‘In­sur­able in­ter­est’ can­not be viewed nar­rowly

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - JEREMY PRAIN

APER­SON is said to have an in­sur­able in­ter­est in some­thing when loss or dam­age to that thing would cause the per­son to suf­fer fi­nan­cial or some other kind of loss.

So it was that in the re­cent case of Lor­com Thir­teen (Pty) Ltd v Zurich Insurance Com­pany South Africa, an in­ter­est­ing fac­tual sce­nario gave the Western Cape High Court an op­por­tu­nity to as­sess the cor­rect ap­proach to the ques­tion of “in­sur­able in­ter­est” un­der South African law.

The case con­cerned the mfv Buc­ca­neer, a fish­ing ves­sel lost at sea in 2008. Un­der­writ­ers re­pu­di­ated the claim un­der the pol­icy for lack of an in­sur­able in­ter­est.

The fo­cal point of the re­pu­di­a­tion was that the in­sured, Lor­com, had no di­rect own­er­ship in­ter­est in the sub­ject mat­ter. At the time of the loss, the ves­sel was owned by Gans­baai Fish­ing Whole­salers (GFW), a wholly-owned sub­sidiary of Lor­com.

A fur­ther rel­e­vant fea­ture of the case was that Lor­com was in the process of be­ing sold at the time of the loss to a third party, sub­ject to the con­di­tion that when the fi­nal in­stal­ment had been paid, own­er­ship of the ves­sel would be trans­ferred out of GFW into the name of Lor­com. As a re­sult, there was an ex­pec­ta­tion that Lor­com would be­come the reg­is­tered owner at some point in the fu­ture.

Against this back­ground, Lor­com as­serted that its in­sur­able in­ter­est was premised on four points. It was the sole share­holder of the com­pany which owned the ves­sel. It was to be vested with own­er­ship of the ves­sel at a later date in terms of the sale agree­ment. It had the right of use of the ves­sel at the ma­te­rial time and, fi­nally, it held the fish­ing per­mit for the ves­sel.

The pol­icy cov­ered hull and ma­chin­ery, war and li­a­bil­ity and was writ­ten sub­ject to the In­sti­tute Fish­ing Ves­sel Clauses. More­over, the pol­icy was sub­ject to South African law, which prompted the judge to delve into the ori­gins of insurance law in the ju­ris­dic­tion. Un­til 1977, the Cape and Orange Free State prov­inces in SA ap­plied English statu­tory law as to ques­tions of in­sur­able in­ter­est.

At that time, the con­cept of in­sur­able in­ter­est was a firm fea­ture of English insurance statutes, such as the Ma­rine Insurance Act, which in­flu­enced the di­rec­tion taken by the South African courts on the mat­ter.

From 1977, the law to be ap­plied in the repub­lic as a whole was Ro­manDutch law. The judge re­marked that it would be er­ro­neous to as­sume, there­fore, that SA in­her­ited a body of com­mon law de­rived from English insurance law.

Con­se­quently, the proper con­text for con­sid­er­ing the ques­tion of in­sur­able in­ter­est in SA is twofold. Un­der the com­mon law, an insurance con­tract which con­sti­tutes a gam­bling transac- tion is not il­le­gal but is nev­er­the­less un­en­force­able. Fur­ther, un­like in Eng­land, there are no South African statutes which lay down the need for a so-called in­sur­able in­ter­est.

The con­clu­sion reached by the judge was that it is ques­tion­able whether or not there is a self-stand­ing re­quire­ment that the in­sured must have an “in­sur­able in­ter­est” in the as­set. He pre­ferred the view that in­sur­able in­ter­est is an el­e­ment of a broader in­quiry into whether the in­sured’s in­ter­est in tak­ing out the pol­icy is an ac­cept­able one which re­moves the con­tract from the am­bit of gam­bling.

Two im­por­tant prin­ci­ples emerge from the case.

The first is that South African cases on the mat­ter show that the courts have of­ten ap­proached the ques­tion of in­sur­able in­ter­est quite lib­er­ally so as to en­able the in­sured to re­cover what the pol­icy promised.

The sec­ond is that the judge was pre­pared to take a flex­i­ble ap­proach to the ques­tion of share­hold­ing in the as­set-own­ing en­tity, which is in con­trast to the con­ven­tional English law ap­proach laid down by the House of Lords in Ma­caura v North­ern As­sur­ance Co Ltd & Oth­ers which held that a share­holder, even a 100% share­holder, does not have an in­sur­able in­ter­est in the as­sets of the com­pany.

On the facts, the court found that Lor­com’s 100% share­hold­ing in GFW, taken to­gether with its right of use of the ves­sel and its ex­pectancy of be­com­ing owner, was suf­fi­cient in­ter­est to ren­der en­force­able an insurance con­tract pro­vid­ing for pay­ment of the loss of the mar­ket value of the ves­sel.

This case sends a warn­ing to in­sur­ers writ­ing busi­ness in SA not to as­sume that “in­sur­able in­ter­est” is a self-stand­ing re­quire­ment of South African insurance law and to be wary of adopt­ing an overly strict or tech­ni­cal ap­proach when tak­ing a view on whether or not a pol­icy is en­force­able in any given case.

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