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Leaning towards insurable interests

Western Trading Ltd v Great Lakes Reinsurance (UK) Plc [2015] EWHC 103 (QB)

Where a claimant assured has no insurable interest in the subject matter of the insurance, a claim against the insurer will fail. The rationale behind this rule is to preclude the possibility of gambling by the assured. But making good a defence of lack of insurable interest is a challenge. A court is naturally reluctant to accept that no contract exists where an insurer has already accepted an insurance premium. The recent High Court decision in Western Trading Ltd illustrates this reluctance.

Background

The claimant was a company that existed solely to hold and to manage the property portfolio of a successful property investor, Mr Singh. Mr Singh personally owned the property that was the subject of this claim. Mr Singh’s son, Sunny Singh, ran his own business from the same property. The property was destroyed by fire on 24 July 2012.

The claimant claimed under its insurance policy with the defendant for a declaration that it was entitled to be indemnified against the costs of reinstatement. The defendant filed a defence of lack of insurable interest.

An insurable interest exists (according to the authors of Colinvaux – 4-013) where:

The assured has legal or equitable title to the subject matter; or if the assured is in possession of the subject matter; or if the assured is not in possession of the subject matter but may be responsible for, or suffer loss in the event of, any damage to the subject matter.

The defendant submitted that since the defendant did not own or let the property, had no interest in its preservation and no exposure in the event of its loss, the claimant’s only interest was in the insurance contract. Therefore there was no insurable interest; an insurance contract by itself cannot give rise to an insurable interest. The defendant described the insurance as “one of naked speculation (i.e. in substance no more than a disinterested wager on whether the [property] would burn down.”

The decision

The defence failed on the facts.

The court did not accept various criticisms of the Singh family’s business arrangement levelled by the defendant. Unless the underlying business model was a sham or unless there was some advantage in procuring insurance under the name of the claimant, then the business model was none of the defendant’s business.

Judge Mackie QC found that the claimant let the property from Mr Singh and sub-let the property to various subtenants, including Sunny’s company. The claimant was at the heart of the Singh family business framework and the claimant would have to account to Mr Singh for the property’s loss. The insurable interest therefore falls into the third of the ‘categories’ described above.

Commentary

The application of the law to the facts as the court found them is no doubt correct. It is the court’s approach to the evidence that is instructive.

The following passage sets out how a court should approach this issue, per Brett MR in Stock v Inglis [1884] 1 QBD 564:

It is the duty of a Court always to lean in favour of an insurable interest, if possible, for it seems to me that after underwriters have received the premium, the objection that there was no insurable interest is often a technical objection, and one which has no real merit, certainly not as between the insured and the insurer.

Clearly, to judge from his comment below, this is an approach that Judge Mackie QC approved:

It has in the past been unusual for insurers to raise questions of insurable interest except in the context of fraud. This is an issue which, judging by the materials generated when taking the risk, the Defendant neither took an interest in (nor alerted the Singhs to the perceived importance of) until the claim came in.

The way in which a court will lean towards the assured can be seen in Judge Mackie QC’s treatment of the evidence in two specific ways. The following commentary is no criticism of the judgment but a useful illustration of the uphill struggle facing a defence of lack of insurable interest (in the absence of fraud).

First, the defendant contended that the claimant had informed the local authority that the property was unoccupied to avoid paying rates. Judge Mackie QC accepted that if true, this “would be powerful evidence” that the claimant’s claim about subletting and occupation by subtenants was wrong. He further accepted that, while there were complications over various types of exemptions, “the overall picture remains confused” and that “the Claimant’s records about all this are unsatisfactory.” But rather than holding the confusion against the claimant, he made the relief granted subject to the claimant ensuring that any rates that had fallen due were paid.

Second, in relation to the claimant’s sublease of part of the property to Sunny’s company, the defendant pointed to a single isolated payment to the claimant over the period, arguing that the lack of regular rent payments showed that no lease was in place. This was an argument with some force: when discussing damages (claimed in the alternative to declaratory relief for an indemnity for the costs of reinstatement), the judge felt that he should reduce the sum claimed by 50 percent in recognition of the “fair chance that in reality the rent would have been neither demanded nor sought.” However, from the liability perspective, he stated that it was “entirely credible and proper that the Claimant would go easy on the rent until a need for cash arose”, reiterating that his “examination, it needs to be remembered, is being conducted only for the purpose of establishing an insurable interest.”

This approach will be discouraging for property insurers. Nonetheless it is a useful cautionary tale – a court will only be prepared to uphold a defence of lack of insurable interest where it is not “possible” (per Stock, above) to find otherwise.

Relief by reinstatement?

There is another interesting aspect to this case. The right to reinstate damaged property under the policy was subject to reinstatement being carried out “with reasonable dispatch.” The defendant contended that it was not liable under the insurance policy because there had been no reinstatement and so reasonable dispatch was absent.

The judge found that the requirement to reinstate “cannot be read to arise until the insurer has confirmed that it will indemnify” and so there would be no absence of reasonable dispatch before the insurer’s obligation was accepted or established. This finding was supported by the reasoning that an assured who could not afford to reinstate without insurance money could not commence reinstatement without knowing whether the insurance money would be forthcoming.

This case is therefore authority for the submission made by the authors of MacGillivray (20-220) that:

the requirement that the insured should commence and carry out the work of reinstatement with reasonable dispatch should only operate if the insurers, in accordance with their contractual obligations, accept that reinstatement is the proper measure of indemnity.

It follows that the claimant would have had to commence the reinstatement with reasonable dispatch following the making of the declaration.