The commonly understood requirement that an insured must have an insurable interest The distinction between a contract of insurance
f insurance and betting agreement lies in the fact
in the subject matter of the insurance for a contract of insurance to be valid was recently
placed under the judicial spotlight in the matter of Lorcom Thirteen (Pty) Ltd v Zurich
Insurance Company of South Africa Limited. The judgment raises some pertinent issues
for underwriters.
The facts
The case involved a total loss claim by Lorcom (the insured) in terms of a valued
hull, machinery and equipment policy of marineinsurance for the fishing vessel
"Buccaneer". Cover under the policy was subject, inter alia, to the Institute Fishing Vessel
Clauses (20/07/87)
The underwriter declined to pay a total loss claim following the sinking of the vessel on
the related grounds that the insured did not have an insurable interest in the vessel and
the loss suffered did not fall within the ambit of the cover. These defences were based on
the fact that the insured was not the owner of the vessel, and that it was accordingly not
the party that suffered the loss covered by the policy of insurance.
While the insured was the holder of 100% of the shares in the vessel owner; and had a
temporary right of use and a factual expectation (although not a legal right) to become
the owner of the "Buccaneer", the underwriter argued that it did not have an insurable
interest in respect of a marine policy covering the loss of hull, machinery and equipment.
The contract of insurance was subject to South African law pursuant to the agreement of
the parties, although South African common law would have applied in any event absent
any express agreement by virtue of section 6(1)(b) of the Admiralty Jurisdiction
Regulation Act, No. 105 of 1983.
Contract of insurance or betting agreement?
The court commenced with an examination of the origins of the concept of insurable
interest, and noted that its genesis is not in common law but rather in English statute,
commencing with the Marine Insurance Act of 1745 and in subsequent English
legislation pertaining to insurance and gaming.
The concept of insurable interest was originally introduced to combat the potential moral
hazard associated with strangers to the subject matter of the insurance having an
interest in the occurrence of the insured event by virtue of the contract alone. (It was
feared that this might provide an unhealthy incentive for the destruction of the property or
life concerned.) It was also introduced to prevent gambling under the guise of insurance.
The court found that there is no South African statute that lays down the need for an
insurable interest, and that there is no justification for the importation of the statutory
requirement of English law. The perceived mischief originally targeted by the insurable
interest requirement is handled in South African law by the statutory regulation of
gambling, and the common law in relation to unlicensed gambling agreements, which are
stigmatised and discouraged as unenforceable.
In the circumstances, the court held that the proper enquiry in South African law is not
whether there is an insurable interest but rather whether the contract in question ought to
be regarded as an enforceable contract of insurance or an unenforceable agreement of
wager.
that an insured party has a reason (apart from the contract) as to why the occurrence of
the events insured against matter. The real interest of an insured (unlike that of a
gambler) is that the specified event should not occur. The court expressed the view that
the enquiry into whether a person has sufficient interest in the event insured against
should not be an unduly technical matter, and that there may be no harm in referring to
the stake as an 'insurable interest'. This is providing one does not equate the interest
required to avoid categorisation as an unenforceable wager with the distinct English law
requirement of insurable interest.
The court held that the presence or absence of an insurable interest is not a self-standing
requirement, though it may be a relevant aspect of the proper enquiry as to whether the
agreement amounts to an unenforceable wager.
The indemnity principle and insurable interest
In the case of indemnity insurance the so-called indemnity principle, which takes effect
as an implied or actual contractual term, stipulates that an insured must have suffered a
loss in order to be able to recover under the policy. The indemnity principle plays a role in
distinguishing between genuine insuranceand unenforceable wager.
Having said this, given its contractual nature the indemnity principle is susceptible to
amendment or possibly even waiver by the parties to the agreement of insurance. While
there is a difference between the contractual indemnity principle and the English
statutory requirement that there be an insurable interest, the proximity between the
concepts has often resulted in the indemnity principle being considered in the context of
statutory definitions of insurable interest.
Since the parties in Lorcom approached the case from the perspective of insurable
interest and not unenforceable wager, the court proceeded to consider the case law
concerning insurable interest, noting that courts often approach question of insurable
interest quite liberally, tending to allow the insured to recover what was promised rather
than permit the underwriter to escape responsibility on the basis of what is regarded as a
technical and opportunistic defence.
By way of example, the court referred to Littlejohn v Norwich Union Fire Insurance
Society 1905 TH 374, where a husband married out of community of property was found
to have an insurable interest in goods of his wife which constituted trading assets in
a business the husband managed. Reference was also made to Refrigerated Trucking
(Pty) Ltd v Zive NO (Aegis Insurance Co Ltd, Third Party) 1996 2 (T) 361, where it was
found that the owner of the vehicle had an insurable interest to obtain cover in respect of
third party liability incurred by drivers of its vehicles. The insurer's promise to pay to the
insured an amount equal to the liability incurred by the driver was enforceable, even
though the insured did not incur that liability itself and did not suffer a patrimonial loss.
Notwithstanding the generally liberal approach to the enquiry as to the existence of an
insurable interest, the court found that the question of insurable interest cannot be
divorced from the type and extent of recovery permitted under a policy. For example, in
Manderson t/a Hillcrest Electrical v Standard General Insurance Co Ltd 1996 (3) SA 434,
the genuine interest that an employer had in his employee retaining the use of his
personal vehicle was found to be insufficient to give rise to an insurable interest for the
purposes of a policy of insurance covering the full value of the vehicle.
Turning to the facts of the Lorcom case, the court found that a proper interpretation of the
policy of insurance did not compel the insured to prove that it had suffered a patrimonial
loss, but rather that there be loss or damage to the vessel. The insured merely needed to
demonstrate "an interest sufficient to render enforceable a policy providing cover
measured with reference to the value of the vessel."
While the court considered that the insured's temporary right of use of the "Buccaneer"
was, by itself, insufficient to sustain insurance cover measured with reference to the
replacement value of the vessel, the additional factual expectation that it had of
becoming the owner of the vessel (in terms of a series of contracts involving its
shareholder and a purchaser), gave rise to an insurable interest in such cover.
In any event, the court held that the fact that Lorcom held 100% of the shares in the
vessel owner put the question of insurable interest beyond doubt, as it gave the
shareholder "an interest in the company's assets sufficient to rationally sustain insurance
cover expressed with reference to the underlying value of the assets." The court went on
to find that this interest entitled the insured to recover the loss or diminution in the value
of the insured asset, not loss in value of the shareholder's shares.
The court expressed the view that permitting a claim based on the market value of the
subject matter of the insurance, without requiring proof that the insured has suffered a
patrimonial loss in the same amount, would not prejudice insurers, as they had taken on
the risk of paying on the basis of an actuarially assessed premium related to the
likelihood of the risk eventuating. The fact that, on this basis, there may be multiple
parties with an insurable interest sufficient to sustain insurance cover measured with
reference to the market value of the vessel was also not regarded as inequitable, since
each insured would pay premium calculated with reference to the risk.
How this contractually imported requirement of an insurable interest should be
interpreted in circumstances where the parties have made an express choice that South
African law should apply remains to be seen. (The provisions of clause 19 of the Institute
Cargo Clauses (A), provides that the insurance is subject to English law and practice.) It
is certainly arguable that the English law understanding of insurable interest would play a
greater role in speaking to the intention of the parities in these circumstances.
Having said this, it should be noted that even in English law a more flexible approach to
the question of insurable interest has started to take root, with questions being raised
regarding its on-going usefulness.
Conclusion
The Lorcom case sounds a clear warning to underwriters regarding the difficulties
associated with the rejection of a claim on the basis of an alleged absence of insurable
interest, or an unenforceable gamble.
Underwriters should carefully consider the true nature of the interest which a prospective
insured has at the time of entering into a contract of insurance, and also the relationship
that interest has to the indemnity provided under the policy, understanding that a court
will not lightly render the bargain unenforceable once a claim has arisen.

Implications for underwriters

One important implication for underwriters in the departure from the indemnity principle
evidenced by Lorcom, is the negative impact this has on the prospects of the underwriter
successfully recovering monies under rights of subrogation.

The underwriter can obviously acquire no better rights against responsible third parties
than those held by the insured. Thus, if one postulates a situation whereby the
"Buccaneer" sank on account of the actionable negligence of a third party, it is the
erstwhile owner of the "Buccaneer", not the insured, that would enjoy that right of action,
and the underwriter would therefore have no prospects of a successful recovery action.

If the uninsured owner proceeded to recover its damages in a hypothetical recovery

action, then the insured shareholder would have the best of both worlds, enjoying the
benefit of both the payment of its claim under the policy and (indirectly) the uninsured
owner's successful recovery action. It is questionable whether or not this possibility is
something the underwriter would have considered when determining the amount of
premium payable under the policy.
It is worth noting that there may well be different considerations applicable in relation to
different policies of insurance. For example in a marine cargo policy based on the
Institute Cargo Clauses the policy wording itself stipulates that in order to recover under
the insurance "the Assured must have an insurable interest in the subject-matter insured
at the time of the loss."