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Insurable Interest as a Requirement for Insurance Contracts: A Comparative Analysis

Document Cited in Related
Vincent
Date01 February 2018
Published date01 February 2018
Pages130-154
DOI10.3366/ajicl.2018.0223
INTRODUCTION

In 1883 the Canadian Court of Appeal held in Castellain v. Preston1 that ‘only those who have an insurable interest can recover on the insurance contract’, adding that an insured could only claim to the extent that his insurable interest would allow.2 The approach in Castellain has been endorsed by South African courts, thus the concept of an insurable interest forms an essential part of the country's insurance law.3 It is remarkable, though, that the concept is still shrouded in confusion and has divided South African courts and academic opinion in the manner that it has for the past fourteen decades.

The confusion stems mainly from the fact that the concept of an insurable interest had not been defined by the South African legislature4 thus leaving the definition, content and role of the concept for the courts to define. The courts have, however, rather than defining, deepened the confusion as they appear to be inconsistent with their rulings on the role and definition of the concept. Thus, in Philips v. General Accident Insurance Co (SA) Ltd,5 the validity of the concept as a requirement was questioned and the court held that too much emphasis was placed on it.6 However, in Lynco Plant Hire & Sales BK v. Univem Versekeringsmakelaars BK,7 the court held that an insurable interest is a requirement for the validity of an insurance contract.8 Then in Lorcom Thirteen v. Zurich Insurance Company South Africa Ltd9 the court rejected the concept altogether by holding that there was little justification for the incorporation of the concept10 and that the only real enquiry was whether the parties to the insurance contract had intended for the insurer to indemnify the insured against the damages that had been suffered.11 As none of these judgments were made by the Supreme Court of Appeal, there is no judicial clarity on the concept.

The judicial confusion is mirrored by academic opinion. Davies, Gordon and Gets12 argue that an insurable interest is a fundamental requirement for the validity of an insurance contract and that risk will not attach to the insured unless such an interest is present. Reinecke and Van der Merwe13 oppose this view and argue that the focus should not be on an insurable interest in order to classify a contract as one of insurance but rather on the intention of the parties.

Unfortunately, the controversy is not only of theoretical significance as the role and definition of an insurable interest can and does have severe practical consequences for the insured. Schulze14 states that the uncertainty is used by insurers as ‘a perfect peg on which to hang repudiation’ which in practice often occurs. It is therefore vitally important that clarity be obtained on the content of the concept in South African insurance law. One of the ways to obtain clarity is through a comparative approach as the insurable interest concept is not unique to South Africa. Both Great Britain and Australia have experienced similar difficulties and have sought to solve them.

Given the situation described in the preceding paragraphs, the question to be answered in this article boils down to the following: to what extent, if any, should an insurable interest be considered to constitute a requirement for the validity of an indemnity insurance contract?15 The question will be answered by firstly discussing the current South African position and then doing a comparative analysis of the British and Australian law.

 INSURABLE INTEREST IN SOUTH AFRICA The Traditional vs Indemnity-Based Definition of an Insurable Interest

As the definition of an insurable interest has neither been clarified by legislation or the Supreme Court of Appeal, two opposing definitions are currently favoured by academics, being the traditional definition and an economic-based definition. Davies, Gordon and Gets are the most prominent authors in favour of the traditional or English definition.16 They suggest that the definition given by McGillivray and Parkington17 should be followed which, as a point of departure, requires a legal basis.

Other jurists, for example Reinecke and Van der Merwe,18 however, do not endorse this definition and are of the opinion that it is too narrow. They advocate an indemnity-based definition in which the focus is not on a legal right or a liability but rather on the intention of the parties and whether it can be said that the insured has suffered damages.19 If a person suffers damages, a financial or economic loss is sustained. Therefore any interest which results in such loss would constitute an insurable interest with regard to insurance contracts. Thus the interest must be ‘a loss with a realistic commercial value’.20

Reinecke and Van der Merwe21 use as their point of departure the definition provided in Littlejohn v. Norwich22 which states:

[I]f the [insured] can show that he stands to lose something of an appreciable commercial value by the destruction of the thing insured, then even though he has neither a jus in re or a jus ad rem to the thing insured his interest will be an insurable one.

They are, however, quick to point out this definition is merely a point of departure and will not be satisfactory in all situations. For example, the definition is only applicable to the physical destruction or loss of a corporeal thing and since South Africa's law has for a considerable time recognised incorporeal rights and expectations as forming part of a person's estate, the definition will not be useful in all instances.23

The definition is important as it shows a willingness by South African courts to move away from the strict English definition of an insurable interest to the extent that a legal basis for such an interest is not required. Reinecke and Van der Merwe24 argue that the way forward should be a more comprehensive definition built on what was stated in Littlejohn.

The indemnity-based definition has found favour in many South African courts. In Manderson v. Standard General Insurance Company25 the court referred with approval to the definition given in Littlejohn26 and came to the conclusion that the real question needed to be whether the insured had suffered damages that the insurer had intended to indemnify.27 In Refrigerated Trucking v. Zive28 the court not only approved the definition in Littlejohn but accepted it as an unchallenged exposition of South African law on this point.29 The court then proceeded to give its own definition:

It seems then that in our law of indemnity insurance an insurable interest is an economic interest which relates to the risk which a person runs in respect of a thing which, if damaged or destroyed, will cause him to suffer economic loss or, in respect of an event, which if it happens will likewise cause him to suffer an economic loss.30

Thus an economic interest is any interest which, if impaired, would lead to the insured suffering damages

A further example where an economic interest was deemed to be sufficient is Pienaar v. Guardian National Insurance.31 Here it was held that the economic interest that a bona fide possessor has in a stolen car was sufficient to constitute an insurable interest.32 This is because the bona fide possessor ‘stands to lose something of an appreciable commercial value’ should the insured vehicle be stolen, notwithstanding the fact that he was not able to obtain good title in the vehicle.33 The loss that was to be suffered by the bona fide possessor in this instance is the ‘loss of continued useful possession of the article’.34 This, the court held, was sufficient to establish an insurable interest.35

 ‘Liberalisation’ of the Definition of an Insurable Interest

As was mentioned above, a lack of an insurable interest is often raised as a defence by insurers who wish to escape liability. This may lead to situations that appear to be manifestly unfair. Unfortunately, no statutory duty is placed on the insurer either to ascertain or to inform an insured whether an insurable interest is present or not.36 Even if such a duty did exist it would be nearly impossible for an insured to prove that the insurance company did in fact have the required knowledge.

This situation has not gone unnoticed by the courts and they have at times gone to great lengths to assist the insured in finding an insurable interest. Two examples of this can be found in Philips and Zive.

Philips <italic>v</italic>. General Accident Insurance

The plaintiff had insured his wife's jewellery for R10,000 with the defendant insurer.37 The plaintiff and his wife had been married out of community of property hence no legal basis existed for the plaintiff's interest in the jewellery although the insurance contract specifically stated that the plaintiff would be insuring his wife's jewellery.38 The plaintiff's wife had been conned into giving the jewellery to a third party who had disappeared with the items shortly thereafter.39 When the plaintiff claimed for the loss the defendant raised the defence that the plaintiff had no insurable interest with regard to the jewellery in question and could not claim under the insurance contract.40 The court held that:

If there is any doubt, the benefit should in my view be given to the insured, having regard to the fact that normally the company has throughout the period of insurance accepted the insurance premiums and that such a defence is really a technical one. I concede that one of the factors to be taken into consideration … is whether the husband has an insurable interest in the article insured.41

It is clear that the court felt the necessity to expand the definition of an insurable interest. The court was not prepared to abandon the concept altogether but held that the plaintiff had an insurable interest in the jewellery as he felt himself under a moral obligation to replace it.42

This decision has been criticised by academics but for different reasons. Davies, Gordon and Gets43 argue that the decision defines an insurable interest too...

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