Insurable Interest

Insurable Interest

1. Insurable Interest Generally

English law recognised that contracts of insurance required the assured to have an interest in the subject matter insured prior to the Marine Insurance Act of 1745 wherein policies by way of wagers were prohibited on British shipping and its goods.

Section 4 of the MIA:-

(1)Every contract of marine insurance by way of gaming or wagering is void.

(2)A contract of marine insurance is deemed to be a gaming or wagering contract—

(a)Where the assured has not an insurable interest as defined by this Act, and the contract is entered into with no expectation of acquiring such an interest; or

(b)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:

Provided that, where there is no possibility of salvage, a policy may be effected without benefit of salvage to the insurer.

Section 4 MIA is the starting point governing insurable interest within the current regime and it does not allow any party who lacks an insurable insurance on the subject matter from claiming if such subject is lost damaged due to the peril of the sea insured against. (Feasey v Sun Life Assurance Corp of Canada)

2. Wager Policies

Wager policies are policies where the parties therein expressly disclaim the same be intended to function as a policy for indemnity.

Section 4 MIA has gone on to provide that all type of wagering or gaming contracts as illegal. It seems to stamp out wagering and gaming contracts in all types of insurance contracts, not just in marine insurance contracts.

The effect of this section is that the insurer cannot claim when he has no expectation of insurable interest at the point of effecting the contract of insurance. As such he cannot acquire the insurable insurance at a later date and claim successfully.

3. Description Of An Insurable Interest

Section 5 MIA:-

(1) Subject to the provisions of this Act, every person has an insurable interest who is interested in a marine adventure.

(2) In particular a person is interested in a marine adventure 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 case of Lucena v Craufurd states : “…To be interested in the preservation of a thing is to be so circumstanced with respect to it as to have benefit from its existence, prejudice from its destruction. The property of a thing and the interest derivable from it may be very different. Of the first the price is generally the measure; but by interest in a thing, every benefit and advantage arising out of or depending on such a thing may be considered as be comprehended.”

4. When An Insurable Interest Must Attach

Section 6 MIA:-

1. The assured must be interested in the subject-matter insured at the time of the loss though he need not be interested when the insurance is effected:

Provided that where the subject-matter is insured “lost or not lost,” 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.

2. Where the assured has no interest at the time of the loss, he cannot acquire interest by any act or election after he is aware of the loss.

This section has modified the stand taken in Lucena v Craufurd where the court held that the interest must exist at the point the policy is entered into.

In modern times, it is sufficient to show that the interest was subsisting at the point the loss occurred.

It is also important to note that the assured cannot acquire an interest after becoming aware of the loss (Anderson v Morice).

5. Loss Before Interest Acquired May Be Recoverable

In the past this was reflected in the lost or not lost clause in the old SG form and has not been reflected within the modern Institute clauses.

6. Defeasible Or Contingent Interest Is Insurable

Section 7 MIA provides for these types of interests.

It is important to note that an insurable interest does not vest merely for being in possession of the goods.

An expectancy coupled with a present existing title to that out of which the expectancy arises is insurable.

Similarly inchoate rights founded on titles subsisting at the time of loss are insurable interest.

7. A Partial Interest May Be Insured

Section 8 MIA – A partial interest of any nature is insurable

These are interests which may be that of a part owner of an insurable property or the interest of one body of adventures in their common adventures (Wilson v Jones).

8. Joint Insurance

en two or more interests are insured under one cover, the policy will be known as a composite policy which insures each interest severally (Samuel v Dumas).

On the other hand, if a few parties have a joint interest in the same goods, then the insurance cover will be known as a joint policy (New Hampshire Ins Co v MGN Ltd).

In the case of a joint policy, each assured must be joined in any proceedings and defences arising from the conduct of any of them are available against them all.

9. Insurable Interest In Property

a. Expectation of Benefit

Where the insured interest is the expectancy of benefit to arise out of the safe arrival of the subject insured, some legal right must be subsisting in the said assured at the time of the loss to enable him to recover such losses (Moran v Uzielli and Deepak Fertilisers v ICI Chemicals)

A liability due to a loss of a thing is an insurable interest in the thing to the party whom the liability rests on. The liability of carriers and other bailees or of insurers to compensate or indemnify in respect of losses affecting property carried or insured by them is an insurable interest. (North British Ins Co v MoffattCrowley v Cohen and Tomlinson v Hepburn)

b. The Right To A Claim In rem

A creditor’s right to claim in rem against a vessel is an insurable interest (Moran v Uzielli)

c. Insurable Interest Of Ship Owners And Charterer In Ship

Both have an insurable interest to the benefir anf liability of the ship (Hobbs v Hannam)

d. Insurable Interest In Goods Prima Facie Depends On Property

Where there is a contract for the sale of specific or ascertained goods, the property in them transfers to the buyer at such time as the oarties intend it to be transferred (Section 17 Sales of Goods Act 1979Andersen v Morice and Reid v Macbeth).

In the case of unascertained goods or future goods by description, and such goods are in a deliverable state and unconditionally appropriated to the contract, either by the seller with the assent express or implied of the buyer or by the buyer with the assent of the vendor, the property passes to the buyer (Section 18 rule 5(1) Sales of Goods Act 1979). Such appropriation occurs when, in pursuance of the contract, the seller delivers the goods to the buyer or to a carrier or other bailee for the purpose of transmission to the buyer, and does not reserve the right of disposal (Section 18 rule 5(2) Sales of Goods Act 1979).

If there is a reservation of rights on the part of eth seller then the property in the goods only transfers to the buyer upon those conditions being fulfilled by the buyer (section 19(1) Sales of Goods Act 1979). This is usually the case in a situation involving the transportation of goods by way of a Bill of Lading (Section 19(2) Sales of Goods Act 1979).

In a contract for sale of goods by sea, property does not transfer to the buyer until received by him As such he has no insurable interest unless there is an agreement in place for the property to transfer to the buyer before delivery (Inglis v Stock).

e. Agreement To Take Risk May Be Implied From Acts Of Parties

An arrangement by which the buyer undertakes the risk before the property in the goods passes to him may be implied from the acts of the parties when not inconsistent with the express terms of their agreement. This act must manifest the intention of the parties without ambiguity (Andersen v Morice).

f. Effects Of Stoppage In Transit

The exercise of the right of stoppage in transit does not end the insurable interest of the buyer. This stoppage in trsansit does not amount to a rescission of the contract of sale of goods (Section 44 and 48 of the Sale of Goods Act 1979).

g. Insurable Interest In Profits

Insurable interest in profits on goods depend on ownership in the sense that unless the assured is or has been the owner of the goods, he must have entered into a binding contract for the purchase of the goods (Stockdale v Dunlop).

The right to recover on the policy will arise if proved that profit would have been made if the goods arrived (Grant v ParkinsonBarclay v Cousins and Hodgson v Glover).

h. Must The Goods Be The Property Of The Assured? Where No Contract For Freight?

Profits may be insured because they form an additional part of the value of the goods in which the Plaintiff has already as interest – Stockdale v Dunlop

In Abbot v Sebor it was held that the assured must have an interest in the subject matter from which the profits are to proceed, in order to prevent the policy from being considered a wager.

i. Insurable Interest Of Lender And Borrower On Bottomry AndRespondentia

Section 10 MIA provides that the lender of money on bottomry or respondentia has an insurable interest in respect of the loan.

j. Consignees having Liens, Indorsees, Pledges etc 

Section 14(2) MIA – A mortgagee, consignee, or other person having an interest in the subject-matter insured may insure on behalf and for the benefit of other persons interested as well as for his own benefit.

Consignees who have a lien or claim on the property in respect of advances or commission agents to whom it is entrusted for the purpose of sale, or indorsees of the bills of lading to whom a general balance is due can effect an insurance on their own account and recover, averring the interest to be themselves, to the amount of their lien claim or balance (Ebsworth v Alliance Mar Ins Co). In Castellain v Preston it was held that they can also insure interest of other parties.

The effect of the assignment of a Bill of Lading depends on the intention of the parties.

An indorsee usually gets the entire property of the goods vested in himself when he indorses the Bill of Lading and this means he has insurable interest. If he has only gets the Bill of Lading as a pledge then the insurable interest in the goods still remains with the assignor (Sewell v Burdick).

Where the purpose of the of the transfer of a Bill of Lading was to bind the proceeds of the consignment in the hands of the consignor’s agents, the consignor, notwithstanding such transfer, recovered for their loss (Hibbert v Carter)

A shipowner who has entered into recognisances in the admiralty court to pay the salvors of ship and cargo has a lien on, and therefore an insurable interest in, the cargo for the average contribution due to him from its owners (Briggs v Merchant Traders’ Association).

As such where the Bill of Lading is pledged by the consignee of the goods as a security for advances to them, the pledgee has an insurable interest in the goods, and may sue in his own name on a policy effected by the consignees, under his instructions, in their own names “for account of whom it may concern”, and deposited with him as an additional security (Sutherland v Pratt).

A consignee of goods who is entrusted as a commission agent to sell them, or who has accepted bills on them, or has a general balance against the consignor, has an insurable interest in such goods at all events to the extent of his claim. (Wolff v HorncastleHill v Secretan and Murray v Columbian Ins Co)

k. General Principles As To Consignees

Consignees of goods being in advance to the consignors, or under acceptances for them, may insure, in their own name, to the full value of the goods, and apply the proceeds of the policies to their own benefit to the extent of their claims in respect of the advances or acceptances, holding the residue in trust for the consignors if they intended when effecting the policies to cover the interest of the latter (Carruthers v Sheddon).

When there is a lack of evidence that an intention existed to cover any interest other than their own, they will not be allowed to claim more than their own interest.

A consignee who is so far identified in interest and right with his consignor as not to be able to apply with effect to his own interest, if derived out of that of the consignor, an insurance which was effected in order to cover the interest of the latter, but which, owing to the intervention of some principle of law, is not available for such purpose. (Conway v Gray)

l. Insurable Interest In Commission Of Consignee And Ship Broker

A consignee has a insurable interest in the commission which he expects to earn on goods consigned to him, but must specifically describe his interest (Flint v Le Mesurier and Lucena v Craufurd).

A ship broker has an insurable interest in his brokerage during the voyage of the ship to the port (Watts v Bacon). But this will not be the case if he only has a mere expectation that the shipowner will continue to employ him.

m. Insurable Interest Of Mortgagor And Mortgagee

Section 14(1) MIA – Where the subject-matter insured is mortgaged, the mortgagor has an insurable interest in the full value thereof, and the mortgagee has an insurable interest in respect of any sum due or to become due under the mortgage.

Similar to a creditor having a claim on a property pledged to him for advances has an insurable interest, it follows that a mortgagee of a ship or goods has a clear insurable interest in the mortgaged property. (Chartered Trust Co v London Scottish Association Corporation).

The equitable title of the mortgaged ship or goods will entitle the mortgagor an insurable interest in a separate insurance cover.

The mortgagee of a ship may protect his interest therein by a general policy on the ship to the full value but he can only claim up to the value of the debt due to him unless the cover is also for that of the mortgagor’s interest (Irving v Richardson).

For an unvalued policy effected by the mortgagee, the intention of the parties is crucial in effecting the policy. In the event the whole interest is insured, he may claim and hold the remainder minus from his interest on trust for the mortgagor. In the event he has only taken an insurance cover for his own interest, then he will only be able to claim up to his charge. (Tomlinson v HepburnCarruthers v Sheddon and Irving v Richardson).

In practice the mortgagees interest is usually covered in a separate policy to afford cover when the policy taken out by the shipowner is not honoured for some reason including insolvency or breach of warranty by the shipowner (The Captain Panagos DP and Samuel v Dumas).

n. The Mortgagor’s Interest

Mortgagor has an insurable interest in the ship (Alston v Campbell and Hutchinson v Wright). He will also act as a trustee if he has covenanted to insure the mortgaged property on account of the mortgagees (Ladbroke v Lee).

o. Insurable Interest Of Shareholders, Masters & Seamen

Section 11 MIA provides an insurable interest to masters and seamen with regard to wages and commissions.

Shareholders on the other hand do not have an insurable interest (Macaura v Northers Assurance Co LtdO’Kane v Jones and Feasey v Sun Life Assurance Corp of Canada )

p. Insurable Interest Of Managers Of A Vessel

This was first explored and recognised in the case of Thames & Mersey Marine Insurance Co Ltd v Gunford Ship Co Ltd. This was later followed in O’Kane v Jones. In the first case it was held that there was an insurable interest because they were to preserve the ship as a source of business profit to themselves. In the second case it was held that the interest arose out of the contract they entered into with the owners where they were to benefit from the safety of the vessels.

q. Insurable Interest Of Carriers

Section 14(3) MIA – The owner of insurable property has an insurable interest in respect of the full value thereof, notwithstanding that some third person may have agreed, or be liable, to indemnify him in case of loss.

A ship owner or other carrier has the insurable interest in the goods which he carries in respect of his liability for loss or damage that may happen to them during transit and may also insure the goods to full value provided that his intention is to hold the balance of the proceeds in the event of loss in trust for the owners of the goods (Crowley v Cohen and Tomlinson v Hepburn).

r. Loss Of Hire And Loss Of Earnings Insurance

The difference between a policy for loss of earnings and policy for freight was set out in the case of The Wondrous. Here the court held that a freight policy does not provide for a fixed sum to be paid by reference to a period of time. A loss in respect of the subject matter insured has to be proved a loss of freight at risk or not at risk, on board or not on board.

Freight insurances are for earnings or potential earnings of the vessel, not with the expenses of earning that amount. It also is not connected to the longer duration of the voyage nor is it connected to higher costs of carrying out the voyage. So in short it is not a profits insurance but a freight insurance for a fixed amount of freight payable.

As such the Court held that there will be no insurable insurance for loss of earnings or loss of hire insurance.

When a vessel is in the market, she may given rise to an insurable interest but if the owners lay up the vessel, then they will not have an insurable interest.

s. Shipowner’s Interest In Freight

A shipowner has an insurable interest on freight properly so called or chartered hire of the ship.

Similarly a charterer will also have an insurable interest on the freight when he relets the ship to a sub charterer to carry the ship (United States Shipping Co v Empress Assurance Co).

The both are able to derive a profit by carrying their own cargo on the vessel and insure the freight (Flint v Flemyng and the US case of Mellen v National Ins Co).

t. Advance Freight

Section 12 MIA – In the case of advance freight, the person advancing the freight has an insurable interest, in so far as such freight is not repayable in case of loss.

A charterer who has paid advance freight has an insurable interest. (De Silvale v Kendall, Allison v Bristol Mar Ins Co and Manfield v Maitland).

Whether the advance attracts an insurable interest or not depends on the construction of the charterparty (The Karnak).

As soon as the freight becomes due, the charterer’s insurable interest starts and even if the loss happens before the payment of freight to the charterer, the charter is liable to pay the advance freight (Smith v Pyman and Oriental SS Co v Tyler).

u. When An Advance Is Part Payment Of Freight

This mainly depends on construction of the Charterparty (De Silvale v KendallMansfield v Mitland)

v. Doctrine of Insurable Interest 

For insurable Interest in freight to be conceived, there must be a title vested in the insuring party, at the time of the loss, of the ship coupled with an inchoate right to the freight (Camden v AndersonLucena v CraufurdMarsh v Robinson, )

w. Insurable Interest in Freight Proper

Montgomery v Eggington decided that where parts of the goods were onboard at the time of the loss, and all were ready to be shipped, the policy attached on the whole freight. This principle was applied in the case of Parke v Hebson.

In Warre v Miller it was held that some portion of the goods from the carriage of which freight was to arise had been actually shipped on board at the time of the loss.

In Flint v Flemyng, the whole freight was allowed to be claimed since they had prepared to load the goods onboard the ship eventhough the loss occurred prior to loading the goods.

x. The Form Of Contract Of Affreightment Is Immaterial

In the case of Patrick v Eames, it was decided that the form of the contract of the contract of affreightment is not material.

In the same case it was decided that the existence of the contract of affreightment is important to prove as to whether entire amount of the goods or part thereof were loaded onboard.

This principle was later applied in the cases of Flint v FlemyngScottish Shire Line Ltd v London & Provincial Mar Ins CoForbes v Aspinall and Willianson v Innes.

y. Readiness of Ship To Receive Cargo

First it is important to consider is the ship was ready to load the cargo (Parke v HebsonTruscott v ChristieDevaux v J’AnsonForbes v AspinallBarber v Fleming and Foley v United Fire and Marine Insurance Co)

Next it is necessary to consider if the cargo was ready to be loaded on the ship or if the contract of affreightment was legal and binding (Forbes v AspinallFlint v Flemyng and Devaux v J’Anson)

z. Insurable Interest In Chartered Freight

A series of cases show that there is an inchoate right to chartered freight and therefore an insurable interest from the beginning of the voyage is described in the charterparty (Thompson v TaylorHorncastle v SuartAtty v LindoMackenzie v SheddenDavidson v WillaseyEllis v LafoneFoley v United Fire and Marine Insurance Co and Rankin v Potter).

On this principle when a ship is to proceed from London to New York, and at New York load a cargo for Port of Salvador in Brazil, there will be an insurable interest in the freight of this cargo when the ship breaks ground from London proceeding to New York.

aa. Previous Voyage Incorporated By the Charterparty

A previous voyage may be incorporated into a charterparty so that there is an inception of the voyage described in the charterparty during the performance of the prior voyage (Foley v United Fire and Marine Insurance Co and Rankin v Potter)

bb. Contract May Be Entire Though There Be a Separate Payments Of Freight

When the ship is chartered for a double voyage, firstly from London to New York, and then secondly from New York to Salvador or from New York back to London, the contract is an entire one eventhough the payment of freight can be paid separately or during different parts of the voyage (Horncastle v Suart and Davidson v Willasey)

cc. Insurable Interest Before Commencement Of Charterparty Voyage And Insurable Interest When Ship Let On Time Charter 

As discussed above, the case in Barber v Fleming states that there may be an insurable interest on freight before the voyage commences.

The same case also states that the ship owner can insure the hire of his ship when he send his ship to a port of choice expressed in the charterparty from where the time charter entered into with the charterer commences

dd. Insurable Interest In Freight Of Ship Owners’s Own goods

This will be allowed as long as he has goods intended and ready to be shipped where the goods are so far ready that he can load them and ship them in the ordinary course when the ship reaches her loading place (Devaux v J’Anson).

Rule 3(d) of the First Schedule to the MIA states as follows:

Where freight, other than chartered freight, is payable without special conditions and is insured “at and from” a particular place, the risk attaches pro rata as the goods or merchandise are shipped; provided that if there be cargo in readiness which belongs to the shipowner, or which some other person has contracted with him to ship, the risk attaches as soon as the ship is ready to receive such cargo.

ee. Is There An Insurable Interest In Freight As Soon As The Contract Is Made?

The first authority on this question was Tonge v Watts where the court held that there was no insurable interest for cargo that has not been loaded onboard.

But as the law developed, there has been a shift in this where courts have allowed for the insurable interest to begin before the loading of the goods onboard (Barber v Fleming).

ff. The Marine Insurance Act And Insurable Interest In Freight

This is seen in Rule 3 of Schedule 1 to the MIA where in paras (c) and (d) it was provided as follows:

(c) Where chartered freight is insured “at and from” a particular place, and the ship is at that place in good safety when the contract is concluded the risk attaches immediately. If she be not there when the contract is concluded, the risk attaches as soon as she arrives there in good safety.

(d) Where freight, other than chartered freight, is payable without special conditions and is insured “at and from” a particular place, the risk attaches pro rata as the goods or merchandise are shipped; provided that if there be cargo in readiness which belongs to the shipowner, or which some other person has contracted with him to ship, the risk attaches as soon as the ship is ready to receive such cargo.

10. Ship-owner’s Insurable Interest In Liabilities

As per Sections 3 and 5(2) MIA there is an insurable interest for the liability of the marine adventure to be pursued.

Apart from this the ship owner will have an insurable insurance for liabilities consequent on the casualties enumerated in Schedule 7 of the Merchant Shipping Act 1995.

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