Insurable interest sailing close to the wind

01 November 2013 Amelia Costa, Ina Gueorguieva, Norton Rose Fulbright South Africa

The object of insurance is to protect the insured’s interest in something, be it a life or a physical item. The general view is that, with indemnity insurance, only a person with an insurable interest will have a claim if the object of the risk is damaged or destroyed. This is not a statutory requirement, so is it a requirement at all?

Traditionally, the concept of an insurable interest was used to distinguish insurance contracts from wagers. With wagers, a person bets on an uncertain event and has no interest in the outcome other than another person having promised to pay something if the event materialises. Insurance contracts are different because the insured person does not want the uncertain event to materialise. If it does, he/she stands to lose something of appreciable commercial value.
Separate requirements?

The insurable interest notion has plagued courts and writers for centuries and recently came under scrutiny in Lorcom Thirteen (Pty) Ltd v Zurich Insurance Company South Africa Ltd, where the admiralty jurisdiction court held that it is doubtful that an insurable interest is a separate requirement for an insurance contract.

The court had to decide whether the 100% shareholder in a company had an insurable interest in the ship, which was lost at sea, where the company owned it but the shareholder had the right to use it and would eventually own it. The court found that the shareholder did have that interest. But to the court, the real enquiry in these matters is whether the insured’s interest in taking out cover is an acceptable one which removes the policy from the ambit of gambling.

Over the years, the insurable interest requirement has been unmoored with good reason.

Reasons include:
• In indemnity insurance, whether an insurable interest exists is determined at the time of loss, whereas whether the contract amounts to a wager (which is valid, but unenforceable) is determined at the conclusion of the contract. An insurable interest can therefore not be a separate requirement for the lawfulness of the contract itself (JP Van Niekerk (1995) 7 SA Mercedes LJ 262 at 267).
• In life insurance, the required interest held at the date of the contract may fall away before the claim arises but the benefit is still payable.
• An insurable interest is just a guideline to establish the loss suffered by an insured. An insured is only entitled to be indemnified for the actual loss. Other spheres of law do not determine loss with reference to an interest (JP Van Niekerk at 268).
• Our courts have liberalised insurable interest with reference to the types of loss an insured may suffer, which also emphasises the loss requirement.
• If there is material non-disclosure or misrepresentation in regard to the interest held there are other remedies.
• In life insurance, the client can give their consent to ensure that there is no wagering on their lives, as long as the insurance is not against public policy.

Effective underwriting needed

We think that the judgment serves as a warning to insurers to steer clear of relying solely on the lack of an insurable interest in avoiding policies. It also places more emphasis on effective underwriting, risk analysis and premium rates. Insurers must relook at proposal forms and other disclosure-driven documents to:
• Understand:
o what the object of the risk is;
o what the type of loss the proposer intends to get cover for is;
o the relationship between the proposer and the object of the risk;
• Reflect these details in the policy; and
• Adequately communicate the terms and conditions of the policy to proposers and existing insured clients.

Whatever emphasis is taken away from insurable interest is, if material, added to disclosure requirements.
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