DENEYS | REITZ Is The Insurable Interest Requirement Dead? ‘Author / Deneys Reitz Contact: Michael Chronis Paper delivered at Deneys Reitz Insurance Seminar. Insurable Interest is a concept which is used both in indemnity and non-indemnity insurance. INDEMNITY INSURANCE Indemnity insurance is insurance where the actual loss of the insured is indemnified to the insured by the insurer. “The purpose of an indemnity policy is to restore the insured to the position the insured was in prior to the loss. The insured is not entitled to make a profit out of the event. This principle is enunciated in the English case of Castellain v Preston (1883) 11 QBD 380 (CA) 386, which has been cited with approval in South African cases. Indemnity insurance is usually in respect of property or the liability of the insured towards @ third party in respect of damages caused to that third party by way of an injury or loss or damage to property. NON-INDEMNITY INSURANCE Inmonrnderniyrsurence the insurer agrees to pay an. or series of amounts to the insured on the happening of the insured event. Exar or accident insurance where an eye or a limb is insured for an agreed amount. n urs. Further, in non-indemnity insurance there is no right of subrogation in favour of the insurer to claim against the party causing the loss to the insured. There is also no right of contribution between insurers. In South African legislation there is @ distinction between short-term and long-term insurance but that does not mirror-image the difference between indemnity and non-indemnity insurance. Short-term insurance would also include for instance stated benefit accident and health policies. | shall concentrate on insurable interest in idemnity insurance. In General Principles of Insurance Law, MFB Reinecke, Schalk Van Der Merwe, JP Van Niekerk and Pieter Havenga 2002 (p31: para 52) ("Reinecke") the learned authors state: ‘Traditionally the object of insurance is explained in terms of the insured's insurable interest. Thus, in the context of indemnity insurance, the court in Castellain v Preston (1883) 11 QED 380 (CA) 386 stated that an insured's insurable interest is the object of the insurance and that ‘only those who have an insurable Interest can recover. To this the court added that an Insured could recover only fo the extent to which his insurable interest had been impaired by the insured peril However, this does not mean that the fo-be-protected interest must be insured eo nominee [by that very name] or that it must be specified in the contract. Uniesscothonwise agreed, the contract will attach to the interest that is eventually proved to exist. By and large these notions obtain the world over.” In an earlier case, Lucena v Craufu court decided that a person has an insurable interest in In paragraph 53 of their work Reinecke advises that one must distinguish the object of incuranee from the object of the risk. What is meant here is that one must distinguish between the interests that one insures in respect of a particular object. The interest that the owner has in 2 house is to be distinguished from the interest that a mortgagor has in the bond granted ‘and the lessee's interest in the house that is being leased. All of these interests are different insured interests in the same object, the house In Enishi there is a requirement that an insurable interest must be in the nature of a legal right oribilty. The insured must have to the object insured. In Macaura v Northern Assurance Co Ltd [ it was held that the Shareholder had no insurable interest in the assets of a company because he stood in no Tegal or equitable relation to the timber insured in his name which was the sole asset of the company, South African law is more liberal and the liberalisation commenced in the case of Littlejohn v Norwich Union Fire insurance Society 1905 TH 374. Wessels, J held that where a husband ‘and wife married out of community of property carried on their joint household from the profits derived from a isiieatblenaingipteuyfe, “hick ‘was under the entire control and management of the husband, the ad an insurable interest in such business. Wessels, J quoted the English case of Lucena v Craufurd and expanding on it he found: “if 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 [a real tight] nor a jus ad rem [a personal right] to the thing insured his interest will be an insurable one’. Wessels, J found that the husband was in @ worse position after his wife's property, insured by the husband, was burnt and that he had therefore suffered an insurable loss thereby. ‘Amore recent case dealing with neeabagiccet inthe South African manner and reflecting ‘a more flexible approach is that of General Accident Insurance Co (SA) Ltd 1983 (4) ‘SA 652 (W). In this case Mr Phillips insured the diamond ring that he had given his wife. One Luigi who read palms managed to persuade Mrs Philips to part with the ring on the grounds that he was going to have it blessed by his church. He managed to ensure that the Phillips parted with some cheques and other articles which, including the ring, were never seen again. Mr Philips claimed on his policy in which he had made it clear that he was insuring his wife's jewellery. The insurer raised two defences, namely that Mr Phillips had no insurable interest and that he had breached the reasonable precautions clause. The leamed Judge quoted Littlejohn and a criticism of Littlejohn in Gordon and Getz, The South African Law of Insurance (2nd ed: p75) where the authors say: “Both these statements are, however, too wide: they do not emphasise the fundamental rule that the If it does have such a basis an expected benefit, however remote, confers an insurable interest.” “The leamed Judge De Vilers, J thought that this was much too narrow an interpretation of Litlejonn. He quoted the case of Price and Another v Incorporated General Insurances Limited 1980 (3) SA 683 (W) and stated: “it seems to me that a practice has grown up that a husband has an insurable interest in his wile’s jowellery. For these reasons Iam of the view that the plaintf, on the principle laid down in the Litlejohn case, had en insurable interest in the engagement ring which was insured. If‘am wrong in coming to this conclusion, then | am satisfied on all the facts that this agreement cannot be said to be either a betting or wagering agreement.” He said that because a betting and wagering agreement would have been illegal and therefore unenforceable. ‘The next case is Steyn V AA Mutual Assurance Association Ltd 1985 (4) SA 7 (T). In this case the insured was a Mr Steyn who had two insurance policies, one covering the furniture in the house and the other covering the house itseff. A ‘and all its contents. The ain © house in terms of arising out of litigation. He occupied the house and received water and electricity free of charge for as long as the provincial administration which was the owner of the house did not require it. The defendant contended that the plaintiff's right to stay in the house free of charge was not an insurable interest as the provincial administration could at any stage begin its road building programme and demolish the house. The court held that it was often forgotten that the concept of insurable interest was to distinguish between a contract which is one of betting and wagering which would be an illegal and an unenforceable contract. The court found that it was clear Mr In our view the insured had an nterat n he propery He had the right to occupy the propery {or tree unt twas required by the Provisional Administration. This rightcertain ° ae: to his patrimony and the early destruction of the property by fire diminished his stated in the Littlejohn case, the insured had lost “something of an appreciable commercial value by the destruction of the thing insurable.” A difficulty is the placing a value on such loss. ‘The decision of the court also was to the effect that the Roman Dutch Law of Insurance should be adopted and not the strict English Law approach. More recently in Refrigerated Trucking (Pty) Lid v Zivé NO (Aegis Insurance Co Ltd, Third Party) 1996 (2) SA 361 (TPD) the court had to consider whether an insured had a clear economic interest in the contingent liability of a driver of a vehicle which it owned and had insured, The court analysed the Littlejohn and Phillios case and said: “The ratio seems to be that where the relationship between the person with the legal right in ihe property and the insured is such that the insured will be worse off in that, for example, he has to forfeit a benefit or be morally responsible, or through circumstances forced, to replace the article the court will recognise that he has an insurable interest. It seems then that in our ‘cuihdadeannisadnsurancaanuosuirablasfjaiast i-an-eeonomiodatenaek which relates to the risk which a person runs in respect of a thing which, if damaged or destroyed, will cause him to sufecanpennamiaios in respect of an event, which if it happens will ikewise cause him to suffer an economic loss. It does not matter whether he personally has a right in respect of that article, or whether the event happens to him personally, or whether the rights are those of someone to whom he stands in such a relationship that, despite the fact that he hes no ‘personal right in respect of the article, or that the event does not affect him personally, he will ravertnloss belworse of fhe objects damaged or destroyed, or the even happens The owner of a motor vehicle stands to lose a lot if his spouse or a member of his household negligently gets involved in a colision whilst driving the vehicle. Apart from the damage to the vehicle itself, third parties may sue the driver for damage to other vehicles or even bodily injury where, for instance, a third party was a passenger in the vehicle in question. It is of aa eee mtareat tote owner hat the mambor of is famiy bo mewrod agaist Such aaa ceiprd parice, Ifa servant hives the vehiae by acer othe ower tre wor lbs third parties for damage negligently caused. It may pose a difficult factual SEN a i cant ccd wiih tc cae Orbis anpioymert To have tat question answered by @ court may lead to extra costs in a court case. It is not only in a case Gfa servant that the owners may be held to be vicariously responsible for damages to third pertos”‘The Judge then goes on to say: “Again complex factual disputes may arise as to whether the driver drove the vehicle for the benefit of the owner, or whether the owner had control over the manner in which he was driving the vehicle. If the owner Is held to be vicariously liable and the servant or acquaintance tums out to be financially unable to pay the damage, the owner will be the one who has to pay the bill. That, in my view, is a clear economic interest in the contingent lability of the driver. It follows that, whilst ! am bound by the conclusions in the Croce case that the ‘owner has an insurable interest in the contingent liability of the driver | am also in full agreement with that conclusion.” (On page 38 Reinecke has the following to say: “ elena it was deemed necessary for the legislature tofree insurable interes Im its so-cal legal basis. Such a step is not necessary to facilitate the insurance of expectancies in South African law. It is clear that, in principle, there is no objection to treating frustration of an expectancy as loss or damage in South African law although no legal right subsists in respect of the subject matter of the expectancy. In South Africa the insurability of a positive expectancy should therefore not be regarded as an exception to a general rule that expectancies cannot be insured. Its simply a consequence of the fact that the law accepts certain expectancies as part of a person's patrimony. That the insurabilly of expectancies is not based on a legal right or labilfy is recognised the world over and itis ‘submitted that our courts need not be hampered by outdated considerations restricting the growth of a dynamic principle of indemnity and its counterpart, insurable interest. To this limited extent the wide description of insurable interest in local decisions is to be welcomed.” The difficulty is always where is one to draw boundaries to insurable interest? ‘The next important case is that of Manderson Ya Hilorest Electrical v Standard General Insurance Co Ltd 1996 (3) SA 434 (D&CLD) which is relevant as to the extent of such boundaries. The plaintiff and defendant had entered into a written agreement of insurance in terms of which the defendant undertook to insure certain motor vehicles, plant tools and equipment. At the time of the loss the relevant motor vehicle was the property of a sub- contractor Mr Sieg who had initially been an employee of the plaintiff. The sub-contractor would attend to all the domestic repairs at the homes of the appliance owners. All that the plaintiff would receive from the payments to the sub-contractor would be a payment of R10 plus the Vat component. It was agreed that the sub-contractor would supply his own vehicle and materials required for each job. The materials were purchased in the name of Hillcrest Electrical which is the plaintiff. The sub-contractor would pay for the materials himself but Hillcrest Electrical would be responsible for claiming Vat refunds. The plaintif agreed that he would insure the sub-contractor’s vehicle. The premium on the policy was paid by the plaintiff in monthly instalments but the portion attributable to the sub-contractor’s vehicle was paid by the sub-contractor to the plaintiff each month ‘The counsel for plaintiff submitted that the plaintiff had an insurable interest in the motor vehicle on two grounds, namely that the plaintiff was bound by his agreement with the sub- contractor and if he did not insure the vehicle he would be liable to the sub-contractor for damages in the event of loss of the vehicle and he would be prejudiced if the vehicle was lost because he stood to lose goodwill of the business. Counsel for the defendant on the other hand contended that the mere fact that it was agreed between the plaintiff and the sub-contractor that the former would insure the vehicle did not give the plaintiff an insurable interest in the vehicle. Secondly he referred to Littlejohn v ‘Norwich Union Fire Insurance Society 1905 TH 374, para 380 and said that the plaintiff had not proved on a balance of probabilities that at the time of the loss of the vehicle he stood ‘to Jose something of appreciable commercial value”. Consequently he submitted the judgment of the court ought to be one of absolution from the instance,‘The court then referred to Davis, Gordon and Getz, South African Law of Insurance (4th ed): “There is no doubt that an insurable interest must be shown fo exist at the for, if there is no interest then, no loss has been suffered, and the insured is not entitled to an indemnity." He then quoted Hallsbury's Laws of England (4th ed: vol 25: para 636): “A contract of fire insurance, like all other contracts of insurance, requires an insurable interest in the subject-matter of the insurance to support it; in the absence of an insurable interest, the assured can suffer no loss, and the contract becomes a mere wager.” He also quoted MacGillivray and Parkington on Insurance Law (Sth ed at 4: para 8): “If, upon a proper construction of the policy, the insurer has undertaken to indemnify the assured against pecuniary loss caused by or arising iets risks, an interest is required by reason of the nature of the contract itsel sssured has no interest at the time when the event insured against occurs, itis clear that he cannot recover anything on an indemnity policy, because he has suffered no loss against which he can be indemnified; similarly, if he has an interest limited to something less than the full value of the subject- ‘matter, he can suffer no greater loss than the total value of his actual interest at the time of the loss, and his claim to an indemnity cannot exceed the value of his interest ‘The Judge then stated that this past passage demonstrates the fallacy of the suggestion by counsel for the plaintiff that, once an insurable interest is established, the insured is entitied to recover under the policy the full value of the items insured, irrespective of the extent of his loss or the value of his interest. The Judge then quotes the authors of the title “Insurance” in Joubert (Ed) The Law of South Africa vol 12: para 102: “in the insurance context toss or damage’ is therefore defined with reference to insurable interest; insurable interest is employed as a yardstick for loss or damage.” He then applied the quoted principles to the present facts and found on p442 E, as follows’ “Applying these principles to the facts of the present case, | am of the view that the plaintiff has not suffered any Joss capable of being valued as a result ofthe theft of the car and tools belonging to Mr Sieg (the sub-contractor). He certainly has not suffered a loss represented by the market value of the vehicle and the tools which were stolen. That is the loss which has been suffered by Mr Sieg. As appears from the evidence of the plaintiff and Mr Sieg which was not disputed, what the plaintiff had in mind was that if Mr Sieg’s vehicle was stolen or damaged and could not be replaced the plaintiff would suffer a loss representing the loss of profit or loss of goodwill suffered by his business as a result of his being unable to supply his customers with a service performed by Mr Sieg. That may well have been an insurable loss and a loss giving him an insurable interest in Mr Sieg's motor vehicle, but that was not a loss insured under the policy. What was insured against was the loss of or damage to the vehicles described in the schedule, including that owned by Mr Sieg, not the loss caused to the plaintitf as a result of the unavailability of that vehicle or the tools which were contained in it when it was stolen. If one applies, therefore, the test of proof of loss or damage, in order to ascertain whether the plaintiff had an insurable interest in the motor vehicle and the tools at the time of the theft of them, | am of the opinion that the plaintif did not have an insurable interest to the extent of the value of the vehicle and tools.” ‘The Judge also considered the mere fact thet the plaintiff had agreed with the sub-contractor that he would insure the vehicle and whether this was sufficient to constitute an insurable interest. He then quoted the case of Van Achterberg v Walters 1960 (3) SA 734 (T) at 744D:“He had an insurable interest as already shown; and even if he had not for any other reason it was enough that he had undertaken an obligation to insure these goods. This alone gives him an insurable interest, because if he fails to insure he would be liable for the damages in the event of loss.” The Judge then states: “That statement was made in the context of the lessee who was under an obligation to repair and replace all fumiture and furnishings damaged or destroyed and at the end of the lease to restore possession of all furniture and fittings let. That is quite different from the case under consideration. The plaintif had no obligation regarding the maintenance or replacement of the Vehicles or tools. He simply agreed to insure them with a view to enabling Mr Sieg to obtain ‘compensation to enable him to repair or replace therm.” The Judge then states in any event there was a specific exception in the policy which excluded the company from being liable for any ciaim arising from contractual liability unless such liability would have attached to the insured notwithstanding such contractual agreement. The Judge then states that even if an insurable interest had been created, this specific exception would have excluded liabilty on the part ofthe insurer. ‘The court also discussed the possibility that the failure by the plaintiff to disclose that the Vehicle was owned by the sub-contractor may have been a material non-disclosure but this, ‘was not required to be decided in the relevant case. In our view this case correctly describes the nature of insurable interest and how it is inextricably linked with the loss or damages suffered by an insured and how the question of insurable interest is to be approached by a court ‘An insured may ha\ rable interest at the time the contract of insurance was entered into but that s at the date of the loss. The indemnity of the insured is calculated as at th and itis the insurable interest that the insured has, at the date of loss which requires to be indemnified, Finally, the Judge found that the plaintiff could not show that because of the loss of the vehicles and tools, the plaintiff stood to lose, what is referred to in Littejohn’s case as something of “an appreciable commercial value”. The Judge accordingly found in favour of the defendant. ‘The next relevant case in our view shows how the concent of insurable interest can be misconstrued. The case was handed down in February 1998 and was inexplicably reported in the January 2003 edition of the South African Law Reports under the citation Bi Enterprises Pvt Lid v Zimnat Insurance Co Ltd 2003 (1) SA 318 ZHC. ‘The plaintiff Brightside insured with defendant Zimnat a vehicle which was owned by Mr Roy Durham, Durham was a director and shareholder of Brightside. Durham and Brightside agreed that Brightside would use Durham's vehicle for business purposes and in return would insure, replace or repair the vehicle in respect of any loss whatsoever. The vehicle was stolen, One of Zimnat's grounds for denying liability was that because the plaintiff was not the owner of the vehicle it had no insurable interest in the vehicle and therefore the contract of insurance was void ‘The court found that insurable interest in respect of a thing does not arise only from ‘ownership of that thing. It arises mainly from a relationship to the thing which causes prejudice to the person concemed ifthe peril insured against occurs. Where the insured derives a benefit from the existence of a thing, that too constitutes insurable interest. We agree with this proposition.‘The court then found that the requirement of insurable interest is only a consideration in the real enquiry as to whether or not the contract of insurance in question is a gambling or wagering agreement. The Judge disagreed with the finding in the Manderson case, quoted previously, that an insurable interest is inextricably interwoven with the question of loss. ‘We do not agree that the Judge's view is the South African position, especially taking into account that gambling is now to a large extent lawful Further, the Judge appears not to have recognised that there may be several different insurable interests arising out of the same object of insurance. ‘The Judge then found: “In my view, an insurable interest can only be determined with reference to the time that the policy of insurance is taken out. Itis at that time that the insured perceives a risk against which he wishes to guard and the insurer issues a policy of insurance on the basis of the risk contemplated.” This obviously ignores the principle that insurance is a contract of indemnity and therefore if the insured does not have an interest at the time of loss and suffers no loss there is nothing to be indemnified. This proposition also ignores the fact that an insured’s insurable interest could ‘well change during the policy and even become non-existent. The Judge further states: “To give an example: If my interest in a motor vehicle given to me by a friend is to use it fora period of say one month, I cannot see any reason in logic or law why 1 should not insure against the loss of that vehicle and why, should the vehiole be lost, | cannot recover the full value of the vehicle whose loss has occasioned prejudice to me in my failure to use it for the period | intended. This should be so quite apart from any moral or legal obligation that | may have to repair or replace the motor vehicle, | do not see why my interest should not be regarded as being in the preservation of the whole motor vehicle up to its value and when itis lost or stolen, why | should be restricted to the perceived loss which, according to the logic in ‘Manderson’s case would be the use value of the vehicle to me.” This underlines the fact that the Judge lost sight of the fact that indemnity insurance is to indemnify an insured for a loss to patrimony. We agree with his finding that because there ‘was an obligation to replace the vehicle there was an insurable interest to the value of the Vehicle. We do not agree with his further comments that even where there is a partial interest an insured would be entitled to recover the value of the vehicle which may be more than the loss to the insured’s patrimony. ‘The ntet dacklon fs that Raigad Salos Sk v Unvam Versokorngsmakalears Bk 2002 (5) SA 85 TPA. In this case two motor vehicles that a plaintiff corporation had leased were on advice of the plaintif's insurance brokers insured in the name of one of the plaintiff's members, one Lindique. There was also an that Lindique would pay over to the plainti fhen both vehicles were stolen, Lindique instituted a claim against the insurers who defended the claim on the basis that Lindique had no insurable interest in the vehicles. The plaintiff then sued the broker defendant for breach of contract on the grounds that the latter had given wrong advice regarding the plaintif’'s rights in terms of the insurance agreement between the insurer and Lindique. A special case was formulated for adjudication by the court, the question being whether Lindique had an insurable interest in the vehicles. The court found that only the plaintiff had a direct interest that is a real right or a personal right to the vehicles but that Lindique's interest was limited to an indirect or economic interest. ‘The court agreed that for there to be a valid contract of insurance there had to be an insurable interest but did not determine what the legal basis for insurable interest was.Further, the court approved of the principle in Litt/ejohn’s case that if 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 real right nor a personal right to the thing insured, his interest will be an insurable one. The court further found that since Lindique had been under contractual duty to repay to the plaintiff any insurance paid out in terms of the contract of insurance he clearly had an insurable interest in the stolen vehioles. In our view this is correct because Lindique was one of the members of the close corporation and these were assets of the close corporation. In this regard the English case of Macaura v Northern Assurance Company and Others [1925] AC 619 (HL Ir) was not followed. In that case a shareholder could not insure the assets of the company in which he held the majority of the shareholding. In this regard we also refer to paragraph 81 of General Principles of Insurance Law where itis stated that there can be no doubt that in principle a shareholder in South Africa does enjoy an insurable interest in the assets of its company, This interest flows from his or her personal rights as a shareholder. This would then be similar to the rights of a member to insure assets of a close corporation. This is also the approach in other Anglo ‘American legal systems where the English rule has not been followed; that shareholder is Unable to insure the property of his or her company. In short, in our view insurable interest in indemnity insurance is, as has been stated in the Manderson case, that loss or damage to the party concerned is the determinant as to whether ‘or not that party has an insurable interest. Further where the insured derives a benefit from the existence of a thing that too constitutes an insurable interest. We also support Reinecke's view on page 38 where he states that in principle there is no objection to treating frustration of an expectancy as loss or damage although no legal right subsists in respect of the subject matter of the expectancy. ‘The above cases thus show how the courts have approached the concept of insurable interest to determine whether an insured is to be indemnified or not. In our view insurable interest and the concept of indemnity is all that is required to prevent insureds from using insurance contracts as ventures bordering on wagers and the dangers consequent thereon. In our view insurable interest is not correctly applied when policies are issued for goods in transit. The owner of the goods has an insurable interest in the goods for the transit and he or she should be insured forall risks or more limited cover. The carrier should be insured for any liabilities it may have towards the owner of the goods. The carrier can insure the interests of the owner as agent or by way of a contract for the benefit of third parties but then the policy of insurance must be formulated in that fashion, Thus the concept of insurable interest is neither dead nor dying and has a place in South African law as long as the courts continue to regard it as a dynamic principle which keeps up ‘with the public policy of the day.