One of the issues considered in the recent English High Court
decision of Western Trading Ltd v Great Lakes Reinsurance (UK)
PLC  was whether the claimant (Western) had a sufficient
insurable interest in the damaged properties.
Western, which was the Named Insured, did not own the
properties. Rather, it was a company through which the owner (Mr
Singh) managed and operated his property portfolio.
Under English law, the insured must have an "insurable
interest" in the subject matter of the insurance. The
rationale for this rule is that it prevents policies of insurance
being taken out as a form of gambling or speculation. Its origin
lies in the Life Assurance Act 1774, which sought to
prohibit people from insuring the lives of third parties with whom
they had no real connection, as a form of speculation, in the hope
of profiting from their deaths. (It is an interesting historical
curiosity that this practice was widespread enough to merit
The insurable interest requirement also applies to property
insurance. It is not necessary for an insured to "own"
the insured property outright – a less direct interest is
enough. For example, it may be enough that the insured is in
possession of the property, or simply that it would suffer loss if
the property were to be damaged. In other words, there may be an
insurable interest if the insured has 'something to lose'
– and it is recognised that the something may be hard to
In this case, the Court held that Western did have a
sufficient insurable interest. In reaching this conclusion, the
Court took into consideration the fact that Western paid rent to Mr
Singh, managed the properties on a day-to-day basis, was
responsible for their upkeep, dealt with insurance, paid the rates,
granted leases to sub-tenants, and ultimately had to account to Mr
Singh. There was no question of speculation or of any improper
advantage being obtained by the Insured.
The Court noted that this kind of property management
arrangement is a common one and ultimately concluded that it was
"obvious" that Western did have an insurable interest in
The legal position in Australia is rather different, and it
provides an interesting point of comparison.
In Australia, there is no requirement for an insured to have an
interest in the insured property when the contract of insurance is
entered into or at the time of the loss. If the insured has
suffered a pecuniary or economic loss, the fact that it does not
have a legal or equitable interest in the insured property will not
bar it from recovering under the policy: see sections 16 and 17 of
the Insurance Contracts Act (Cth) 1984.
In other words, the common law proprietary test, which requires
an insurable interest, has been replaced with a test which focuses
on economic loss.
This means that an argument such as the one made in
Western would not be viable for an insurer in Australia.
It would still be open to the insurer to question whether, as a
matter of fact, the insured had suffered an economic loss, but the
insurer would not be able to avoid liability simply on the basis
that the insured had no insurable interest per se.
This change in the law was founded on a view that the
requirement as to an insurable interest was based on
"imprecise drafting and historical accident, rather than
the implementation of any clear legislative policy."
The insurable interest rule was also seen as serving no useful
purpose in the context of an indemnity policy, given that the
indemnity principle would in any case prevent a recovery where the
insured has not suffered any loss.
The outcome in Western would therefore have been the same under
Australian law (in that the Insurer would not have been entitled to
avoid liability) but the reasoning would have been different, and
the Insurer would have had to approach the claim from a different
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Contractors and principals should ensure they have appropriate insurance coverage instead of relying on indemnity clauses.
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