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INSURABLE INTEREST AS A REQUIREMENT FOR
INSURANCE CONTRACTS: A COMPARATIVE ANALYSIS

ESTIAN BOTES * and HENK KLOPPERS**

I. INTRODUCTION
In 1883 the Canadian Court of Appeal held in Castellain v. Preston' 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 Castellainhas 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 legislature' 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,' 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.

* LLB, LLM (North-West University), candidate attorney. Contact: estian777@[Link].

** Associate Professor at the North-West University, BCom, LLB, LLM (Potchefstroom
University for Christian Higher Education), LLD (North-West University). Contact:
[Link]@[Link].
1 Castellain v. Preston (1883) 11 QBD 380 (CA).
2 Ibid., 397.
3 M. F. B. Reinecke, J. P. van Niekerk and P. M. Nienaber, South African Insurance Law
(LexisNexis, 2013): 26.
4 Neither the current Short Term Insurance Act 53 of 1998, nor the Long-Term Insurance Act 52
of 1998 has filled the void.
5 Philips v. GeneralAccident Insurance CO (SA) Ltd 1983 4 SA 652 (W) (hereafter Philips).
6 Ibid., 659E-G.

African Journalof Internationaland ComparativeLaw 26.1 (2018): 130-154

Edinburgh University Press
DOI: 10.3366/ajicl.2018.0223
© Edinburgh University Press
[Link]/ajicl
130
 InsurableInterest: A ComparativeAnalysis 131

Univem VersekeringsmakelaarsBK,7 the court held that an insurable interest is a

requirement for the validity of an insurance contract. 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
concept 0 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." 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
Gets 2 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 Merwe1 3 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. Schulze1 4 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?" 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.

7 Lynco Plant Hire & Sales BK v. Univem VersekeringsmakelaarsBK 2002 5 SA 8 (T) (hereafter
Lynco Plant).
8 Ibid., para. [9].
9 Lorcom Thirteen v. Zurich Insurance Company South Africa Ltd 2013 5 SA 42 (WCC) (hereafter
Lorcom).
10 Ibid., para. [23].
11 Ibid., para. [26].
12 D. M. Davis, Gordon and Gets: The South African Law of Insurance,4th edn (Juta, 2005): 94-5.
13 Reinecke, Van Niekerk and Nienaber, South African InsuranceLaw, 26.
14 W. G. Schulze, 'Extension Clauses in Insurance Contracts-Uncertainty Rules, OK?', SA Merc
LJ (1997): 64-76, at 65. Also see T. Woker, 'The Problem of Insurable Interest Yet Again: With
Particular Reference to Extension Clauses', SA Mere LI (1996): 392-8.
15 This article will focus solely on indemnity insurance contracts. For an in-depth discussion of
the requirement in non-indemnity insurance see P. Havenga, 'Liberalising the Requirement of an
Insurable Interest in (Life) Insurance', SA Merc LJ (2006): 259-73.
132 Estian Botes and Henk Kloppers

II. INSURABLE INTEREST IN SOUTH AFRICA

A. 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.1 6 They suggest that the definition given by
McGillivray and Parkington" should be followed which, as a point of departure,
requires a legal basis.
Other jurists, for example Reinecke and Van der Merwe," 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.1 9 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 Merwe 2 1 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
23
in all instances.
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

16 The locus classicus with regard to the traditional definition is to be found in Lucena v. Craufurd
(1806) 2 Bos & Pul (NR) 260 (hereinafter Lucena).
17 Davis, Gordon and Gets: The South African Law of Insurance, 92.
18 Reinecke, Van Niekerk and Nienaber, South African Insurance Law.
19 Damages is defined as 'the diminution, as a result of a damage-causing event, in the utility or
quality of a patrimonial or personality interest in satisfying the legally recognised needs of the
person involved' (J. M. Potgieter, L. Steynberg and T. B. Floyd, Visser & Potgieter: Law of
Damages, 3rd edn (Juta, 2012): 27).
20 Reinecke, Van Niekerk and Nienaber, South African Insurance Law, 36.
21 Ibid., 27.
22 Littlejohn v. Norwich Union Fire Insurance Society 1905 TH 374 380-381 (hereafter Littlejohn).
23 Reinecke, Van Niekerk and Nienaber, South African Insurance Law, 27-8.
 InsurableInterest: A ComparativeAnalysis 133

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 GeneralInsurance Company2 5 the court referred with
approval to the definition given in Littlejohn2 6 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.2 7 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.2 9 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
Pienaarv. 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. 3 3 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' .3' This, the court
held, was sufficient to establish an insurable interest. 3 5

24 Ibid., 27-8.
25 Brian Hilton Manderson v. Standard General Insurance Company Limited (D), 2 September
1993 (case 4898/92) unreported (hereafter Brian Hilton).
26 Littlejohn, 374.
27 Brian Hilton, 9.
28 RefrigeratedTrucking (Pty) Ltd v. Zive NO 1996 2 SA 361 (T) (hereafter Zive).
29 Ibid., 371D-E.
30 Ibid., 372F-H, emphasis added.
31 Pienaarv. Guardian National Insurance Co Ltd 2002 3 SA 640 (C) (hereafter Pienaar). Also
see Fosterv. Mutual & Federal Insurance Co Ltd (T) 5 2002 unreported, where the right of a
bona fide occupier was held to be sufficient to constitute an insurable interest.
32 For a discussion of Pienaarsee T. Manamela, 'Insurable Interest in Stolen Property Bought in
Terms of an Instalment-Sale Agreement', SA Merc LJ (2003): 479-86.
33 Pienaar,640D-F.
34 Ibid., 647A-B.
35 Ibid., 647C.
134 Estian Botes and Henk Kloppers

B. '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
6
or not .3 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.

1. Philips v. GeneralAccident 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.4 1

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 obligationto replace it. 42
This decision has been criticised by academics but for different reasons.
Davies, Gordon and Gets 4 3 argue that the decision defines an insurable interest
too widely as it flies in the face of the concept requiring a legal basis. Reinecke

36 Neither the Short-Term Insurance Act 53 of 1998 nor the Long-Term Insurance Act 52 of 1998
creates such a duty.
37 Philips, 653A-B.
38 Ibid., 653A-B; 658E-E
39 Ibid., 656C-H.
40 Ibid., 65SE-F.
41 Ibid., 659F-H.
42 Ibid., 660H.
43 Davis, Gordon and Gets: The South African Law of Insurance, 99.
 InsurableInterest: A ComparativeAnalysis 135

and Van Niekerk" accept the decision as a step in the right direction, being a
step away from the traditional definition, but find it unacceptable that the court
awarded compensation:

on the ground of a nebulous interest such as that the insured felt

himself morally-but not legally-obliged to replace the insured
property, and thus leaving him a choice whether or not to honour the
'obligation'.45
The main thrust of their argument is that the decision extends beyond the
indemnity principle as it could not be argued that the insured stood to suffer a
financial loss due to the theft of the property.4 6 Mothupi4 7 illustrates this argument
by asking whether it would be acceptable for a person to insure the property of his
neighbour due to him feeling morally obliged to do so. It is also argued that such
an extension of the insurable interest concept would lead to unnecessary problems
and uncertainties and that the courts should rather consider themselves bound by
the indemnity principle.4 8 It is, though, easy to empathise with the court in this
case as the insurer had undertaken to indemnify the insured, who had faithfully
performed in terms of the contract of insurance. It is, however, difficult to avoid the
conclusion that the court was guided by a sense of justice, especially considering
the fact that no legal authority could be produced for the notion that a 'moral
obligation' would be sufficient to constitute an insurable interest.

2. Refrigerated Trucking v. Zive

This case concerned an extension clause in an insurance contract. The effect of
an extension clause is that the insurer indemnifies third parties against damages
that they might sustain while driving the vehicle that has been insured. Extension
clauses have caused considerable problems for the courts as according to the
traditional definition the insured does not have an insurable interest in the damages
sustained by third parties driving his vehicle. The insured does have an insurable
interest in the vehicle, but not in the contingent liability sustained by the third
party driving the vehicle. The court held that in respect of indemnity insurance
an economic interest would be sufficient for an insured to claim. It defined an
economic interest as an interest that relates to either the destruction or damaging
of an object or the happening of an event that would result in the insured suffering
an economic loss.49 The court emphasised that it was not required for the insured
to stand in a legal relationship with the object of the insurance contract or that the

44 Reinecke, Van Niekerk and Nienaber, South African InsuranceLaw, 35.

45 Ibid., 35.
46 S. Mothupi, 'The Problems and Criticisms Relating to Interest Theory in South Africa Insurance
Law and Other Legal Systems: Some Suggestions for Reform', Codicillus XLIV (2003): 101-9,
at 105, and M. E B. Reinecke and S. Van der Merwe, 'Insurable Interest and Reasonable
Precautions: Blessed Be the Meek (and Gullible?)', SALJ (1984): 608-13, at 610.
47 Mothupi, Codicillus XLIV, 105.
48 Reinecke and Van der Merwe, SALJ (1984): 610.
49 Zive, 372H.
136 Estian Botes and Henk Kloppers

event should happen to him personally. 0 All that was required for an insurable
interest to exist was that the insured should suffer an economic loss.
Although it appears that the court favoured the indemnity-based definition,
ultimately the court based its judgment on considerationsof convenience. It held
that the matters which might arise would be so complex that it would simply be
more convenient that an extension clause, extending liability in the manner that
it did in the present case, be deemed to provide the insured with an insurable
interest."
The court's decision in Zive has been heavily criticised by academics, including
Reinecke and Van Niekerk who argue that the court deviated from the indemnity
principle.52 Schulze5 3 also criticises the reasoning behind the judgment, arguing
that the court should rather have held that the extension clause amounted to a
stipulation in favour of a third party. It seems that, similarly to Philips, the court
went out of its way to bring the facts within the scope of the concept of an
insurable interest. In doing so it might have caused more confusion, rather than
providing clarity, as the decision begs the question of just how far this convenience
theory can be extended and applied to other disputes concerning an insurable
interest.
The debate with regard to the insurable interest of a person covered by an
extension clause has been laid to rest by the Supreme Court of Appeal which held
in UnitransFreight v. Santam5 4 that an extension clause amounts to a stipulation in
favour of a third party and is therefore enforceable against the insurer. However,
there are still many unanswered questions with regard to the application of the
Supreme Court of Appeal's judgment.

3. Concluding Remarks
It is evident that South African courts have in some circumstances gone to
great lengths to assist those who have been prejudiced by what some coin a
technical defence. In attempting to extend the definition, however, the courts
might have gone too far in that certain interests are now insurable that cannot
be considered viable within insurance contracts. This further begs the important
question whether the concept is still necessary or should still be considered an
element of an insurance contract. This question will be discussed in the following
paragraph.

50 Ibid., 372G.
51 Ibid., 372H-373D.
52 Reinecke, Van Niekerk and Nienaber, South African Insurance Law, 35.
53 Schulze, SA Mere LJ (1997): 72-3.
54 Unitrans Freight (Pty) Ltd v. Santam Ltd v. Santam Ltd 2004 6 SA 21 (SCA). For an in-depth
discussion of the case, see J. P. van Niekerk, 'Extension Clauses in Motor-Vehicle Insurance
Contracts as Stipulations in Favour of a Third Party: Clarity at Long Last', SA Mere LJ (2004):
286-303, and M. E B. Reinecke, 'Extension Clauses and Indemnity Insurance, TSAR (2012):
342-8.
55 In this regard, see J. P. van Niekerk, 'Extension Clauses in Motor-Vehicle Insurance Contracts as
Stipulations in Favour of a Third Party: A Slight Hiccup', TSAR (2006): 819-26.
 InsurableInterest: A ComparativeAnalysis 137

C. Insurable Interest as a Requirement for Insurance Contracts

1. Introduction
The concept of an insurable interest was developed from the lex mercatoriaof the
Middle Ages and eventually accepted in South African law through the adoption
of English insurance law and the principles in the Life Insurance Act 1774.56
Originally it served a descriptive purpose only as the object of insurance but as
time progressed the concept was seen not merely as the object of insurance, but
as a characteristic feature of an insurance contract. Eventually the concept was
accepted as a fundamental requirement for the validity of an insurance contract.
Thus, for example, in Lynco Plant" the court assumed that an insurable interest is
in fact a requirement for the validity of an insurance contract.

2. Criticism Against Adoption

Reinecke5 9 criticises the acceptance of the concept in South African law. He
argues that the introduction thereof in English law was due to the unique position
of the English common law where certain wagering contracts had until that point
been accepted as valid by English common law. He points out that legitimate
insurance contracts can hardly be described as the 'mischievous kind of gaming'
which was prohibited in the Life Assurance Act's preamble.6 0 Reinecke6 1 further
argues that the wagering contracts that the LAA intended to put an end to had
in any event been regulated by South African common law well before 1774 and
that the concept of an insurable interest is foreign to both South African common
law and the legislature. He concludes that the LAA was never applicable to the
South African legal system and that the importation of the concept was wholly
unnecessary.6 2 His views, however, are not always shared by the South African
courts.

3. The View of South African Courts

South African courts have followed a varied approach to the insurable interest
concept, although the latest trend seems to be more questioning or dismissive. To
illustrate the approach the cases of Lynco Plant, Philips, Steyn v. AA Onderlinge
64
Assuransie Assosiasie Bpk 6 3 and Lorcom will be referred to.

56 Reinecke, Van Niekerk and Nienaber, South African InsuranceLaw, 25.

57 Ibid., 26.
58 Lynco Plant, para. [12].
59 M. F. B. Reinecke, Versekering sonder versekerbare belang?', CILSA (1971): 193-223, at 201.
For further criticism of the incorporation of the concept see Mothupi, Codicillus, 101-9, and
Schulze, SA Mere LJ (1997): 64-76.
60 Reinecke, CILSA (1971): 201. The Act is subsequently referred to as the LAA.
61 Reinecke, CILSA (1971): 201.
62 Ibid., 202.
63 Steyn v. AA OnderlingeAssuransieAssosiasie Bpk 1985 4 SA 7 (T) (hereafter Steyn).
64 Lynco Plant is included to illustrate the general approach that has been taken by our courts.
Philips and Steyn gradually culminated into Lorcom and therefore all the criticism directed at
138 Estian Botes and Henk Kloppers

1. Lynco Plant Hire v. Univem

An interesting example of the application of the concept of an insurance contract
can be found in this case. The plaintiff purchased two motor vehicles on a lease
agreement and had, on the strength of the advice of one of its insurance brokers,
insured the vehicles in the name of one of its members.6 5 The plaintiff and the
member had concluded an agreement that all monies obtained in terms of the
insurance agreement would be payable to the plaintiff. When the two vehicles
were stolen the insurance company repudiated the claim on the basis that the
insured had no insurable interest in the two vehicles.66 The plaintiff sued the
defendant, the broker, on the grounds that he had given incorrect advice. As part of
the adjudication the court had to determine whether the member had an insurable
interest in the property of the closed corporation.6 7 With regard to the question
whether an insurable interest is a requirement for the validity of an insurance
contract the court answered in the affirmative, holding that:

Wat vasstaan is dat 'n versekerbare belang wel 'n vereiste is vir
'n geldige versekeringskontrak. [What remains certain is that an
insurable interest is indeed a requirement for a valid insurance
contract.] 6 8
The court has assumed that an insurable interest is a requirement for the validity
of an insurance contract without an investigation into the historical origins of the
concept and accepted that the concept has been a part of the South African legal
system for such a long time that it is unnecessary to even consider its validity.
Lynco Plant, along with the cases discussed in sections JJ.B.1 and JJ.B.2 above,
illustrates that the courts generally accept that an insurable interest is in fact a
requirement for the validity of an insurance contract. Although the courts may
disagree with regard to the definition and the validity of the requirement, they are
wary of departing from it. That being said, several relatively recent decisions, as
will be discussed below, are indicative of the fact that the courts are beginning to
become more comfortable with the notion of abandoning the concept entirely.
2. Philips v. GeneralAccident Insurance
An illustration of the courts questioning the validity of the concept of an insurable
interest can be found in Philips. This case has already been discussed in section
IB. 1 above with regard to the definition of an insurable interest but it is relevant
again with regard to this discussion on the role of the concept of an insurable
interest. Regarding the importance of the concept of an insurable interest the court
held that too much emphasis was being placed on the requirement of an insurable
interest. 69 The real inquiry was whether the contract in question amounted to a

Lorcom will be equally relevant to Philips and Steyn in respect of abandoning the concept of an
insurable interest.
65 Lynco Plant, para. [86].
66 Ibid., para. [86].
67 Ibid., para. [86].
68 Ibid., para. [12]. Author's own translation.
69 Philips, 659E.
 InsurableInterest: A ComparativeAnalysis 139

contract of wager. This indicates that the court was of the opinion that it should
be guarded against attaching too much importance to the concept of an insurable
interest. The court, continuing its line of argument, stated that an insurable interest
could be taken into consideration as a factor to determine whether the contract
amounted to one of wager, but that it was not the only factor to be considered.70
From this statement one might assume that the court was implying that an
insurable interest is not a requirement for an insurance contract but merely a
yardstick to be used in determining whether the contract before it amounted to one
of wager. This conclusion is dubious, though, considering the fact that the court
went to great lengths to bring the conduct in question in line with the concept,
holding that a moral obligation will suffice to constitute an insurable interest.

3. Steyn v. AA OnderlingeAssuransie Assosiasie Bpk

The Steyn case followed shortly on Philips and drew heavily on it. The facts
of the case are as follows. Mr Steyn insured his residence and furniture within
the residence with the defendant insurer.7 2 Subsequently, the house burned down.
When the plaintiff claimed for his damages the defendant raised the defence that
the plaintiff did not have an insurable interest in the residence due to the fact that
the residence belonged to the Provincial Administrator. The plaintiff had the right
to live in the residence for as long as the Administrator did not need it, although
the plaintiff could at any time be requested to vacate the residence. It was on this
last-mentioned fact that the defendant relied for its defence. 7 3
The court held that it was often forgotten that the purpose of an insurable
74
interest was to distinguish between a contract of insurance and that of a wager.
Therefore, according to the court, the primary question was not whether the
insured had an insurable interest but whether or not the disputed contract
amounted to one of wager. Whether the insured possessed an insurable interest
would be a factor to be considered by the court in determining whether the contract
constituted one of wager. The lack of an insurable interest would, however, not
automatically result in the contract constituting a wager as the intention of the
75
parties would also be an important consideration to be taken into account.
The intention of the parties could be determined by the contract itself and the
surrounding circumstances .76
Although the court did not specifically stipulate that the insurable interest
concept should be abandoned altogether the wording indicates that it was of the
opinion that not too much emphasis, if any, should be placed thereon. However,
the judgment was not based on the presence of an insurable interest or the lack

70 Ibid., 659G-H.
71 Ibid., 660H.
72 Steyn, 7F-G.
73 Ibid., 7G-H.
74 Ibid., 1E-F
75 Ibid., 11G-J.
76 Ibid., 11I-J.
140 Estian Botes and Henk Kloppers

thereof. The court held that, due to the fact that the plaintiff had failed to inform
the defendant that he was an un-rehabilitated insolvent, the claim had to fail.77

4. Lorcom Thirteen v. Zurich

Gansbaai Fishing Wholesalers bought a fishing vessel.7 8 Lorcom Thirteen, which
owned 100 per cent of the shares in Gansbaai Fishing and for all practical purposes
was the owner of the vessel, obtained insurance from Zurich to indemnify it
against all 'loss, damage, liability or expense' with regard to the vessel for
R3 million. 79 The proposal form did not indicate that Lorcom was the owner of the
vessel nor did it contain any questions aimed at identifying the owner of the vessel.
However, various certificates and documents were provided to the defendant
indicating, or at least suggesting, that Gansbaai Fishing was the owner of the
vessel. 0 The vessel was eventually 'lost' under rather 'suspicious circumstances'
and when Lorcom claimed from Zurich the insured amount, Zurich repudiated
the claim on the ground, among others, that the insured did not have an insurable
interest in the insured property.
The primary question before the court was whether Lorcom did have an
insurable interest in the vessel. The court commenced with a general discussion
on the requirement of an insurable interest,8 2 acknowledging that it is generally
accepted that such interest in the insured property is a requirement for a valid
insurance contract. 8 3 The court then took a brief look at the English origins of the
concept84 and stated that South Africa had no statutory requirement with regard
to an insurable interest but that the common law and statutes make provision
for the regulation of wagering contracts. " It concluded that there appears to
be very little justification for the importation of the concept from English
insurance law.8 6
The court then referred to the difference between a game of chance and
an insurance contract. It concluded that the difference is that with regard to a
wagering contract, the person making the wager hopes that the event will happen
so that he may claim the money, whereas with an insurance contract, the insured
has no interest in the happening of the event in that he actually hopes that the event
will not occur. 7 The court then states:
There seems no good reason why an enquiry into whether a person
who has concluded a purported insurance contract has an interest in
the event or contract apart from the insurance contract itself, should

77 Ibid., 14D-E
78 Lorcom, 44B.
79 Ibid., 45D-I.
80 Ibid., 45F-G.
81 Ibid., 42D-E.
82 Ibid., 47A-59.
83 Ibid., 47D-E.
84 Ibid., 47C-48E.
85 Ibid., 48F-G.
86 Ibid., 48G-H.
87 Ibid., 49G-H.
 InsurableInterest: A ComparativeAnalysis 141

be an unduly technical matter. In the context of insurance contracts

it may do no harm to call this distinguishing interest an 'insurable
interest' provided one guards against equating this criterion with the
English law of insurable interest.

The court specifically referred to the decision in Lynco Plant indicating that the
approach was incorrect as it did not consider the historical basis and purpose of
the concept.89 It is clear that the court was not satisfied with only a less strict
interpretation of the concept but took the view that it should be done away with
altogether. It also ruled that patrimonial loss is not a requirement for an insurance
contract. If the contract requires that a patrimonial loss be proven, then it has to
be proven; should the contract provide otherwise or be silent on patrimonial loss,
then it should not be required to prove.90
The court thus divorced insurance contracts from both the insurable interest
concept and the indemnity principle and reduced the matter solely to the intention
of the parties. Thus an insurance contract would be enforceable, regardless of
patrimonial loss, provided that the contract did not amount to a wager.9 1 it
therefore found that Lorcom did have an insurable interest in the vessel.
The judgment has not been accepted without criticism. Reinecke welcomes
the decision in all but one respect, namely the apparent discarding of the
indemnity principle. He argues that if not for the indemnity principle, it could
be difficult to distinguish between a wager and an insurance contract. He
concludes that there exists no support for divorcing indemnity insurance from
the principle of indemnity as it would 'fly in the face of ages of history, long
standing precedents and international thinking'.92 Reinecke and Van Niekerk
argue that no coherent argument can be made for divorcing insurance contracts
from the indemnity principle. If insurance contracts were to be divorced from
the indemnity principle this would lead to unlimited and unforeseen liability
for insurers with the consequence that insurers will noticeably raise their
premiums.9

D. Summary

It is clear that the insurable interest concept has created extensive legal uncertainty
within the insurance sphere. Due to the rigid and formalistic nature of the
traditional definition, the requirement of an insurable interest has repeatedly been
used as a means for insurers to attempt to repudiate liability.9 4 Owing to the often
unfair results from the rigid application of the concept, the courts have attempted

88 Ibid., 49H-50A.
89 Ibid., 50F-G.
90 Ibid., 52A-C.
91 Ibid., 52E-G.
92 M. E B. Reinecke, 'Insurable Interest', TSAR (2013): 816-24, at 820.
93 Reinecke, Van Niekerk and Nienaber, South African InsuranceLaw, 36.
94 See section I above.
142 Estian Botes and Henk Kloppers

to come to the aid of the insured. However, in their endeavours some courts have
stretched the definition to the extent that authority can be found for holding that a
nebulous interest (such as the insured feeling himself morally obliged to replace
the property in question) is sufficient to constitute an insurable interest. What
complicates the issue further is that although it is generally accepted that the
concept is a requirement for the validity of an insurance contract, some courts have
recently demonstrated a willingness to move away from the concept altogether.
Considering the above, the future of the concept remains uncertain. The current
trend would suggest that the courts are ready to abandon the concept altogether
or to replace the traditional definition with a more suitable one. The ideal would
of course be for the Supreme Court of Appeal to remedy the situation or for the
legislature to intervene and craft an all-encompassing definition that would bring
some clarity to an extremely murky situation.
The difficulties faced with regard to the doctrine of an insurable interest are
not, however, unique to South Africa. Identical issues have been experienced in
both Great Britain and Australia. Furthermore, each one of these countries has had
their own unique approach to solving the problems experienced with regard to the
doctrine. The subsequent paragraphs therefore focus on the British and Australian
experience with regard to the doctrine.

III. GREAT BRITAIN

A. Introduction

Unlike the South African common law, British common law did not prohibit
wagering, thus wagering contracts were fully enforceable albeit unregulated.9 5
Due to this, certain 'morally hazardous' agreements became common which took
the form of insurance contracts but were in fact nothing more than contracts of
wager.9 6 The maritime industry was especially hard hit by these agreements where
a large number of ships were lost in fraudulent or suspicious circumstances. In the
mid-eighteenth century the British parliament addressed the issue by passing the
Marine Insurance Act.97 The MIA introduced the insurable interest concept into
the sphere of indemnity insurance in an attempt to curb contracts that encouraged
the destruction or loss of marine cargo.
It was not, however, only in the marine industry that simulated insurance
contracts were encountered. Atmeh98 refers to life insurance obtained on persons
accused of capital crimes or on elderly famous persons. In the first instance the
wager was whether the accused would be convicted and executed and in the
second the premium would be estimated on what was known of the person's

95 J. Birds, Birds' Modern Insurance Law, 8th edn (Sweet & Maxwell, 2010): 39.
96 K. C. T Sutton, Insurance Law in Australia (LBC Information Services, 1999): 504, and Birds,
Birds' Modern Insurance Law, 39.
97 1745, 19 Geo. 2, c. 37 (the MIA).
98 S. M. Atmeh, Regulation Not Prohibition: The Comparative Case Against the Insurable Interest
Doctrine', Northwestern Journal of InternationalLaw and Business (2011): 93-133, at 98-9.
 InsurableInterest: A ComparativeAnalysis 143

health. The LAA9 9 was therefore promulgated a few years later and the insurable
interest concept extended to non-indemnity insurance.
The primary purpose of the concept was thus to prohibit insurance contracts
that were deemed to be morally abhorrent and encouraged the loss of property or
death of the person against whom the insurance was obtained. This is commonly
referred to as a moral hazard. In 1845 the Gaming Act"oo further extended the
scope of an insurable interest to encompass all forms of indemnity insurance.
The Marine Insurance Act of 1906 has to date been the only attempt by the
British legislature to define the concept, which reads as follows:

(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.0

This definition formed the basis of the traditional definition discussed above and
since no other legislative definitions exist, the courts have prior to the Act made
their own attempt to define the concept.

B. Defining an Insurable Interest

In Lucena Lord Elton of the House of Lords on behalf of the majority defined an
insurable interest as:

a right in the property, or a right derivable out of some contract about

the property, which in either case may be lost upon some contingency
affecting the possession or enjoyment of the party.1 02
This definition is generally referred to as the strict or traditional definition of an
insurable interest with the emphasis on the insured having 'a present right to a
legal or equitable interest or a right under contract'.103
The minority opted for the more liberal definition which is generally referred
to as the economic relationship test and requires that the insured suffers some
kind of economic loss upon the destruction or injury of the insured property.1
This definition is generally referred to as the economic definition, and is akin to

99 1774, 14 Geo. 3, c. 48.

100 1845, 8 and 9 Vict., c. 109 (the Gaming Act).
101 1909, 9 Edw. 7, c. 12. S5.
102 Lucena, 650.
103 Atmeh, Northwestern Journal ofInternationalLaw and Business (2011): 36.
104 Lucena, 643.
144 Estian Botes and Henk Kloppers

the definition favoured by Reinecke and Van der Merwe discussed above. The
traditional definition, however, formed the basis of the definition contained in the
Marine Insurance Act of 1906.
Macaura v. Northern Assurance"os was decided after the 1906 definition. In
this case the court defined an insurable interest as a legal or equitable interest.10 6
Therefore a person would only have an insurable interest if he stood in a legal
relationship with the object (such as ownership), or put differently, if it has a
legal basis. 0 7 This definition was followed for nearly a century until the harsh
consequences of the strict definition moved some courts to prefer a more relaxed
definition.0 8 These different rulings culminated in Feasey v. Sun Life Assurancel0 9
where the court found that the concept of insurable interest could be classified into
four different groups.o Group 1 refers to cases where the court has defined the
subject matter of the insurance as an item of property and the purpose was to
recover the value of the property. In these instances the court held that a real or
equitable interest in the insured property was required11 and that both Lucena and
Macuara fell into this category.
Group 3 are instances where it is not the actual property that is insured but
some other interest of the insured in the property.1 12 The court held that this 'other'
interest constituted an insurable interest. To illustrate Group 3 the court referred
to Wilson v. Jones 13 where the court held that an investor's interest in a share
of the profit to be made when cables had been successfully laid was sufficient
to constitute an insurable interest. 1 14 The definition applied in Wilson was the
economic relationship test formulated in Lucena and not the strict definition that
required a legal or equitable relationship with the insured property.1
Group 4 consists of policies in which the interest insured was not even strictly
speaking a pecuniary one but rather an interest in a certain event not happening.
An example of this is Deepak Fertilisers& PetrochemicalsLtd v. Davyll6 where it
was held that a subcontractor had an insurable interest in an unfinished methanol
plant due to the fact that he would potentially 'lose the opportunity to do the work
and to be remunerated for it' if the plant was not completed. 1

105 Macaura v. NorthernAssurance Co. Ltd [1925] AC 619 (hereafterMacuara).

106 Ibid., 619.
107 Davis, Gordon and Gets: The South African Law of Insurance, 92 and Birds, Birds' Modern
Insurance Law, 58-60.
108 Scottish and English Law Commission (2008) (hereafter SELC), at [Link]
[Link]/docs/ICL4 [Link] 37.
109 Feasey v. Sun Life Assurance Co. of Canada[2003] EWCA Civ 885 (hereafterFeasey).
110 Ibid., 607. Group 2 deals with non-indemnity insurance exclusively and will therefore not be
discussed.
111 Ibid., 607.
112 Ibid., 607-8.
113 Wilson v. Jones (1867) LR 2 Exch 139.
114 Ibid., 145.
115 Ibid., 150-1.
116 Deepak Fertilisers & Petrochemicals Ltd v. Davy McKee (London) Ltd [1999] 1 All ER
(Comm) 69.
117 Ibid., 85-6.
 InsurableInterest: A ComparativeAnalysis 145

Although Lord Justice Waller was criticised for his analysis, Feasy remained
the leading authority on the definition of an insurable interest. Therefore an
insurable interest exists if:

(1) the assured has legal or equitable title to the subject

matter; or
(2) if the assured is in possession of the subject matter; or
(3) if the assured is not in possession of the subject matter but
may be either responsible for, or suffer loss in the event
of, any damage to the subject matter.1

The Feasy judgment constitutes a noticeable deviation from the traditional

definition in that it recognises both possession and economic loss as grounds upon
which an insurable interest may be found.

C. The Legal Position after 2005

In 2005 the British Parliament promulgated the Gambling Act.119 Section 334
of the Gambling Act repealed section 18 of the Gaming Act thus removing the
legislative requirement of an insurable interest in indemnity insurance. Further,
section 335 of this Act provides that 'the fact that a contract relates to gambling
shall not prevent its enforcement', thereby removing the primary 'moral' purpose
of the requirement.
These statutory provisions, which Atmeh1 20 describes as a 'death knell' to the
insurable interest concept, did not, however, resolve the issue on an insurable
interest as the concept became the subject of three papers by the Scottish and
English Law Commission.

D. The 2008 Paper on the Insurable Interest Concept

In 2008 the SELC released a paper in which the insurable interest concept was
fully discussed and analysed. 1 2 1 It indicated that the legislative requirement of an
insurable interest in respect of indemnity insurance had been accidentally repealed
as neither the White and Green Papers nor the parliamentary discussion preceding
the Gambling Act addressed the concept. 12 2 The purpose of the 2008 paper was
thus to clarify whether the concept still finds application and whether it should.

1. InsurableInterest
After a thorough discussion of the history, purpose and definition of the doctrine
the SELC contemplated whether it was still relevant. 1 23 It considered both the

118 Feasey, 610.

119 2005, c. 19.
120 Atmeh, Northwestern Journal ofInternationalLaw and Business (2011): 101.
121 SELC (2008), at [Link]
122 Ibid., 45.
123 Ibid., 2-9.
146 Estian Botes and Henk Kloppers

amendment and the abolition of the insurable interest, referring to two primary
concerns regarding the abolition of the doctrine. 2" The first of these concerns
was whether an insurable interest is considered necessary to distinguish insurance
from other similar contracts. The second was whether an insurable interest is still
a requirement to prevent certain moral hazards or wagering contracts disguised
as insurance contracts. Pertaining to the first question the SELC referred to the
British common law and the Financial Services Authority (FSA) which does not
consider an insurable interest as a defining feature of an insurance contract. It
came to the conclusion that support could not be found for the notion that an
insurable interest is a requirement for an insurance contract.
With respect to the second question, the original purpose of an insurable
interest was to prevent contracts that were deemed to constitute moral hazards.
The SELC referred to several factors that undermine the effectiveness of the
concept to prevent such contracts,12 5 including that modern insurance practice
makes it relatively simple to transfer and trade insurance policies.

2. The Indemnity Principle

The indemnity principle is an implied or actual term that is automatically
incorporated into every indemnity insurance contract in terms of British common
law.126 The principle entails that in order for an insured to claim on a contract of
insurance, he must be able to prove a loss and the claim will only be to the extent
of the proven loss.127 The SELC identified three important differences between an
insurable interest and the indemnity principle. Firstly, the former is required in
terms of British common law whereas the latter was required by the now repealed
Gaming Act. Secondly, due to the strict definition of an insurable interest, the
indemnity principle potentially lends itself to a more lenient application than the
former as a legal relationship with the subject matter is not required. Thirdly,
the indemnity principle can be waived by the parties as is the case in contracts
of reinsurance whereas the insurable interest doctrine cannot.12 8 The indemnity
principle remains unaltered by the Gambling Act and remains a requirement for
all contracts of indemnity insurance.12 9

3. The Indemnity Principleas a Substitutefor the Insurable Interest Doctrine

The conclusion of the SELC regarding the insurable interest concept was that
the statutory definition only created legal uncertainty without adding value to the
protection already offered by the indemnity principle. The commission added that
the definition of the doctrine had been stretched to such an extent that no material
difference exists between the doctrine and the indemnity principle. It concluded

124 Ibid., 47.

125 Ibid., 55.
126 Ibid., 35.
127 Ibid., 34.
128 Ibid., 35.
129 Ibid., 34.
 InsurableInterest: A ComparativeAnalysis 147

that it could find no reason for the continuing application of the doctrine in Great
Britain and recommended that the doctrine should not be reinstated and that the
indemnity principle should serve as a substitute.13 0 The SELC's recommendations
were met with approval by the vast majority of academics writing on the subject.
Merkinl3 1 called it a 'bold' approach while Birds 3 2 argued that the continuing
application of the concept is questionable because the indemnity principle ensures
that the insured does not recover more on a policy than the damages that he
sustains.

E. Second Joint Consultation Paper 2011

In 2011 the Commission completely reversed its former recommendation by

proposing that the concept be reinstated. This seemingly happened because most
of those who responded to the recommendations made in the 2008 paper 'argued
strongly in favour of retaining the requirement'.133 Thus the SELC held that the
requirement 'was thought to fulfil four useful functions' as follows:

It provides a dividing line between gambling and insurance; it guards

against moral hazard; it protects the insurer from invalid claims and
in an increasingly global market place it is used to define where
insurance is located and therefore which regulatory or tax regime it
4
falls within. 13
The four functions were subjected to criticism by several authors. With regard
to the 'dividing line' function Meggit states that the UK Revenue and Customs
Authority consider an insurable interest to be one of many features of an insurance
contract1 35 and concludes1 36 that this practice renders the SELC's argument open
to question. As to the 'moral hazard' function the SELC stated that by preventing
insurers from entering into contracts that are 'overly speculative or encourage
wrongdoing' they are protected from themselves. 1 37 This argument is questionable
especially if one takes into account that the insurance industry is responsible
for annual investments of £1.8 trillion and for 22 per cent of total EU premium
income. Further, contracting parties are never on an equal footing as the large
majority of insurance contracts incorporate standard terms and conditions which
are usually non-negotiable and other terms are incorporated through reference to

130 Ibid., 57.

131 R. Merkin, Colinvaux's Law of Insurance, 9th edn (Sweet & Maxwell, 2010): 154-5.
132 Bird, Birds' Modern Insurance Law, 64.
133 SELC (2011), at [Link]
pdf 101.
134 Ibid., 101.
135 For more detail see UK Government (2014), at [Link]
notice-ipt-1-insurance-premium-tax.
136 G. Meggit, 'Insurable Interest-The Doctrine That Would Not Die', Society of Legal Scholars
(2014): 1-22, at 11.
137 SELC (2011), at [Link]
pdf 101.
148 Estian Botes and Henk Kloppers

other documents. One would assume that it is the consumer rather than the insurer
who would require protection under these circumstances.13 8
Whether an insurable interest prevents fraud and invalid claims is also open
to doubt. Harnett and Thorntonl39 indicate that 'a reasonable prudent criminal'
will in any event rather defraud an insurer with his own property where he can
plan 'undisturbed by prying eyes, and leaving the minimum of evidence'. This
is supported by the 2013 Annual Fraud Indicator which estimates a fraud loss of
£2.1 billion with regard to insurance activities. 1 40 The largest identified cause of
insurance fraud is organised 'cash for crash' cases involving the fraudster's own
vehicle. 1 41 These statistics indicate that the insurable interest concept is not the
preventative tool it is argued to be. Pertaining to invalid claims and the 'customary
understandings' that were developed by the courts to decide who may claim on
a contract Meggit1 42 argues that it must be remembered that insurance contracts
'are just that -contracts'. Therefore, the general rules of 'contractual construction'
are applicable and it is highly unlikely that the courts would assume that insurers
and policyholders would be happy for complete strangers to benefit from their
insurance contracts. It is also open to insurers to construct the contract in such a
way that unwarranted persons will not be able to claim and the indemnity principle
is also still applicable.
The final function, that 'in an increasingly global market place' the concept
served to define where the insurance is located and therefore which system
of taxation and regulation applies, 14 3 has also been met with opposition as the
requirement of an insurable interest is not exclusive to British insurance law.1

"
In any event, as Meggit1 45 draws attention to, it is standard policy to include a
'governing law or jurisdiction clause' in any contract of insurance that provides
cover to those who are not situated in Great Britain.

F. Issue Paper Number 10 of 2015

The latest development on the insurable interest requirement is Issue Paper

Number 10, published by the SELC for comment in 2015 which contains
the Commission's final recommendations about the requirement. The SELC
recommends that, with regard to indemnity insurance, the insurable interest
concept be given a clear statutory basis. If an insurable interest is not present,

138 In this regard see Bird, Birds' Modern Law of Insurance, 85-9.
139 B. Harnett and V. Thornton, 'Insurable interest in Property: A Socio-economic Re-evaluation of
a Legal Concept', Col LR (1948): 1162-9, at 1167.
140 UK Government (2013), at [Link]
data/file/206552/[Link] 39.
141 IFB (date unkown), at [Link]
142 Meggit, The Society of Legal Scholars, 14-16.
143 SELC (2011), at [Link]
pdf 102.
144 The doctrine also finds application in the USA, Canada, South Africa and Hong Kong to name a
few.
145 Meggit, The Society of Legal Scholars, 17.
 InsurableInterest: A ComparativeAnalysis 149

the contract is to be declared void subject to a repayment of the premiums to the

insured. 1 46 Regarding the definition of an insurable interest the SELC recommends
that a non-exhaustive list of interests that would constitute such interest should be
included in the proposed legislation. 147

G. Continuing Application of the Concept

From the discussion it is clear that the insurable interest concept has yet to draw its
final breath and that the SELC's latest recommendations, if given effect through
legislation, would cement the application of the concept for the foreseeable future.
The reason for the SELC's turnabout can be found in the heavy push-back
against the purported abolition by the insurance industry. 1 48 Thus Meggit argues
that despite very little evidence that the insurable interest concept achieves
the purposes stated by the SELC, the majority of the insurance industry is in
favour thereof, seemingly to 'protect insurers from themselves' .149 Despite strong
criticism against the concept, including that levelled against it by the very law
commission that is now recommending its reinstatement, it would appear that the
concept is to remain a requirement of British insurance law.
However, the position is not as certain as it would appear. This is reflected
in Western Trading Ltd v. Great Lakes Reinsurance."so Although the court in
para. 53 approved of Feasy and repeated the quote from Clark's Law of Insurance
Contractsthat '[t]o make an insurance claim the insured does not have to prove his
or her interest', it proceeded to indicate that the rationale for an insurable interest
is 'to preclude the possibility of gambling by the assured' (para. 58). The court
then found on the facts that '[i]t seems to me obvious that the Claimant has an
insurable interest' (para. 59). The effect of this is that the court, in one judgment,
simultaneously approved the principle that an insurable interest is unnecessary
and ruled that the claimant had an insurable interest, therefore an insurable interest
is necessary!

IV. AUSTRALIA

A. Introduction
The Australian approach to an insurable interest was until 1984 similar to
that of Great Britain, the reason being that, much like South Africa, Australia
was a British colony.15 1 In 1982 the Australian Law Reform Commission

146 SELC (2015), at [Link]

[Link] 6.
147 Ibid., 11.
148 [Link] [Link]
149 Meggit, The Society of Legal Scholars, 21.
150 [2015] EWHC 103 (QB).
151 However, the legal position relating to insurable interest was quite complicated as Australia is
divided into different states and territories each having its own system of courts and parliaments
150 Estian Botes and Henk Kloppers

(ALRC) released a paper titled Insurance Contracts.1 52 In this paper the ALRC
comprehensively discussed insurance reform, including the doctrine of an
insurable interest. The proposals put forward by the ALRC led to the passing
of the Insurance Contracts Act, 1 53 which completely abolished the requirement of
an insurable interest with regard to indemnity insurance.
The paper is of importance to the South African debate on insurable interest
for two reasons. Firstly, it resulted in the abolition of the doctrine of an insurable
interest. Secondly it contains a full discussion on the importance, nature and the
application of the indemnity principle in insurance contracts. As the indemnity
principle is currently being applied in South Africa and since some authors have
argued that it should replace the insurable interest doctrine, cognisance should be
taken of the paper's arguments.

B. Abolition of the Doctrine

The ALRC acknowledged that an insurable interest is generally required to claim

on a contract of insurance1 5 4 and stated that the requirement was thought to
serve a dual purpose. Firstly, it discouraged wagering and gaming, and secondly,
it discouraged the malicious destruction of the subject matter of the insurance
contract by the insured.1 55 In its discussion the ALRC stated that even in 1774
with the promulgation of the LAA there was no reason why that act should
extend to contracts of indemnity, since the nature of such contracts prevents
gaming and wagering in the form of insurance. With regard to the argument that
the requirement is essential in lowering the risk that the insured would destroy
the insured property, the ALRC argued that the indemnity principle provided
sufficient protection since the insured would be limited to his actual loss and
156
therefore no profit was to be made from the destruction of the insured property.
On the strength of these arguments the ALRC concluded that the requirement of
an insurable interest should be abolished in its entirety with regard to indemnity
157
insurance.

C. Indemnity Principle

The ALRC's argument that an insurable interest should no longer be a requirement

for an insurance contract relies heavily on the premise that the indemnity principle
would provide sufficient protection for insurers. Due to the importance of the
indemnity principle the ALRC felt it necessary to describe and define the type

with only the Parliament of the Commonwealth that can pass legislation that is binding on all
territories and states. The doctrine was therefore not uniformly applied in all territories.
152 ALRC 1982 [Link]
153 80 of 1984.
154 ALRC 1982 [Link] 67.
155 Ibid., 67,72.
156 Ibid., 72.
157 The ALRC recommended that the doctrine must be retained with regard to non-indemnity
insurance.
 InsurableInterest: A ComparativeAnalysis 151

of interest that would be required in terms of the indemnity principle15' and

also discussed ways in which certain 'anomalies' with regard to the indemnity
principle should be handled. These anomalies include the nature of the interest
required, third-party insurance, limited interests in property and so-called 'valued
policies' which refer to insurance for a fixed amount regardless of the value of the
insured property. 159

D. Insurance Contracts Act

The recommendations of the ALRC were given legislative force by the passing
of the Insurance Contracts Act.160 Section 16 stipulates that an insurable interest
is not a requirement for an insurance contract and that such a contract is not void
due to a lack thereof. Section 17 gives effect to the ALRC's recommendations
concerning the type of interest required and reads as follows:
Where the insured under a contract of general insurance has suffered a
pecuniary or economic loss by reason that property, the subject matter
of the contract has been damaged or destroyed, the insurer is not
relieved of liability under the contract by reason only that, at the time
of the loss, the insured did not have an interest at law or equity in the
property.
Thus section 17 implies that an economic interest would be sufficient to satisfy
the indemnity principle, although the exact scope of the interest required has been
left largely to the discretion of the courts. Section 20 stipulates that it is no longer
required for those parties who stand to benefit from the provisions of the insurance
contract to be named in the policy.

E. Conclusion
Unlike the position in Great Britain, the Australian legislature followed the lead
of its law commission and abandoned the concept of an insurable interest as a
prerequisite for a valid insurance contract. The ensuing Insurance Contracts Act
also widened the reach of insurance to third parties and limited interests. Although
the ALRC's views relating to the abandonment of an insurable interest do not
contain the same amount of detail as the 2008 paper released by the SELC they
provide South African jurists with valid arguments.
It could be asked why were the ALRC's recommendations pertaining to
an insurable interest implemented while the SELC was severely criticised,
leading the SELC to retrace its original recommendations? The answer to these
questions is quite simply that the insurance industry in Australia supported

158 Ibid., 72.

159 It is interesting to note that some of the decisions that have been traditionally interpreted by the
British courts to apply to the insurable interest doctrine have been interpreted by the ALRC to
apply to the indemnity principle.
160 80 of 1984.
152 Estian Botes and Henk Kloppers

the recommendations of the ALRC, whereas the British insurance industry

vehemently opposed those of the SELC.16 1
Regarding the indemnity principle South African authors who advocate the
abandonment of the insurable interest doctrine generally recommend that the
indemnity principle either serve as a replacement or form the basis of
the definition of the insurable interest doctrine. The ALRC's discussion on the
indemnity principle could therefore provide valuable guidance should South
Africa decide to abandon the insurable interest doctrine or alternatively create
a legislative definition in line with the indemnity principle. It is further submitted
that the best solution for the insurable interest conundrum would be the way
followed by the Australian legislature. If South Africa's legislature had adopted
the approach of the ALRC, the uncertainty currently surrounding the doctrine
would have been resolved by now.

V. SUMMARY

The central focus of this article was to establish to what extent, if any, an insurable
interest should be considered to constitute a requirement for the validity of an
insurance contract. The need stems mainly from the fact that both the definition
and essentiality of the doctrine is currently unclear. The practical implication
of the confusion surrounding the doctrine is that insurers have a technical tool
whereby they can, and often do, attempt to escape from performing in terms of
the insurance contract.
The article commenced with a discussion on the use of the concept by South
African courts and jurists. It was established that the doctrine of an insurable
interest is defined, but jurists differ on the content of the concept. Due to the lack
of a legislative foundation it has been left to the courts to craft a working definition
for the doctrine. Initially the strict or traditional definition was preferred in terms
of which an insured would only be able to claim if he stood in a certain legal
or equitable relationship to the insured property. Recently, however, the courts
have moved to the economic-based definition, where an insured will be able to
claim if he suffers damages due to the loss or destruction of the insured object.
This shift from the traditional definition to the more liberal economic test was
necessitated by the harsh consequences that result from the application of the
traditional definition.
It has also been argued that in an attempt to come to the aid of the insured, the
courts have 'liberalised' the definition of an insurable interest to include certain
questionable interests, such as convenience and the insured feeling 'morally
obligated' to insure the property in question.
Shortly summarised, the definition of an insurable interest remains unclear,
although it can be said with a reasonable amount of certainty that the courts have
started moving away from the traditional definition to a more consumer-friendly
economic-based definition. It is also true that most South African courts still

161 ICA Submission, 9 August 1979, 6.

 InsurableInterest: A ComparativeAnalysis 153

appear to consider an insurable interest a requirement for an insurance contract

although the doctrine has been criticised by the courts with some going as far
as suggesting that the real inquiry should be whether the contract amounts to
one of wager. Despite the criticism levied against the doctrine it has been shown
repeatedly that the courts are loath to abandon it with the notable exception in
Lorcom where the court held that an insurable interest was not essential for an
insurance contract. As this is not a judgment of the Supreme Court of Appeal,
uncertainty, however, still reigns.
Regarding the position in Great Britain, although the concept of an insurable
had been formally (although perhaps accidentally) abandoned by the British
legislature with section 334 of the Gambling Act, uncertainty still reigns, as was
evident from the contrary views held in the SELC papers. Ultimately, it would
appear that the doctrine is to be retained in Great Britain.
In Australia the ALRC and legislature, however, seem to be more successful in
dealing with the insurable interest concept. On the strength of recommendations
given by the ALRC, the Insurance Contracts Act abolished the requirement of an
insurable interest in Australia. The argument put forward by the ALRC in favour
of abolition was that no good reason existed for the extension of the doctrine
to indemnity insurance. The indemnity principle, it was argued, already contained
the mechanisms whereby the purposes that the doctrine sought to achieve could be
reached. The ALRC's discussion regarding the indemnity principle is especially
informative. It illustrated that the indemnity principle could not be seen as a
rule set in stone, due to the fact that certain insurance practices that had become
common place could not be justified in terms thereof. The approach adopted by
the ALRC is flexible in that certain interests were given legislative recognition
despite the fact that it cannot be said that the insured suffers damages of a
patrimonial nature. It is argued that the Australian experience with regard to the
insurable interest should serve as the foundation for future discussions regarding
the continuing application of the doctrine.
In conclusion, a simple and efficient method of remedying the current situation
in South Africa would be either legislative intervention or a clear and concise
judgment from the Supreme Court of Appeal. As the traditional definition of
an insurable interest is inherently anti-consumer and does not meet the modern
economic needs of the insured, the approach advocated by jurists such as Reinecke
and Van der Merwe would be the most viable. The concept of an insurable
interest should be redefined to consist of any economic interest that, if impaired,
would result in the insured suffering damages that the insurer has undertaken to
indemnify to the extent agreed upon by the parties. In essence, the concept would
be kept in name only, with the focus shifting to damages coupled with the intention
of the respective parties.
An economic interest would be any interest that is deemed to form part of
a person's patrimony, the loss of which would result in the insurer suffering
damages as understood in the general law of damages. The advantages of this
approach are numerous. It would create legal certainty were it is sorely lacking
and it would relieve the perceived unfairness of the insurer being able to shield
154 Estian Botes and Henk Kloppers

himself with an extremely technical defence of which the lay person will seldom
possess any knowledge.
The incorporation of this definition would furthermore not lead to limitless
liability on the part of the insurer, as it would be more than capable of limiting its
liability by defining the nature and extent of the damages which it intends to carry
the risk for. If the parties wish to broaden the definition of damages past those
generally recognised in the law of damages, then they should be free to do so.
Thereby greater contractual freedom will be available to those parties who wish
to make use of it.
The mere replacing of an insurable interest doctrine by the indemnity principle
will not, however, adequately address all the interests that are currently insured
as the difficulties with extension clauses shows. It is therefore recommended that
certain interests be given legislative recognition in order for the South African
law of insurance to remain compatible with the economic and social needs of its
citizens. What is required is a flexible approach that is willing to ignore some of
the 'rules' that have been developed by the courts.
ISSN 0954-8890

African Journal of International and Comparative Law

Revue Africaine de Droit International et Compare

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Hakeem jaiya, Wardah 1. Abbas and 0. T Wuraola

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