Insurable Interest: The Key Element Of Marine Insurance
By
-- Atul Nigam, Advocate, Delhi High Court --

The Definition or Concept:

The Key aspect of insurance is for an assured to monetarily recover what has been lost,providing nomore than the indemnity. The striking noteis insurable interest whicharises fromthe concept to protect the insured, as it catches attention of courts, framers of law and academia making it desirable to be studied as a legal concept.

Marine Insurance Act is based on five principles which are Indemnity, Insurable Interest, Utmost Good Faith, proximate cause Subrogation & Contribution. Through this writing, ‘insurable interest’ under the Marine Insurance Act, 1963, hereinafter called the ‘Act’is sought to be probed in context of the present legislation.The applicable test for its validity is to avoid wagering contracts in Marine Insurance.

Insurable Interest has been defined in Lucena v. Craufurd[1] to be in relation with tangible property in respect to policy holder standing in some” legal or equitable relationship to the property insured”.

The insurable interest as an indemnity principle in context of marine insurance has been identified to be valued in policy where on an occurrence of the insured event it is to do no more than indemnifying the assured on account of losses suffered as a result of insurance peril but is not to be more than actual loss.

It can also be justified to hold that that insured need not have a legal or equitable title to a property to have an insurable interest but must have a legal right. The existence of legal right is mandatory irrespective of an expectation based on ‘likely or moral’ grounds of realization, which would not afford creation of an insurable interest.

When an assured is unable to satisfy the indemnity requirement by proving any loss, the position is simply that it cannot be recovered under the policy. The ‘principle of indemnity’ is to take effect as an implied term in the agreement between parties whereas breach of rules of insurable interest are statutory and may not be waived by agreement[2]. Holding that an insurable interest is a requisite for a valid contract of insurance[3].

Legislative History:

Around 1745, the Parliament of United Kingdom first attempted to control the growth of insurance without interest through legislation, known as Marine Insurance Act 1745. This Act rendered Marine Policies void which were made without ‘interest’.

Thereafter in 1785 there was another legislation passed for regulating insurances on Ships and on Goods, Merchandise or effects.The UK Parliament passed Gaming Act 1845 whereinas per Section 18 of the Act, it declaredall contracts made by way of ‘gaming or wagering in insurance or otherwise’, as null and void. This was followed by British Marine Insurance Act ,1906, which continues to remain in force and is kept under legislative check.

Indian Legislation:

The Marine Insurance Act 1963 came into force on 1st August, 1963, codifying the law relating to Marine Insurance. In true sense, it is the mirrored version of British Marine Insurance Act of 1906. It poses its own set of complexities as insurance policy form continues to be under influence of British Mercantile Customs and Business Convention, found to be in conflict with Provisions of Indian Contract Act ,1872. It’s these complexities which call for intervention of courts to interpret an agreement wherein the insurer undertakes to indemnify the assured in the manner and to the extent agreed, against Marine losses which are incidental to marine adventure.

Section 6 provides for avoidance of wagering contract holding that every contract of Marine Insurance by way of wagering is void. Section 6(2) provides that a policy of Marine Insurance is deemed to be a wagering contract under two circumstances (a) where the assured does not havean ‘insurable interest’ as defined by the Act and contract is entered into with no expectation of acquiring such an interest or (b) where the policy is made “interest or no interest” or “without further proof of interest other than the policy itself” or “without benefit of salvage to the insurer” or subject to any other like term.

Section 6 (2) of the Marine Insurance Act 1963 provides marine insurance contracts to be deemed as wagering contracts where assured does not have insurable interest as defined in Section 7 of the Act and the contract is entered with no expectation of acquiring such an interest. Or otherwise, subject to any other like term.

The statutory provisions mandate Marine Policies to possess an insurable interest at the outset and when suffering a loss, to mount a claim on the occurrence of an insured peril.

Impact of Insurable Interest:

Section 7 of the Marine Insurance Act 1963 has defined insurable interest, to be with every person who is interested in marine adventure carrying restriction of holding “legal or equitable relation”.

That ‘legal or equitable relation’has been defined in the case of Sharp v. Sphere Drake Insurance[4] by holding “insurable interest in property might arise nearly because the assured owed a duty to exercise reasonable care in respect of the property”. On similar lines, in the case of National Oilwell (UK) Ltd. v. Davy Offshore Ltd.[5], it was held to have broaden the principle to apply ‘legal or equitable relation’ to a case in which the assured “was not in possession of property” but in close physical relation to it.

Through the interpretation given by the Courts, ‘legal or equitable relation’ exist even when there is proximity of the assured to the subject matter or when assured is not in possession of the subject matter but may be either responsible for it to suffer loss in the event of any damage to the subject matter.

That section 8 of the Marine Insurance Act provides that the assured must be interested at the time of the loss though he need not be interested when insurance is affected. The proviso provides that where subject matter is insured “lost or not lost”, the assured may recover although he may not have acquired his interest until after the loss, unless at the time of affecting the contract of insurance the assured was aware of the loss and the insurer was not.

The purpose of requiring insurable interest to support a policy is to remove the possibility of wagering by the assured or to hold that as long as assured is not wagering, there is every reason to uphold the contract even when the interest possessed cannot be categorized.

Section 9, 10& 11 of the Marine Insurance Act 1963 provides for three categories of insurability of interest which is:

(i)    Defeasible interest: it is stated to be an insurable interest which is determined by subsequent event.

(ii) Contingent interest: it is stated to be an insurable interest which depends upon fulfillment of certain conditions.

(iii)  Partial interest: it is stated to be an insurable interest. Which could be lender’s interest in respect of a loan.

Section 12 provides for bottomry as an insurable interest under the Marine Insurance Act, followed by section 13 of the Act in respect to Master’s and Seamen’s Wages alongwith Section 14 in relation to advance freight. Section 15 is in respect to charges of insurance and Section 16 pertains to quantum of interest relating to mortgage. While section 17 of the Act deals with Assignment of interest required for an express or an implied agreement for transfer without barring for transmission of interest by operation of law.

Impact of insurable interest on insurable value:

Section 8 of the Act provides that the interest must attach at the time of the loss and need not attach at the time when policy is taken.The issue clearly emerges if there is no interest at the time when policy is taken out as there should be reasonable expectation of acquiring one or else the policy is by way of wagering.

Wagering Contracts and Insurable Interest:

Section 30 of Indian Contracts Act 1872 provides that agreements by way of wager are void and no suit shall be brought for recovering anything which is based on a wagering contract.

As per Sir William Anson’s definition of Wagering Contract it is “a promise to give money or money’s worth upon the determination or ascertainment of an uncertain event”.[6]

The expression “Agreements by way of Wager” came to be defined through Section 30 of the Contract Act and has been interpreted as to the expression “gaming and wagering” under the Gaming Act of 1845 (English Act). The cases under the respective English Acts of Gaming & Wagers have been useful in construing the expression “by way of wager” under the Indian Contract Act. As defined in Hampden v. Walsh[7], “a wager to a contract is when A is to pay money to B on happening of given event in consideration of B paying money to him on the event of not happening”. Similarly in Thacker v. Hardy[8], it was held that essence of gaming and wagering was that “when one party was to win and the other was to loose upon a future event, which at the time of the contract was of an uncertain nature; there were some transactions in which parties might lose and gain according to the happening of a future event”.

In VappakanduMarakayarv. AnnamalaiChettiar[9], wherein plaintiff had lent a sum of money to defendants on the risk of a ship belonging to them. Defendants had put in writing to plaintiff “that the ship was on sail and the loan would be refunded with interest of 18% if the ship returns safely after completion of its voyage. If the ship did not return, “the plaintiff would lose his money”. The ship was lost at sea after three days. It was held that “on the ground that the ship was lost before the date of agreement, agreement was by way of wager and void”.

Conclusion:

Sections 6 to 17 of the M.I. Act 1963 have set down statutory provisions in respect to insurable interest for Marine Policy. These sections have survived the test of time. There is no reason to separate insurable interest from policy contracts and impact of wagering. There is clear demarcation between insurance and wagering as it has guarded against moral hazard. Holding, insurable interest a necessary ingredient in the Marine Insurance.

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The Author, Senior Partner at Chamber of Nigam and Nigam and has also been an Arbitrator. His practice areas include Arbitration, Insurance and Commercial Laws at High Court of Delhi and Supreme Court of India.



[1] (1806) 2 Bos& PNR 269 (Appendix 2.1).

[2] Waters v. Monarch Fire & Life Assurance Co.(1856)5 E.& B.870.

[4] (1992) 2 Lloyd’s Rep.501.  

[5] (1993) 2 Lloyd’s Rep.582.

[7] (1876) 1 QBD 189.

[8] (1878) 4 QBD 685.

[9] (1902) ILR 25 Mad 561.


09 Aug 2020