Do you need an ‘insurable interest’ to claim under an insurance policy?

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By Frazer Hunt, Partner and Diana Lee, Law Graduate

The common law requirement for an insured to have an insurable interest in the subject-matter of the insurance policy was abolished under the Insurance Contracts Act 1984 (Cth) for contracts of general insurance, so an insured needs only have suffered a pecuniary or economic loss to claim under a policy which was highlighted in the case of Barroora Pty Ltd v Provincial Insurance (Aust) Ltd (1992) 26 NSWLR 170.

Prior to the Insurance Contracts Act 1984 (Cth) (ICA), the Australian common law required an insured to have an “insurable interest” in the subject matter of the insurance.  This requirement was directed against gaming and wager to stop insurance being used as a form of gambling. The Life Assurance Act 1774 (Imp.) made it illegal in England to insure the lives of third parties in the hope of profiting from their deaths. (Historically, it is interesting that such conduct was obviously occurring regularly enough to require legislation to make it illegal.)   The insured needed to have an actual legal or equitable interest in subject-matter of the insurance policy, for example, by owning the insured personal property. A mere economic interest in the subject-matter of the policy which is created by the insurance contract itself was not sufficient for an insured to make a claim.

However, with the introduction of the ICA, the requirement for an insured under a contract of general insurance to have an insurable interest was abolished. Under section 16 and 17 of the ICA, it is sufficient that the insured has suffered a pecuniary or economic loss by reason that the subject matter has been damaged or destroyed, as extracted below:

16(1). A contract of general insurance is not void by reason only that the insured did not have, at the time when the contract was entered into, an interest in the subject-matter of the contract.

17.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 in equity in the property

(our emphasis).

As a consequence, the class of people who could be an insured under a contract of general insurance was broadened. For example, depending on the wording of the insurance policy, a person could insure a property which they do not own, as long as damage to that property would cause them to suffer an economic loss.

The case of Barroora Pty Ltd v Provincial Insurance (Aust) Ltd (1992) 26 NSWLR 170 highlights how the abolishment of the insurable interest requirement in the ICA has allowed entities without a legal or equitable interest in the insured property to sue under a general insurance contract.

Barroora Pty Ltd v Provincial Insurance (Aust) Ltd (1992) 26 NSWLR 170

In this case, Barroora Pty Ltd was the first plaintiff and BLE Capital was the second plaintiff. BLE Capital financed a business purchased by which Barroora by providing finance to Barroora’s parent company, Hanipe Pty Ltd, which Barroora guaranteed through a deed. In the deed, Capital obtained a floating charge over some of Barroora’s assets and Barroora undertook to keep the relevant property insured against the risk of fire in the names of Barroora and Capital. The deed also included a provision for the application of proceeds of any claim under the insurance policy for the benefit of Capital. Subsequently, Barroora took out an insurance policy with Provincial Insurance. However, the Certificate of Insurance named only Barroora as “the insured” and named Capital under the heading “Extensions” without explanation. Some of the insured stock in trade was then destroyed by fire. Provincial Insurance rejected a claim by Capital, asserting that it was not “the insured” under the policy and it did not have an insurable interest, as Capital only had a floating charge over Barroora’s destroyed property.

The Court held that Capital did not have sufficient equitable or legal interest in the destroyed property for it to have an insurable interest which was required under the Life Assurance Act 1774 (Imp) for contracts of fire insurance prior to the enactment of ICA. However, as this Act was repealed under the ICA, Capital’s floating charge was held to be sufficient for it to have a claim pursuant to section 16 and 17 of the ICA. This was even if Capital’s floating charge had not yet crystallised by becoming a fixed charge. Further, even though Capital was not explicitly named “the insured” in the insurance policy, the Court found that naming Capital in the heading “Extensions” was sufficient to infer that Provincial Insurance intended to cover Capital. At 180, Justice Brownie held:

The contract of insurance now sued upon is within the Insurance Contracts Act 1984 (Cth)…It therefore does not matter whether Capital is or is not one of “the insured” for the purposes of s 16 and s 17: for there is no rule of law whether of the common law or of statute, which prevents someone such as Capital, having what I assume to be only a floating charge over Barroora’s stock  from insuring that stock; or in the present circumstances, from relying upon the contract made by Barroora with the defendant for the insurance of that stock.”

Comments

Barroora makes clear that the threshold for a party to make a claim under a contract for general insurance has substantially lowered since the abolishment of the insurable interest requirement under the ICA. Accordingly, it is important for insurers to clearly word insurance policies to ensure that the intended parties are insured.

Separately, the ICA does not apply to contracts of insurance listed in section 9, which include reinsurance, some health insurance and marine insurance contracts. Realistically, however, the insured still needs to have suffered a loss to recover under an insurance policy.

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