The principle of insurable interest

Insurable interest is a fundamental legal concept that refers to the financial or other interest that a person has in the subject matter of an insurance policy. In other words, it is the interest that a person has in the property or life that is being insured.

Aside from referring to the Civil Code elements, Maltese jurisprudence has established the importance of common law principles of insurable interest and utmost good faith in contracts of insurance.

In determining what is considered as ‘insurable interest’, we can refer to English Law, namely the Marine Insurance Act 1906. Article 5 (2) of the Act defines Insurable Interest:

“where he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due arrival of insurable property, or may be prejudiced by its loss, or by damage thereto, or by the detention thereof, or may incur liability in respect thereof.”

The definition stresses the existence of legal or equitable right or the possibility of ‘legal liability’ in respect thereof. Harnett and Thornton provide a functional definition of insurable interest as “that kind of relationship to an occurrence, or traditionally viewed, that kind of interest in the property insured, which a claimant must show in order to have a legally enforceable claim to recovery.” ^[1]

From these definitions, we can deduce that in order for one to insure, he must have a legal right to insure which emanates from the financial relationship between the insured and the subject of insurance, known as insurable interest. The requirement of insurable interest is an essential prerequisite for all contracts of insurance. In order to ensure that the insurable interest does exist, one should examine whether:

1. The relationship between the insured and the subject of insurance is one which is legally recognised, and not merely existing in fact. This stance was upheld in numerous cases including Alfio Borg vs Fogg Insurance Agencies Limited^[2], and Elmo Insurance vs Pace.^[3]

“There must be some direct relationship to the property itself for otherwise the interest is too remote and therefore not insurable”.^[4]

Judgements, such as Macaura vs Northern Assurance Co Ltd^[5] emphasise the requirement of the legally recognized relationship between the insured and the subject. In this case, the owner of a time estate sold its timber to a company whose majority shareholding was Macaura’s. Although Macaura had insured the timber against fire, he had done so in his own name, rather than in the company’s name and the insurance company consequently refused his claim upon the timber’s destruction by fire. In its decision, the House of Lords emphasised that for insurable interest, the person is required to have a legal or equitable interest in the property he is insuring.

“even if he holds all the shares is not the corporation […] neither he nor any creditor of the company has any property legal or equitable in the assets of the corporation.”

In fact, Birds’ Modern Insurance Law maintains that:

“Shareholders have no insurable interest on corporate property and cannot insure simply on the property but must specify their interest and define the risk as an insurance on shares or dividends.”

This stance was also held in countless judgements, including Elmo Insurance Services Ltd Noe Et vs Edwin Pace Et^[6], whereby the court held that Zammit Tabona lacked insurable interest in his capacity as shareholder of the company U Rent A Car Ltd.

2. The insured would benefit from the subject’s continued safety or absence of liability;

“for one to protect an object with insurance, it is not necessary to be the owner of that object; as long as he has… “an insurable interest”. This exists when the insured ‘may be said to benefit by the continued existence of the property or life insured and will suffer a loss by reason of its damage or destruction’”; ^[7] and

3. The insured is prejudiced by the loss of the subject or the creation of liability. The law requires the existence of a relationship between the person and the thing insured so that in the event that the risk materialises, the consequences of the damage will be felt in the estate of the person seeking insurance. The interest is therefore not the thing that is destroyed by the happening of the risk, but it is solely the underlying reason why the destruction of the thing affects the individual depositary of the right.

“Insurable interest in property is not confined to absolute legal ownership. Generally, any person who is so situated that he will suffer a loss as the proximate result of danger in or destruction of the property has an insurance interest in it”.^[8]

It therefore follows that if “the assured has no interest at the time when the event insured against occurs, it is clear that he cannot recover anything on indemnity policy because he has suffered no loss against which he can be indemnified” ^[9]

There must be a current interest rather than a mere expectancy. In fact, in Lucena vs Craufurd^[10], the court held that the expectation of something in the future does not equate insurable interest. As explained earlier, the interest must be a financial involvement which can be measured.

If the answers to the above-mentioned questions are in the affirmative, then insurable interest does indeed exist. The essential principle of insurable interest was upheld in Police v. Carmelo Spiteri^[11], whereby in its decision, the court highlighted the importance of the insured having insurable interest, in order for the insurance contract to be valid. Therefore, if an insurance policy has been contracted, and insurable interest is not present, the policy would be considered null.

[1] Insurable interest in property: a socio-economic re-evaluation of a legal concept by Harnett and Thornton
[2] Alfio Borg vs Fogg Insurance Agencies Limited decided by the First Hall, Civil Court on 15^th February 2012
[3] Elmo Insurance Services Ltd Noe Et vs Edwin Pace Et decided by the Court of Appeal on 27^th May, 2016
[4] MacGillivray & Parkington
[5] Macaura vs Northern Assurance Co Ltd (1925) AC 619
[6] Elmo Insurance Services Ltd Noe Et vs Edwin Pace Et decided by the Court of Appeal on 27^th May, 2016
[7] Bertu Camilleri vs Harold Bartoli et decided by the First Hall, Civil Court on 9^th October 2003
[8] MacGillivray & Parkington
[9] MacGillivray & Parkington
[10] Lucena vs Craufurd (1806) 2 B&P (NR) 269, HL
[11] Police v. Carmelo Spiteri decided by the Criminal Appeal (Inferior Jurisdiction), on 25^th October 1952