming or wagering void. Therefore, the assured is not liable for the premium and the insurer is not liable to pay for a loss; moreover, if such payments have been made, they can be recovered. The invalidity of the contract will also cause any contract of reinsurance to fail for want of consideration. 3.11 The view has also been expressed, by Lord Shaw of Dunfermline, that, where a person effects several insurances in respect of the same adventure—eg on ship, cargo and freight—and one of the insurances is invalid as a gambling transaction, then all his insurances are affected by this invalidity; this is because all the interests in the adventure, whether his or third parties’, are subject to the same risks, and “the law will not countenance or enforce a transaction which is thus tainted by conflict between duty and self interest”.22 His Lordship distinguished “the case of insurances upon ships in which third parties have acquired, in ignorance and in good faith and for valuable consideration, separate interests”.23 However, there is no other authority for Lord Shaw’s views and his implication that knowledge of a prior invalid gambling insurance will invalidate a subsequent insurance by a third party on this ground alone24 seems particularly doubtful. 3.12 Unlike under the 1745 Act, which it replaced, the Marine Insurance Act 1906 did not make the contracts covered by section 4 illegal. 3.13 Given the shadow cast by statutory suppression of insurance arrangements by way of gaming and wagering, there has been a view that, if an insurance contract is not tainted by gaming and wagering, it will not fail for lack of insurable interest.25 However, the two inhibitions are distinct and cumulative, so a contract which is not by way of gaming and wagering may still fail for lack of insurable interest.26 Nonetheless, the development of the law on insurable interest has been accompanied by a growing reluctance to find an absence of insurable interest so that the contract fails.27 Indeed, there has been a movement to attenuate or remove both the prohibition on gambling (including the repeal of the Gaming Act 1845)28 and the concept of insurable interest from the law.However, for the present both remain; indeed, it has been proposed to restate and strengthen the requirement of insurable interest in indemnity contracts.29